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Wednesday, January 02, 2013

The rise of high-end finance work in India

by Shashank Bansal.

Until recently, outsourcing by global financial firms to India conjured up an image of commoditised low end services outsourcing: call centres, peripheral systems programming, and testing and maintenance. However, in recent years, there is a new rise of more sophisticated work. This reflects supply and demand factors. Global financial firms are keen to cut costs. Capabilities of operations in India -- both captives and independant firms -- have grown for many reasons:

  • The individuals involved in this field in India have gained experience ("learning-by-doing") and credibility.
  • New management practices and improved telecommunications technologies have improved the extent to which teams and projects are handled in a more non-local way.
  • The Indian diaspora has been rising to senior management levels in global firms, and is better able to envision what can be done in India and to obtain execution.

A European investment bank was among the first to experiment by bringing in teams in India into critical projects. This was a landmark change as a lot of inertia about confidentiality was overcome. Other banks followed suit. New management practices, higher pay, greater meritocracy came in, which helped Indian teams make the transition from low-end work where the HR and management techniques used are quite different. Demand for high skill labour has helped induce greater supply, with a lag, as individuals were more inclined to tool up with advanced degrees and high-end knowledge.

Alongside the developments in finance, parallel developments were taking place in the field of offshoring which have driven up skill levels, and helped create a high skill ecosystem in India. Top tier consulting firms launched `centres of excellence' in India, hiring grads from IITs, IIMs, IISc, statisticians, economists. While education in India has huge problems, the raw talent available in India was of good quality, particularly when we focus on individuals who were able to read on their own and reinvent themselves ("never let your school come in the way of your education"). This process has been helped by globally recognised certification exams such as the FRM and the PRM.

IT firms have have been evolving from core development and maintenance to an entire gamut of IT strategy and consulting for financial firms. Many smaller KPO firms with specialised domain knowledge in finance have emerged, who cater to smaller hedge funds, trading houses, not just outsourcing increasingly complex pieces of work, but also advising them on the entire outsourcing strategy. All this has helped create a pool of high skill labour which is moving between multiple employers in India and able to build knowledge through diverse kinds of experience.

The most impressive development of recent years has been the growth of offshore trading units of global brokerages and trading houses, where people sitting in India take independent trading decisions in international financial markets based on their own skills and judgement. In some ways, this is the highest level of transfer of decision functions to India, albeit at relatively low monetary stakes.

In this fashion, within a period of 15 years, India had graduated from doing repetitive low value tasks to Knowledge Process Outsourcing (KPO) for the global financial system. While these activities are primarily in Bombay, they are also taking place in Gurgaon and Bangalore. The number of high-end finance workers in Bombay has never been greater than it is today. It is estimated that there are now 50 individuals working in Bombay doing work for global financial firms who have Ph.D. degrees in quantitative fields. This is starting to become a big enough number for them to talk with each other and get network effects going. From an employer's point of view, it is now possible to shop in the labour market in Bombay and recruit a 10-man team all with Ph.D. degrees so as to get a new group going. This is a sea change when compared with conditions just a few years ago.

To appreciate this change a little further, it was interesting to take a look at some of the capabilities of finance focussed KPOs, divided mainly into 4 broad categories, catering to Sales and Trading, Middle office and Back office:

  1. Quantitative Research and Analytics Support:
    1. Equity and FICC Analytics: Model Validation, Price Verification jointly with clients: these are pretty quant heavy functions which require in-depth understanding of products.
    2. Technical and Fundamental Analytics.
    3. Index and Portfolio Analytics: Index maintenance, design, construction, operations and after sales, Portfolio tracking, decomposition and correlation analysis, performance measurement and attribution support.
    4. Derivatives and Risk Analytics: Measurement of derivatives Greeks, Value at Risk, Tolerance checks.
  2. Research:
    1. Equity and FICC Research: Company research, Credit Research, Economics research etc. to augment senior analysts in money centres.
    2. Trade idea generation and back testing: Sales pitches for clients and internal trading desks.
    3. Country, Sector, Company profiling, trends, news and projections: Pitch book generation and support.
    4. 24x7 weather patterns tracking for global energy trading outfits
    5. Overnight trade and market tracking to feed in summary reports, Market Dashboards, news letters, morning meetings and agendas
    6. Market Research: Pre-entry market research and positioning survey for bank's clients.
  3. Data Analysis and Modelling:
    1. Data sourcing from multiple heterogeneous sources, refining and maintenance: Static data, Live and Historical market data maintenance. Data research and statistical studies feeding into trading strategies.
    2. Data Mining solutions.
    3. Data modelling, smoothing: Providing data solutions for Algo trading desks.
  4. Operations and Control
    1. Derivatives trade processing and documentation: Trade review of structured trades and complex documentation. End to end life cycle management of trades e.g., matching, broker confirmations and fee calculations.
    2. P&L and balance sheet control: Generation and reporting of P&L for vanilla products. Some banks have started moving exotics P&L functions to India. This is quite a significant milestone as such activities require high degree of confidentiality and direct user (e.g., traders) interaction who have zero tolerance for mistakes.
    3. Risk Stress testing, VaR back testing, Risk reporting to senior management.
    4. Auditing: external auditing of valuation marks of trading desks and control processes around it.
    5. It should be noted here that since the funding crisis of 2008, these jobs have become quite complex as most banks have built more sophistication into their analytics. For example, most yield curves would now have multiple basis spreads (like tenor basis, xccy basis) and not just rates desks but even credit and equities desk have been using such advanced discounting curves.)

What's next

The biggest push probably has been in quantitative middle-office functions with an ever increasing emphasis on valuations and counterparty risk management. Given the way markets have adopted collateral based pricing of derivatives, and the regulatory push on managing counterparty default risk, some captives have started building quantitative teams who will develop and manage CVA, DVA, etc. processes for all trading desks.

The new regulatory climate (Dodd Frank, Basel III etc) has lead to a substantial increase in costs due to additional checks and reporting requirements e.g., centrally cleared OTC trades, real time trade reporting to regulators, exhaustive risk reporting - all of which can are leading to fresh volumes of activity in offshoring.

All high quality banks have a team of techno-quants who work closely with the sales/trading desk, risk managers etc, on their day to day needs as well as on strategic projects. It is now feasible to move such high impact roles to India. It would be possible to have "extended front office teams" where dedicated staff support traders in money centres, doing real time risk analysis and client profiling, while the trade is being dealt overseas.

For a back-of-envelope calculation, if we think of internal billing rates of $100,000 per person per year, and if there are 10,000 persons at this average price, then this is services export of $1 billion a year, which is a sizeable amount. It appears that the early beach-head is in place, and this area will grow dramatically now.

This blog post reflects my experience, which is in investment banking and money management. A similar escalation of complexity of work in India is taking place in retail banking, insurance, etc., reflecting similar compulsions and opportunities.


There is a certain tension between the push towards offshoring to India, and the activities that regulators consider `key in-house activities' that cannot be outsourced.

There are serious constraints with education in India. The top institutions are producing some quantitative skills (e.g. fluency with matrix algebra, fluency in numerical computation). On one hand, there are weaknesses of broad intellectualisation that shapes cognition, creativity and malleability. On the other hand, there is essentially nothing in place by way of a finance education in India. A small amount of high-end finance research is taking place (example) but for the rest, there isn't much capacity in the existing academic campuses. New approaches to learning and training need to be devised through which high quality individuals, with strong quantitative skills, can be converted into full fledged participation in high-end global finance work. A mix of public and private initiatives are required in order to jump to the next level.

There are strong synergies between the sophistication of the Indian financial system and the work that is done for global financial firms. There is a two-way feedback loop here: Better domestic capabilities will help do sophisticated offshore work, and the brainpower built for offshore work will strengthen domestic capabilities. The best example of this is found in the equity derivatives market, where India has a world-class market. The individuals with a domestic background here are ready for offshore jobs in fields like algorithmic trading, and individuals with capabilities built in offshore work are useful in the domestic setting. This is where India can set itself apart from Malaysia and the Philippines. To the extent that Indian financial reform makes progress, this will fuel the rise of high-end outsourcing to India.


I am grateful to Anand Pai, Paul Alapat and Gangadhar Darbha for useful discussions.


  1. Hi Shashank,
    A compregensive article as this examining the state of 'high finance' in India is long due. Insightful article.

    I was looking at this article which mentions that JP Morgan alone spends as much as $3bn on cost on regulation.

  2. I am amused by this article which to me seems to be in line with the general myth in the BPO circles in India - "we are moving up the value chain". Having seen the output of this so called "high finance" work that gets produced in India, let me assure you that we are still squarely in the wage arbitrage world

    1. Harsh,

      If a Ph.D. is paid $150k in London and $50k in India, it can be both wage arbitrage and high-end work. Or not?

    2. I could argue that if a $150K PhD is being replaced by a $50K PhD, then the work might just be easier to do or has reduced in importance or has become costly due to exogenous reasons like regulation. The question is what is the $150K PhD moving on to?

      What is high-end is changing all the time. Most outsourcing by definition tackles the low-end, that which can be commoditized. Sure, one can commoditize/outsource more and more things, up the value chain. So, on an absolute basis we are doing more high-end work, but on a relative basis, it is still low-end, almost by definition. This is not always true and applies mainly to the mass outsourcing, commoditized areas, but I think that the majority of the cases.

      All programming (computer software) used to be high-end for which the H1B visa was used. All programming is no longer high-end and that visa is grossly misused and out of line with what it was intended for. That's not to say that labor laws shouldn't be free between developed and developing countries, but I'm not sure if the terms should be different for something that is deemed high-end and of strategic, technical importance as opposed to wage arbitrage. That's the elitist view point that will be bashed by many, many people. :)

      But, if you look at the proposed legislations, they are not talking about a new STEM visa to target talent in science, technology, engineering, and mathematics. That might be the new high-end visa and H1B might be maintained as the wage arbitrage visa.

      Before I get pilloried as being a pessimist and spreading negativity, etc. Let me add that there have been cutting edge algorithmic trading firms in India for 8+ years which were more indicative of high-end. So, you will always find islands of high-end work, but I don't find it necessarily a story of recent years and something that is on the rise quite as much as the overall numbers might indicate.

      Now of course, algo trading is also commoditized, and I woudn't call it high-end anymore. In fact, I would argue that high finance itself is more or less fully commoditized (and is on the wane in the developed world). When you see more regulation, you can see more outsourcing. That's not high-end work. When the imperative to shift more financial modeling outside the US increases, to some extent it means that its not high-end or crucial any more.

      I think it depends a lot on where the demand/clientele is and where the envelope needs to be pushed. That is what high-end must be, by definition, and I don't see the demand for high-end work picking up within India as fast as I had thought. And, where we do, we see the opposite, outsourcing of contracts to foreign companies to run the IPL, run the CWG games, run the F1, build metro coaches, etc. All of that does get commoditized and gets done within India eventually, but by then should be even call it high-end any more?

      The definition of high-end is subjective and highly dependent on context and vantage point. Relative to the rest of the economy, all of it is high-end, but in other contexts, especially in the contexts prevailing in developed economies, perhaps not as much.

    3. I could argue that if a $150K PhD is being replaced by a $50K PhD, then the work might just be easier to do or has reduced in importance or has become costly due to exogenous reasons like regulation. The question is what is the $150K PhD moving on to?

      I don't agree. When a Ph.D. in India, being paid $50k a year, is able to do useful work in globalised production, and replaces a guy in London who used to get paid $150k a year, it is a huge event. It is the big enchilada.

      The guy there can either goup (do more exotic work at $250k a year) or down (work in non-tradeables at $50k a year). That's a totally separate question. The point is: It's a very big thing for India to have individuals who are doing globalised production at an income of $50k a year.

      Shashank's article had a fascinating fact: There are roughly 50 Ph.D.s in quant fields doing globalised finance production in Bombay today. (Surrounding them there will be assistants, programmers, etc. so the overall team sizes will be bigger). I think this is huge. Just 5 or 10 years ago, this did not exist. Five or ten years ago, it was all low-end work.

    4. Following up from my previous Anon comment, I don't agree with the idea of PhD == high-end. It will also be interesting to know how many of those PhDs got their PhDs out of India. There are lots of IIT BTechs and IIM MBAs (especially those with IIT+IIM background) who have been doing high-end finance in India for many years now. I don't know why they should not be considered in the high-end set? With the rise of Master's programs in Finance, the need for PhDs has declined both in the developed world and here in India.

      I would also dissociate my previous comments from the skill set argument. The same person with the same skills has better quant opportunities in NY than in Mumbai. So, I'm not saying that the skills are not up to par. In fact, I would argue that a PhD level high-end finance guy in India earning only $50K would be selling himself short, unless we are talking about entry level (which I doubt is the case for the 50 PhDs?). But, then again, this a matter of context. In the context of the rest of the Indian economy, this is all a good thing and a better deal. That I wouldn't disagree with.

  3. Proof that Shashank Bansal is on the right track:

    33,655 Ph.D.s in the US are on food stamps.

    I know, some of them are Ph.D. in french literature, and a good programmer never starves, but still.

  4. To some extent, the two numbers ($150k and $50k) look far apart because of taxation. In the UK, the post-tax compensation will be roughly $75k. In India, the post-tax compensation will be roughly $35k. More like 2x apart (from the viewpoint of the employee). And things are cheaper in India.

  5. thanks for the feedback.
    Just few comments:
    Lot of senior management in banks are concerned about finding intellectual and motivated staff in money center locations. But they do find Indian talent (despite being raw) eager for knowledge and relatively easier to groom.
    In some of the set ups, sales and trading staff in money centers are working directly with folks in Mumbai who build trading strategies, back test it, price it and prepare full sales pitch for clients. Such places are becoming breeding grounds for future bankers and more and more global market participants try to pick guys from here.

    Dedicated staff in india are checking the mark to market valuations for complex books. Lot of this core process is done overseas and methods just implemented here but increasingly more outfits are doing volatility/correlation etc surface calibrations, designing innovative data fitting procedures-in some cases providing valuable market insights to trading desks -which is much beyond conventional role of valuations teams. starting from simple process outsourcing, the teams have developed as partners doing core finance work and much more value addition having direct p&l impact.

    Lot of such pockets of activities are coming up where money center teams are being reduced to bare skeleton level mainly for last mile connectivity with end users. It's a small percentage of overall business as of now but definitely growing.

  6. Dear Sir,

    Request you to kindly throw some light on currency trading in India (OTC markets) whether it is legal or illegal.


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