How Quants from the 90s Gave us Today's Fintech Economy

Note: This is the final excerpt from my 2015 book, so this is a little dated (though Greg Neufeld is still with ValueStream).

The nexus of New York tech has for years been centered on Wall Street, where an army of quantitative analysts (aka “quants”) toil away on their computers for big-name banks like JP Morgan, Goldman Sachs, Morgan Stanley and others.

Their work? Instead of developing apps and creating new software programs, they are tasked with creating the algorithm-based trading programs that drive much of the market activity on today’s stock and bond markets.

The quants began coming to the city in the mid 1990s, drawn from engineering- and math-focused schools like Stanford, CalTech and the Massachusetts Institute of Technology by the promise of untold riches, and the opportunity to put their computer science and advanced mathematics skills to work for banks instead of technology companies.

Their reputation since, in the city and beyond, is mixed at best.

Wall Street journal reporter Scott Patterson described quantitative analysts’ influence on the world financial markets in 2010’s “The Quants: How a New Breed of Math Whizzes Conquered Wall Street and Nearly Destroyed It.”

“At Morgan Stanley's investing powerhouse Process Driven Trading on Monday, Aug. 6, founder Peter Muller was AWOL, visiting a friend near Boston,” Patterson wrote. “Mike Reed and Amy Wong manned the helm, PDT veterans from the days when the group was nothing more than a thought experiment, its traders a small band of young math whizzes tinkering with computers like brainy teenagers in a cluttered garage.

“On Wall Street, they were all known as ‘quants,’ traders and financial engineers who used brain-twisting math and superpowered computers to pluck billions in fleeting dollars out of the market. Instead of looking at individual companies and their performance, management and competitors, they use math formulas to make bets on which stocks were going up or down. By the early 2000s, such tech-savvy investors had come to dominate Wall Street, helped by theoretical breakthroughs in the application of mathematics to financial markets, advances that had earned their discoverers several shelves of Nobel Prizes.”

Not surprisingly, most of these quant analysts and traders remain well outside the realm of New York’s startup ecosystem – no founder is going to be able to convince a Wall Street developer, no matter how promising or how interesting their business idea, to give up the multi-million dollar rewards that come with life on the front lines of the financial services industry.

But the rise of the quant class did something else, perhaps even more important for the New York tech ecosystem: it brought a generation of tech-minded developers and engineers to the area en masse for the first time.

It also helped seed the city’s growing financial technology industry, those startups focused on serving the banks and money managers, as wave after wave of Wall Street layoffs sent thousands of former quants packing following the 2008 downturn. These “fintech” companies have become a particularly large part of the city’s technology ecosystem, primarily because of finance’s traditional role in the New York economy and the opportunities that exist in the city for entrepreneurs to find new clients and exploit new markets.

“It’s tremendous,” says Greg Neufeld, of the fintech segment, which has been a cornerstone of the New York tech scene since the 1990s. “Everybody wants to make that changeover, or at least wants to get their finger into the cookie jar. It’s a very interesting dynamic right now.”

Neufeld is the managing partner and founder of ValueStream Labs, a fintech-focused accelerator and investment fund in the city’s Meatpacking District. The firm’s offices were spare when I visited – just a few open offices carved out of a converted loft space, with exposed brick walls, plank flooring, and windows overlooking the midday activity on 14th street. The Hudson River is about a block away.

“They all want to get out,” Neufeld says of the bankers he talks to regularly who are interested in going to work for a startup. Layoffs on Wall Street have only accelerated these calls, he says. “And the guys who are higher on the food chain, they want to invest in these companies and stay in the cushy managing director roles where they are now. We’re kind of appealing a little bit to that group by allowing them to invest in the rounds for the companies that we work with here at ValueStream. So basically, we’re looking for the guys who can be the triple threat: the customer, the advisor, and the investor. And there’s a lot of them floating around.”

The fintech sector itself is changing too, he says.

Although entrepreneurs have long targeted Wall Street firms with their innovations – dating all the way back to Bloomberg’s original computerized market data terminals in the early-1980s -- the natural progression of technology has accelerated in recent years, bringing mobile, tablet and other options to the wider world and putting pressure on financial firm to catch up and bring their notoriously conservative operations into the 21st century. 

“Like the consumerization of IT is a big trend now,” Neufeld says, “so are people saying, ‘OK, I can do this on my smartphone; why can’t I do this in my work?’ And so you’re going to see more of those Web-enabled platforms that are less expensive to build going on top of the already existing infrastructure, and for most companies that just means, you know, a website. It goes without saying that mobility is a big part of that. And the ‘bring your own device’ movement gets some of these consumer type of platforms that are already working in consumer markets and we can actually reposition them for the institutional side. Figure out licensing deals and ways to create a new source of revenue, which tends to be a lot higher than in the consumer space.”