Quants worth following: Timothy Klassen

"Quants worth following" is our latest interview series highlighting thought leaders in the quantitative trading industry actively sharing their knowledge and resources with the community.

In this edition, we spoke with Timothy Klassen, CEO of Vola Dynamics.  Klassen founded Vola in 2016 to provide the options industry with advanced pricing, modeling, and volatility fitting analytics. Many of the world's most sophisticated hedge funds, banks, and prop shops are clients of Vola Dynamics.

Klassen designed the "new VIX" that Cboe introduced in 2003. Before founding Vola, he built the options analytics infrastructure and quant team at Getco LLC from the ground up. He started his career in finance as an equity derivatives quant in Emanuel Derman's team at Goldman Sachs in 2000. He received his Ph.D. in particle physics from the University of Chicago.

For Klassen, quant finance was a natural extension of his lifelong curiosity. "I still think of myself as a physicist at heart—it's the only club I ever wanted to belong to," he says.

"Since I was a kid, I was always interested in the big questions," Klassen says, which led him to study theoretical physics, a field he saw as offering the most rigorous tools for understanding fundamental truths. He started in string theory, but as it became increasingly clear that a testable version of such a theory might be not years but decades away, he shifted his focus to more practical fields, eventually ending up in lattice QCD (Quantum Chromo Dynamics), which he describes as "fantastic preparation for quant finance."

Klassen explains that his work in lattice QCD laid a unique foundation for his later work as a quant: "I worked on, essentially, the quantum version of improved finite-difference schemes for solving PDEs, which then had to be combined with a large-scale Monte-Carlo infrastructure we built in C++, as well as all the necessary data analysis tools." In hindsight, this was remarkably similar to the work we do at Vola Dynamics: constructing mathematical models to represent aspects of financial markets, coding up algorithms to solve them, and refining them through data analysis in a continuous feedback loop."

This early experience proved invaluable as he transitioned to Goldman Sachs under the mentorship of Emanuel Derman. At Goldman, Klassen worked on flow and exotic equity derivative modeling, designing the first modern, asymptotically arbitrage-free volatility curves and surfaces. Combined with appropriate fitting algorithms, this enabled rapid and reliable calculations of local volatilities. He also created the "new VIX" formula that was in short order, adopted by the Cboe. His innovative work at Goldman laid a strong foundation for his later role at Getco.

"From my perspective at the time, the founders Dan and Shu ran Getco a bit like an experiment in creating the 'perfect society.'" He recalls a meritocratic, entrepreneurial culture that valued transparency and integrity in markets, adding, "Getco would advocate for fairer markets—a level and transparent playing field, where competition between diverse market participants… would lead to tighter spreads and hence lower transaction costs for end users, like everyone's 401k pension fund."

"Working at Getco was by far the most exciting job I had before starting Vola," Klassen says.

While at Getco, Klassen had the chance to speak with many people passing through for interviews and realized that many of his ideas about pricing and volatility modeling were not just competitive but often ahead of what even industry leaders had come up with over the years. "I started thinking about whether it would make sense to start a business trying to sell a quant library solving all the long-standing problems around the super-fast pricing of American options, implied vol surface calibrations, etc.," he recalls. "These are the building blocks of any derivatives business, whether focused on listed 'vanilla' options or more exotic structured products that only trade OTC."

Launching Vola Dynamics without outside investors, Klassen and his co-founders, Jiri Hoogland and Misha Fomytskyi, established a lean, high-caliber team, with world-renowned quant Jim Gatheral as an advisor. As Klassen notes, recruiting top talent in the early days was a challenge: "We were competing for the same talent that might otherwise land at big tech companies or the Citadels, Susquehannas, and Goldmans of the world." Since then, Vola's name and reputation have grown. Today, Klassen proudly shares that "quants are often asked in interviews on the street if they are familiar with Vola Dynamics!"

"The listed equity options markets have by any number of metrics become very large, liquid, competitive, and sophisticated over the last decade. The pandemic revealed many new, remarkable features, from the 'strange' — but perfectly rational — shapes in index and single stock vol surfaces to changes in spot-vol dynamics to the dramatic increase in retail participation and trading frenzies in meme stocks and 0DTEs. With the new interest rate regime we are in now, it has become very clear that American options are path-dependent 'exotics,' not 'vanillas,' and every little detail around rate term structure (including, e.g., negative borrows), settlement, and events, to name a few, has to be modeled properly to be competitive. These are all fairly technical matters, but there is one simple example that illustrates the remarkable amount of information encoded in option prices, 'visible' to anyone with the right tools. Namely, the Federal Reserve recently published a detailed study showing how SPX options encode, they argue, the most unbiased estimate of the true 'risk-free rate curve' available anywhere in the market (this is something Vola Dynamics has provided for many years; we like to call it 'SPIBOR')."

"From day one, our long-term vision has been to become the go-to provider of all computationally and mathematically demanding analytics, data, and services for volatility, options, and other derivatives," Klassen says. "This kind of infrastructure is a necessary, but not sufficient, condition to thrive in this day and age. We allow our clients to concentrate on their unique edge—their real source of profitability."

He continues: "Without us, they often end up grappling with similar, hard, and tedious problems again and again, incurring significant opportunity costs and wasting both time and money—if not risking outright failure. By the available evidence, it seems that our solutions are better than what even the largest and most sophisticated firms have developed in-house. Many of these firms now trust us for these tools, and we make them available to all market participants, large and small."

Klassen offers this advice: "I'm not a typical entrepreneur – I assume the hardcore entrepreneurial types will have no trouble finding better advice out there – so I'll just mention a few points for quants who may want to become entrepreneurs down the road: while you're young, start reading and learning as widely as possible. If you can, study a technical field like physics, where you'll learn what fundamental and effective theories are and how to express them as mathematical models. Then, as a quant looking to build a business, find a niche that is small enough that you have a chance of becoming a world expert but part of an important enough field or problem that people will care. Finally, try to surround yourself with some talented friends who have complementary skills. If you work hard and you're lucky, you can make a dent in the universe!"