Part I: So You Want To Be A Derivatives Trader?
Joris Luyendijk is an Anthropologist who runs The Guardian'sBanking Blog, a series of monologues where people in the financial sector anonymously talk about their working lives. This series is about a 20-something derivatives trader who worked in a small European country and is now a quant at a major London institution. I’ve formatted it into a Q&A interview with responses from his monologue, not mine. So if you're interested in what it's like to be a trader, especially overseas then read on...
A QUICK PRIMER
A derivatives trader is an agent who acts for a firm to purchases a financial instrument whose value is derived from another. Derivatives can vary greater and have increasing levels of complexity and they involve two other major factors, time and volatility. This particular trader claims that he's purchased his financial security [wealth] by dealing in and understanding volatility, hence the name, “vol trader”.
Q. WHAT IS A TYPICAL DAY LIKE?
A. Pre-Market
• I would arrive at the office just before 8:00 AM and switch on the seven monitors and log-into the multiple trading systems because nowadays,
it doesn’t matter how much of a mathematical genius you are, it's about systems.
• Then I sort each preferentially by Bloomberg news, existing or potential positions, and macro developments because that's what moves the markets.
• I make sure that all connections to the relevant exchanges are ensured and functioning to weed out any problems BEFORE trading starts.
• Then I calculate hedge limits and enter them into the order book by 8:45 AM but some traders can take up to three hours, especially if they’re doing option-on-options, path-dependent options, or correlated products.
Market Hours
Believe it or not, today there is little information asymmetry. Everyone has the same Bloomberg terminal, market feed, and variant of the B-S model. However, making small margins on each trade is crucial because most of my systems are executing scalp trades and the human input is how I program it to hedge my exposure and at what level I choose to take on a block trade.
• First, I look at option Greeks. The first-order derivatives such as delta, vega, theta, and rho. Then second-order derivatives like gamma, vanna and charm. When I'm trading vol I'm hypothesizing how much an instrument is going to move. So I want to optimise my various ratios at different strikes to ensure that I have bought and sold optionality at good levels.
• Second, I want to make relative value trades between components in the same index OR in the same business sector [how is volatility priced at the 25% delta put option in a French oil company versus the 25% downside in a Spanish oil company] I need to answer questions such as:
1. Where has the spread been historically?
2. How divergent are the skews in the volatility smile?
3. Have I been fast enough in identifying an anomaly and monetizing it?
If and when I do pull the trigger then it’s back to dynamic hedging, responding to broker requests from our sales traders, and coding / repricing it in line with new market developments.
Trading derivatives is really a reductionist activity. I condense the underlying's price, strike, contract duration, prevailing market interest rates, stock borrowing rates, dividend expectations and volatility into two numbers. A bid / offer price and the first three inputs are known so
...it's only volatility that I'm unsure of and that's essentially what I'm trading.
Post-Market
By 6:30 PM I’m out of the office and I have the evenings completely free to relax, play a sport, or even manage my own housework!
UNTIL NEXT WEEK...
Okay, I know this first question was long [pun intended ] but if you enjoyed it be sure to read Part II next week. I'll ask a few more questions about trading and the industry but if you can’t wait until next week you can read it in it’s entirety, here.
Otherwise, if you have any comments, questions, or concerns let us know in the section below.
First of all, who buys such complex derivatives (eg. path dependent, correlation and options on options)? Secondly, I assume this is more a prop role than a banking role isn't it? And is there any difference?
That blog has some pretty hilarious posts especially if you read the comments (mainly because the Guardian is a bit of a banker-bashing paper).
http://www.guardian.co.uk/commentisfree/joris-luyendijk-banking-blog/20…
http://www.guardian.co.uk/commentisfree/joris-luyendijk-banking-blog/20…
Are derivatives traders seeing the same margin pressure and volume reduction as their equity counterparts?
you sound cheesy.
Thank you for your comments! There's a couple of good questions and I'll try to answer them as best as I can...
Derivatives can certainty be private party instruments not hosted on the OTC. Not all of them are plain vanilla like equities. Others include bonds, futures, mortgages, swaps, etc. It's an instrument whose value is derived from another and to my knowledge this is part of what financial engineers do, create and value such derivatives.It sounds like the interviewee worked for a MM in northern Europe because he mentioned about maintaining market order as part of his job. Prop trading is prop trading really. I did it for a startup firm but it was for my own benefit and with my own capital. If you're outstanding enough to be a prop trader at a bank, you trade your own ideas on the bank's capital. But if not, you can work for a bank or firm and trade as part of S&T department for client and institutional orders.
In my opinion, I would say it depends on what type of derivatives are being traded. For plain vanilla I would say yes but for more esoteric ones, less so because of their specialized nature but I wouldn't be surprised if one day the HFT algorithms catch up this market.Part II: So You Want To Be A Derivatives Trader? (Originally Posted: 06/16/2013)
If you enjoyed last week’s post then...here’s Part II! Straight from the Banking Blog about a 20-something derivatives trader who worked for a MM firm in a small European country and as a quant for a major London institution. I've formatted it into a Q&A interview but last week I was only able to spit out their response to a typical day. This last part wraps up with a couple more questions about their lifestyle and the industry, so read on to pick up where I left off...
Q. HOW’S THE TRADING LIFESTYLE?
A. People don’t generally do this their whole lives and it can take over your entire life if you let it. My experiences have been that it’s not really that stressful. Further, I was able to save 50% of my net salary and working in northern Europe didn’t separate you from the rest of society like it does in the City, where finance is more of a lifestyle defined by a culture of big spending and splashing out.
Where I worked, people concealed their wealth and ostentatious behavior was socially unacceptable. For example, there isn't any discrimination towards the back office and it was completely natural for the secretary to join us for a drink. There’s no need for pinstripes and seniors don't make juniors get food orders either. However, if I did stay there I feel that I’d be pigeonholed despite being comfortable and eventually most do gravitate to the major hubs like Hong Kong, London, New York, or Singapore.
Q. WHAT’S THE INDUSTRY LIKE?
A. I don’t think you can plan your career more than two years ahead. Instead, you really ought to just be single with no LT relationship, kids, or house and here’s why:
Suppose you were trading in Sweden before the financial transactions tax which, was extended in 1989 to cover a wider range of instruments. Subsequently, 98% of volumes in bond derivatives in Stockholm went elsewhere. Now imagine you had been trading such products but were married to a local woman who insisted on staying put. You’d have to get a similar job in a niche market and if you aren't prepared to migrate,
Further, if you're mid-level and get laid-off it can be just as difficult to get back in.
CONCLUSION
Unfortunately, that's all I could parse out into a Q&A but hopefully this series served as a quick bit of information on derivatives trading. If you’re interested in learning more start with the CBOE and CME education pages otherwise thanks for reading and if you have any questions, comments, or concerns let us know below.
Silly question- do banks train new staff from scratch on the basics of trading or do they expect you to have trading experience as a day trader ?
Thanks for asking. As far as banks are concerned, to my knowledge most have a structured training program in place. However, they'll screen your arithmetic and risk-management abilities first. Further, they'll likely pull from the "usual suspects" like the experienced, Ivy League interns / graduates, and WS networks. My experience has been prop trading and I can tell you that well-established shops will want to see a P&L with a positive history. This means you better have an idea of what you're doing! If you don't fall into either of these categories don't panic, you can simply start on your own with as little as $5K. It all comes down to money, if you can make it with some semblance of RM and show it then a firm may throw you a bone. Otherwise, if you need a starting point I can point in the right direction if you'd like. I hope this helped!
Thanks for getting back to me! I'm brushing up on my arithmetic skills and will be studying risk management in my final year. How would one get into a F/O role in an IB as a junior trader since I only ever see analyst roles advertised, I can't imagine going from IB analyst to trader since they are different departments. Could you recommend a starting point since I don't fall into any of the categories. I'm at the 2nd/3rd best university in Ireland if that helps and I'm studying for CAIA level 1 and getting the Wall Street prep package soon enough!
Trading Derivatives (Originally Posted: 02/10/2008)
What are some reputable shops for trading derivatives (options, futures, etc)? Is this area very quantitative? Highest level of math I've taken is calculus...
I'm an analyst in IBD looking to move to the trading side. Just trying to collect more information.
To trade derivatives, are the options better at HF or at prop desks in a BB?
Thanks.
SocGen and BNP Paribas. Even with the recent events that have unfolded at SocGen ;) It is quantitative, even for the sales force... You don't really need more than calculus, but you better know your Martingales and Stochastic processes on the tip of your fingers :-p
Remember, you will always be a salesman, no matter how fancy your title is. - My ex girlfriend
did kerviel know martingales??
I understand kerviel didn't really do complex derivatives. He was on the delta one desk- where he was supposed to try to arbitrage equity indexes of different european stock exchanges. Usually a pretty simple way to make a little bit of money (although he didn't really do that of course)
He had a masters degree in financial engineering... So yeah I hope he knew his calculus ;) Plus math studies in France are really intense as opposed to many other countries, and you see Martingales and what not in high school. He was a smart guy, even though everybody portrays him as mister average, the guy had a graduate diploma, not from the best University but that doesn't matter since the knowledge you get is the same.
Remember, you will always be a salesman, no matter how fancy your title is. - My ex girlfriend
Well, I like Disjoint but he has a massive hard on for the french banks. the french have a few flaws which causes them to blow up every few years....arrogance, and blind faith in the math.
two, when you hear martingale think random walk. in the absence of drift, they're the same. it's not that complicated of a concept.
three, never trust a salesman. they usually don't know what they're talking about anyway.
Any recommended reading to learn some derivative pricing concepts? Ive been trying to find something that teaches C/C++ progamming from a finance quant perspective.
elan: There are books by Mark Joshi and Daniel Duffy(spelling?) on the precise topic.
Disagree about the French banks and their blind faith in math, but that is something that could be discussed forever. I still believe in SocGen and BNP, even though I am not working for either one of them.
I might have to partially agree with the salesman comment though. I was considered for both S&T, it seemed like my high aptitude at bull shitting convinced them to put me in a sales job :-p
Remember, you will always be a salesman, no matter how fancy your title is. - My ex girlfriend
"I might have to partially agree with the salesman comment though. I was considered for both S&T, it seemed like my high aptitude at bull shitting convinced them to put me in a sales job :-p"
for a good one, the sky is the limit
Prospects for Derivative trading (Originally Posted: 06/16/2007)
The following post is pretty long here are the main points: - LSE MSc in Finance and Accounting - No I-banking internships, just other internships - University of Washington 3.6 GPA, (3.85 in Finance) - Fluent (by order of fluency): French, English, Russian, Spanish - Learning Java and OCAML programming - LOVE derivatives (spend my life on interactive brokers losing $$$ ;)
Hi all, I am about to start out the London School of Economics (LSE) MSc in Finance and Accounting, and I was wondering what are my prospects to get a job into either: the middle office managing the company's risk; or trading derivatives. Basically all I want to do is work with derivative products for the rest of my life, and eventually get a Phd in the field (15 years from now :) I finished my undergrad at the University of Washington in Finance with a 3.6 (3.85 GPA in my major). I knew from the start that UW would not get me an I-banking job (I chose UW due to financial reasons), which is why I busted my arse to get into a good finance MSc program. I never interned at an I-bank, I interned however at Scottrade for a year, and at the US commercial service. I also worked part time through college at a bunch of s... jobs to pay for my education. I also speak four languages fluently (native French, lived in the US 8 years, Russian school every wednesday while living in France, and finally I studied Spanish and lived in Cuba for a bit). Also I am not doing any internships this summer, as I am re-learning Java programming and trying to learn OCAML programming as well so as to understand the structure of most derivatives softwares used in the industry. Do I stand a chance next year after my MSc to integrate one of the magical bulge bracket firms?
Also my GMAT was pretty low (660) I didn't bother retaking it because I knew the rest of my application would be enough to get me into LSE. Should I retake my GMAT so as to put my score on my resume when applying to I-banks? Or is it a complete waste of time, and I should just focus on Java and OCAML?
Apply for summer associate programmes now - you have a strong CV, if you apply in London no one will care about your GMAT
Should I wait until the fall to apply for the summer associate programs (or should I say programmes ;))?
Also, I figured that as long as you don't screw up during the summer you shouldn't have any problems getting a full time job right after, right?
hey Disjoint,
I have bad news and good news for you concerning your applying to programmes. I can only answer in regards to applying in London cause that is where I have
Bad news is, in London and at BB's, I doubt anyone will consider your application as an associate. Here, like in the US, you need a few years analyst experience or an MBA to come in at associate level.
Good news is, by having secured a place on an LSE MSc (congratulations) you will be highly sought after (in my opinion) if you apply at analyst level. See here in london, the main target universities for IB's are Oxbridge (Oxford and Cambridge) and LSE, aka the holy trinity, then there is a gap and you can still be considered if you went to Warwick, Imperial, Cass, UCL, Manchester (or even Ivy league in the US or top schools elsewhere in Europe). For those with undergrad at non targets, an MSc from a good University can go a very long way.
http://www.ibtalk.com/forum/viewtopic.php?t=4267&highlight=target+unive…
In your case having and LSE MSc and with your internships, it should be an easy task to get interviews at BB's for front office positions at analyst level. Thus you could easily get into trading derivatives straight away if you wanted. If you definitely wanted to do quantitative risk analysis, you could also pull it off I think because programmes don't necessarily demand a PHd and sometimes accept a quantitative MSc. don't quote me on that and look around. Asking agencies won't hurt either.
I hope I have informed you well and I hope it's not too much of a bummer that your chances of going in at associate level will be minimal. You could always call HR departments or agencies and ask to see if it could be done.
Last but not least, you said you wouldn't be doing an internship this summer, it's a bit late anyways to secure one but it certainly would have helped a lot. What you can do, which I know is possible cause someone did it when I was doing my MSc, is to look for an internship starting next summer with the permission of the university (word of advice, start the thesis project early so it doesn't get in the way). At the same time also apply for full time positions starting in september. This way you could even end up with several choices of where to work in the end.
good luck with everything and I hope the post wasn't too long.
Thanks a lot Phab; this post definitely wasn't too long, but very informative. I was mainly hoping to get recruited at the analyst level with my MSc, so I guess there is only good news in your message :)
The program at LSE is only a year, and ideally I would want a job straight out of LSE, without having to go through an internship. Although if worse comes to worse I will try and get an internship that would hopefully lead to a full time offer. I am going to start to apply in August/September at I-banking firms.
I saw that MSc from my program are sought after in the M&A industry, which is something I have a lot of interest in (as long as I have time to trade options on my own :), so I won't be strictly looking into derivative trading.
Thanks again for your opinion.
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