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S&T Interview Coming Up? Read This First
 

SenhorFinance's picture
HF
(Orangutan, 356
 
Points)
 on 12/10/12 at 5:00am
sales and trading job interview.jpg

mod note (andy): this was originally posted 9/30/12
It’s interview season, time of great joy and nostalgia: over the past decade, I have been in both sides of many interview tables, BB, consulting, HFs, you name it. If you are interviewing for S&T, today is your lucky day, I will share a few thoughts and tips on S&T interviews.

But remember: this is only my opinion, and I make no claim as to the helpfulness of any of this. Plus, I accept no responsibility for anything that happens to you if you take my tips at face value. That’s for symmetry: you won’t send me a check if they get you to your dream job.

Lessdoit.

You may have heard that the most recurring phrase in IBD is “this is very interesting” whereas in S&T, it is “fuck you”. Maybe that’s why I am so fond of S&T people. Sales and Trading is a true relationship business. You may have heard that electronic trading does most of the work a broker does, at a fraction of the cost, and this is true. Why are there still a good bunch of brokers (although way less than before)?

Because if you’re an investor, the average algorithm won’t tell you how it’s feeling about the stocks X, Y and Z. It won’t give you trading ideas involving EM currencies. Hell, it won’t even encourage you to tell your adultery stories or pay you Thursday drinks.

In other words, unless we’re talking about a hardcore quant fund with no subjective inputs in its models, talking to brokers and running ideas through sanity checks is part of every PM’s day. If you’re good at math but you dislike heavy networking and goofing around at the phone, you don’t belong here. Maybe ER. Certifications, credentials, financial proficiency, it all helps, sure. But being likeable is rule #0. Period.

Also, when you look at the typical “trade idea”, you will sometimes see stuff like DCF, multiples and technicals all mixed up. This doesn’t mean S&T people despise any form of the EMH, but rather that the client is always right. It doesn’t matter whether the client is a hedge fund based on pseudoscientific futurology, or an UHNW individual who claims she contacts alien civilizations on a daily basis before deploying her cash. If you relate to them, you get their business. That understood, you do need to know some stuff.

Think an equity desk: as you may know, stocks are a residual claim of investors in the assets of an issuer. Big deal. How does it work? It goes like this: the desk sells to investors whatever crap IBD originates, and then encourages them to trade with each other. You need to know your sector/region quite well, but unlike people in ER or IB, you can forget about profitability levers, deal synergies and all of that crap.

What actually makes a difference in equity is having an awesome price memory (1 week high/low of VOD LN, down to the penny, AAPL yesterday’s close?) and knowledge of the market’s trading dynamics (volume curves, order sizes, preferred trading venues). The day you realize you actually know a lot of clients, and on top of that, you can tell which like or dislike each name you cover, you know you are on the right track. Don’t fight the tape.

Another example: FX. Huge. Around 4-5 trillion USD change hands every day in those markets. FX traders see themselves as arbitrageurs par excellence. A successful FX trader is a cold-blooded bipolar (nice with clients, psycho-killer with everyone else) individual with a huge ability to focus, and makes a ton of cash. But no jokes, no lunches, no small talk. In that desk, you need fast risk assessment skills, on the fly calculations and very little to no fear.

Knowing this sort of stuff in advance will save you a lot of guesswork. If you can only take away one idea from this entire text, take this one: in S&T interviews, reading the Vault guide and memorizing the answer for the most common questions is far from enough. Why?

Because unlike in IB or even consulting, there isn’t such thing as “the right answer”. Different interviewers will expect different answers to the same question, and you need thoughtful prep and amazing people-reading skills to go well. Makes sense, as this is the bulk of the work.

Now, to wrap up, a few sample questions I would use in an S&T interview this week. You can actually post your answers here (or PM me if you’re too shy) and I’ll give you a two-line feedback.
1) Explain the 2008 market crash to a 9-year old kid in <100 words.

2) What is LIBOR? Where is it at? Why does it matter?

3) I have $1M face-value-worth of a 2% coupon T-bond maturing Sep2014. I want to sell them and buy FB stock. How many shares can I buy?

4) Speaking of, how did FB trade last week? Month?

5) What risks does an agency MBS carry? Which of those are more relevant in the current environment?

6) Name the 5 largest economies in the world. (Credit kids only: give me a ballpark estimate of their sovereign rating)

7) (Structuring kids only: a risk-loving client wants a fancy 4-year zero-coupon bond. At the end of every year, the bond either doubles in value or goes to zero, 50%/50%. How much would you charge for $1m face value? What is its duration upon issuance?)

8) Explain forward rates.

9) What is algorithmic trading? What about high-frequency trading, is it the same?

10) What is the difference between a dollar neutral and a beta-neutral long/short portfolio?

Good luck.

See my other WSO blog posts
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Comments

cjjung's picture

I love it, especially #1.

(Chimp, 5
 
Points)
 on 9/30/12 at 9:04pm

I love it, especially #1. Stumped me there.

Would love to see a post detailing "What to do on your first week intern in S&T".

mongoose's picture

I thought Algo Trading = HFT

O
(King Kong, 1,030
 
Points)
 on 9/30/12 at 9:09pm

I thought Algo Trading = HFT Trading.

Also, can you please post answers to your questions when this thread runs its course.

Thanks.

wolverine19x89's picture

Would anybody be interested

O
(King Kong, 1,845
 
Points)
 on 9/30/12 at 10:43pm

Would anybody be interested in starting a continuously updated thread filled with technical s&t interview questions?

If your dreams don't scare you, then they are not big enough.

"There are two types of people in this world: People who say they pee in the shower, and dirty fucking liars."-Louis C.K.

nonos's picture

9) HFT = starving geeks going

(Baboon, 156
 
Points)
 on 9/30/12 at 11:35pm

9) HFT = starving geeks going for the crumbs (=exchange rebates). Algo Trading = guys who do the very opposite of what's written in the fineprint (you know, "past returns don't guarantee future results"). An british word might be "wankers". In either case, social ineptness mandatory

(Disclaimer: sort of self-bashing)

RE Capital Markets's picture

I don't work in S&T, nor do I

RE
(Gorilla, 649
 
Points)
 on 9/30/12 at 11:38pm

I don't work in S&T, nor do I want to, but its nice to see topics like this instead of bankerella's "how to answer 'what's your biggest weakness?'" type posts.

Man made money, money never made the man

shark-monkey's picture

Algo is not HFT. Almost all

HF
 
Points)
 on 10/1/12 at 11:48am

Algo is not HFT. Almost all equity buy side traders use Algo's to execute normal positions which they intend to hold(not exclusively). HFT guys, are the firms that buy office space next to the exchange so they can be a millisecond faster in buying and selling a position which they hold for a second.

Fear is the greatest motivator. Motivation is what it takes to find profit.

andres17's picture

Ok, I will take a cut on #1.

 
Points)
 on 10/1/12 at 4:58pm

Ok, I will take a cut on #1. This is what I would answer:

Americans began speculating on the housing market. Investment banks created instruments that allowed them to pass the risks of the loans to outside investors. The rating agencies gave these instruments investment grade ratings. Mortgages default increased to levels never seen before. Banks were left holding those securities, as nobody wanted to buy them. Some banks went bankrupt. The government issue a bank rescue package. Banks stopped lending one another and credit dried. The economy stopped. Companies began cutting workers, resulting in more mortgages default. The stock market crashed.

SenhorFinance's picture

andres17: Ok, I will take a

HF
(Orangutan, 356
 
Points)
 on 10/1/12 at 5:30pm
andres17:

Ok, I will take a cut on #1. This is what I would answer.

Thanks for the answer, but that is a helluva 9-year-old kid you're explaining this to! You may not notice this but there are many layers of complexity under terms such as "investment grade", "bank rescue package" and "mortgage default".

In an interview like that, I would be expecting something more along the lines of "Houses were getting more and more expensive, and whoever owned houses was getting richer. So everyone decided to borrow money from the bank to buy another house - maybe one at the lake - and at some point everyone owed the banks so much that people started missing their payments blah blah...".

Don't be afraid to tone down a lot and perhaps even to sound sort of retarded in questions like this, they're not about whether you own the lingo, they're about whether you have a good grasp of the basics.

See my other WSO blog posts

andres17's picture

SenhorFinance: andres17: Ok

 
Points)
 on 10/1/12 at 8:12pm
SenhorFinance:
andres17:

Ok, I will take a cut on #1. This is what I would answer.

Thanks for the answer, but that is a helluva 9-year-old kid you're explaining this to! You may not notice this but there are many layers of complexity under terms such as "investment grade", "bank rescue package" and "mortgage default".

In an interview like that, I would be expecting something more along the lines of "Houses were getting more and more expensive, and whoever owned houses was getting richer. So everyone decided to borrow money from the bank to buy another house - maybe one at the lake - and at some point everyone owed the banks so much that people started missing their payments blah blah...".

Don't be afraid to tone down a lot and perhaps even to sound sort of retarded in questions like this, they're not about whether you own the lingo, they're about whether you have a good grasp of the basics.

You're right, I don't think a 9 year old would follow that haha. I guess I just forgot how to think like a 9 year old. It's been so long.

I wanted to ask you about the LIBOR question. Do you need to know only the 3-month LIBOR or all of them? Also, I know that LIBOR is some sort of interest rate banks charge each other for repo lending, or something like that. Why is this important for traders? Pardon my ignorance.

msmandoo's picture

I'll take a stab at a few

 
Points)
 on 10/1/12 at 8:51pm

I'll take a stab at a few questions.

2) Banks' unsecured lending rate, up to 1 year. Not necessarily actual funding rate since a group of banks simply report a rate on a daily basis. Rate determined by taking out outliers in the low/high and averaging the middle. Very important because $350T+ notional of interest rate swaps use LIBOR as benchmark floating rate. Under the spotlight these days because some banks allegedly conspired to manipulate it to under-report true borrowing costs.

3) Yield curve close to zero out to 2-year, so assume discount factor = 1. Then price of bond is $1.04M. FB at around $20/share so approximately 52,000 shares.

5) Backed by Uncle Sam so virtually no default risk. Primary risks is interest rate risk and negative convexity (refinancing risk). Given that the Fed is buying $40B/month worth of agency MBS, yields and vol will likely stay low. But if housing market picks up there will be more and more borrowers refinancing, so negative convexity is the most relevant today.

7) Expected Value = $2M (assuming zero rate down to 4-year). Duration is just 4 years. Not quite sure about this one - I'm sensing there's some sort of trick question here..

8) Forward rate = future interest rate based on current zero curve. This is NOT an expectation of future rates, merely a non-arbitrage rate given current shape of yield curve.

10) dollar-neutral = L/S equal dollar amounts. So long asset 1 short asset 2 is equal amounts. Hence portfolio should consist of securities with similar characteristics in terms of beta. Beta-neutral just means portfolio is weighted such that portfolio beta = 0, i,e, uncorrelated with market.

mrktmaker's picture

Let me take a shot at all ten

(Monkey, 35
 
Points)
 on 10/1/12 at 8:55pm

Let me take a shot at all ten (no googling, obviously). Please correct me where I am wrong.

1. Imagine if you, or your parents, bought a house, for example, and before you knew it, it was worth twice as much as you paid for it. Now, you feel a lot richer of course, so maybe they go out and buy another one using money that they made from your first house. For each of these homes, your parents still have to make monthly payments to the bank, but now imagine what happens if you fall behind on the payments on both houses, and then lose your job.
2. London InterBank Overnight Rate. It’s the interest rate bank charge each other if they need short term (overnight) funding. Right now it is at around 0.25%, and fluctuations in the rate can serve as a gauge of financial stress in financial institutions as a whole.
3. Let’s see. Right now a 2 year bond is probably trading at around 1%, so that makes the 2% coupon bond worth $1.01M. Facebook is trading around $20 after they rolled out their gift service, so you could buy 50,500 shares of stock.
4. Last week FB rebounded after the gift services rollout, but is still down after the lockup expiration last month where major holders like the fmr Paypal Executive sold nearly his entire stake
5. An agency MBS carries the risk of the agency who issued it, like Annaly or AGNC, and has interest rate risk as well as risk in the underlying security, mortgages, defaulting. Right now, the risk of interest rates rising, and therefore making the security less valuable, is a much higher risk. (Was guessing and prb shat a few bricks on this one, will Google later)
6. United States, China, Germany, Japan, and India? Not a credit guy but US is AAA/AA, China is AA, Japan is AA, Germany is AAA, and India is A?
7. In order for the client to get his money back, the bond cannot go to zero each year for the four years, meaning there is a 6.75% chance of repayment. For 1M face value, I would charge less than $67,500 due to the risk-free rate (and forward rates), so taking off around 5% for four years interest leaves me around 62,500.
8. Forward rates are the expectation of what rates will be in the future. For example, in the US, forward rates are higher than current rates due to the expectation that the Fed will raise the discount rate at some point in the future, affecting the entire curve (guessing again)
9. Algorithmic trading is making trades without human input, or a significantly reduced level of human input, using a program designed to make money in the current market environment, using past data as a guide. HFT is a type of AT that focuses on nano or millisecond trades that try to front-run orders and provide liquidity to the market.
10. Beta-neutral refers to the portfolio not being more exposed to a rise or a fall in the market. Dollar neutral, I believe, refers to having matching dollar amounts long and short in a portfolio at the moment.
How did I do? Great article, I appreciate the exercise, SB.

mrktmaker's picture

.

(Monkey, 35
 
Points)
 on 10/1/12 at 8:58pm

.

msmandoo's picture

Oops, misread 7) to be

 
Points)
 on 10/1/12 at 9:31pm

Oops, misread 7) to be double/halve each year. mrktmaker's answer looks correct to me.

recruder's picture

Amusing and very fun post,

ST
(Monkey, 30
 
Points)
 on 10/1/12 at 9:43pm

Amusing and very fun post, thought i'd chime a few cents to the questions.

1) Explain the 2008 market crash to a 9-year old kid in <100 words.
- people bet that what goes up, can't come down....we'll, they placed some wrong bets....'make sure you take you take physics in high school kid'.

2) What is LIBOR? Where is it at? Why does it matter?
- this is the average interbank borrowing rate, which banks use as rates to loan to each other. Centralized around London hence the name London InterBank Offer Rate (think money markets), but since a good chunk of the worlds money plays through those markets, global players participate in this. This is the cost of doing business with other big players and is a base rate for many other products.....so the LIBOR scandal that was recently displayed, is a big hurt financially to all products directly linked to LIBOR.

3) I have $1M face-value-worth of a 2% coupon T-bond maturing Sep2014. I want to sell them and buy FB stock. How many shares can I buy?
-> assume FB is trading at $20/share, you get around 50k shares....(but this is a good question and also another interesting opportunity in the reverse..pool funds for face value, go long coupon T-bill, make bets interim and hope it pays with coupon investment (def not FB) otherwise get full refund and return funds)

4) Speaking of, how did FB trade last week? Month?
- falling stock from the day it was born, 3-6% daily vol avg but downward trend...good short since IPO day.

8) Explain forward rates.
- what the general population believe the future value will be

9) What is algorithmic trading? What about high-frequency trading, is it the same?
- algo=automating your mind for consistent patterns, HF=eating the pie as it moves....no its not the same thing although HF is a form of algo.

and now to hedge...
- - - - - - - - -- - - -
But remember that this is only my opinion. I make no claim as to the helpfulness of any of this. I accept no responsibility for anything that happens to you if you take my tips at face value or for any misinterpretation.

trazer985's picture

go into S&T these days

ST
(King Kong, 1,747
 
Points)
 on 10/2/12 at 5:42am

go into S&T these days without an understanding of what the algorithms do at your peril. You will be eaten alive.

on the flip side, if you have a decent strategy in the flesh, which you can quantify the inputs for, you can automate it and make money while eating pizza.

Macro Arbitrage's picture

shark-monkey: Algo is not

HF
(King Kong, 1,369
 
Points)
 on 10/2/12 at 8:38am

"I swear, by my life and my love of it, that I will never live for the sake of another man, nor ask another man to live for mine."

Zafrynex's picture

Question #1 to the 9 y old

(Baboon, 139
 
Points)
 on 10/2/12 at 9:09am
prospie's picture

S&T seems too varied and

(King Kong, 1,682
 
Points)
 on 10/2/12 at 9:19am

Financial Modeling Training
Guide to Finance Interviews
Banking Resume

SenhorFinance's picture

Alright, for the best answers

HF
(Orangutan, 356
 
Points)
 on 10/2/12 at 10:06am

See my other WSO blog posts

SenhorFinance's picture

prospie: S&T seems too varied

HF
(Orangutan, 356
 
Points)
 on 10/2/12 at 10:25am

See my other WSO blog posts

WreckEmFinance's picture

I answered all these off the

O
(Baboon, 144
 
Points)
 on 10/2/12 at 6:59pm

"Everything comes to those who hustle while they wait."
-Thomas Edison

jj43912's picture

yikes. been reading through

(Chimp, 2
 
Points)
 on 10/7/12 at 10:31am
Pimp C's picture

Great guide, thanks a lot

ST
(Chimp, 14
 
Points)
 on 10/7/12 at 3:04pm
Pimp C's picture

Great guide, thanks a lot

ST
(Chimp, 14
 
Points)
 on 10/7/12 at 3:05pm
ChildPlease's picture

null

O
 
Points)
 on 12/9/12 at 11:38pm
Hank Rearden's picture

Wow!! Do one for BB IBD...

IB
(Baboon, 173
 
Points)
 on 10/15/12 at 12:56am

If you ain't gettin money dat mean you done somethin wrong.

" If you have built castles in the
air , your work need not be lost;
that is where they should be .
Now put the foundations under
them." - Henry David Thoreau

0860's picture

Should I be worried if I

 
Points)
 on 12/10/12 at 10:05am
bullbythehorns's picture

mrktmaker: Let me take a shot

O
 
Points)
 on 12/11/12 at 12:54am

Here's the thing. If you can't spot the sucker in the first half hour at the table, you are the sucker.

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