Prop to Bank/Fund
I'm a discretionary rates trader at a prop firm. My P&L for 2016 was low 6 figures. Talented guys at my firm who have been around longer than me earn mid 6 figures and less than a handful broke the 7 figure mark. I'm talented enough to continue grinding this out going forward while increasing my P&L as my size grows and my profit split becomes more favorable. Furthermore, if the Fed continues hiking rates and if Trump removes some regulation (Dodd Frank/Volcker) and banks come back in to start hedging their interest rate risk, the markets can really start to move again, and that trajectory can improve significantly. Having said that, that's a lot of "if's".
I'm curious if my skill set is transferable to another institution (bank, fund, corporate firm, etc)? Can someone help me understand how traders at banks trade? For example, I come in, turn on my screens and start to take action as soon as I see opportunity. I have full discretion over my decisions and my trades are based on my own analysis. Are traders at banks permitted to trade this way? Could I pitch them on saying, "I know how to trade these particular products, this is my P&L, etc"? Are traders at banks able to come in, sit down and start trading or how does it work? If the answer to this is no, can you please include some of the skills/experience I'm missing in order to be successful at a bank or fund?
For someone who is a prop trader and supposedly profitable, should at least know what traders at banks do... Look up "the practical guide to wall street by matthew Tagliani"...
discretionary rates prop trader probably means you are probably trading US Treasuries cash/futures (tho maybe you are in Europe trading Bunds / Gilts / something else). But i'll assume you are US based.
These bank "traders" are mostly just market makers these days trading prop on the side. You walk in, sit down, take over the book from the london market maker around 7:30 or so, and then wait for customer flows to price and hedge. That is the job of the market maker...and the firm expects you to be profitable doing it. However, since you are also expected to "pre-hedge", then yes, you can just trade whatever you want (in your sector, upto your risk limits) pretty much 23.5 hrs a day.
However, your man "job" at a bank is to be the market maker in your sector. So, even if you make zero as a market maker, but millions from your "pre-hedge" (prop) trading, you are still expected to be a fast and accurate market maker to the firms clients. Market making is the price you pay, to be able to trade prop in that seat.
In terms of, "how do i get that seat" you need to be in the right place, at the right time, and know the right people. Banks prefer to hire experienced traders from other banks, sometimes they hire their customers away from their hedge funds (i've seen both happen). On rare occasions, banks will hire traders from prop firms (i've seen this happen), but generally you would need to know / have a relationship with someone on the desk already, to vouch for you (these guys were usually former bank traders who tried prop trading on their own, but then went back to a bank). This is a hard world to break into if you don't have the personal relationships. The new young hires tend to com from the summer analyst / intern class...but those are generally only filled with junior/senior undergrad / MBA kids. If you don't have a personal relationship to get your foot in the door, then a top MBA will probably enable you to get a summer intern spot, which will then enable you to be in the running for a junior seat on a trading desk. Since most MBA's have never traded, you should have a leg up in the scenario. Unfortunately, the number of hires has dwindled in recent years. 10 yeas ago, a rates desk might have 12-15 traders...but now the number is almost half of that. Fewer seats...fewer opportunities to break in.
I know this is not what you wanted to hear....but its just reality. The bigger shops like Millennium are always looking for talent (assuming you can show a history of more than 1-2 years of returns). At Millennium, you would be in a silo, on your own (so, similar to what you do now), but with very tight PnL stops. The hardest part is getting in.
Thanks for the thoughtful response ironchef.
I primarily trade treasury/eurodollar/fed funds futures. I have a few follow up questions if you dont mind:
What might a sample inventory look like that you take over from the London guys? I recognize this could vary widely but just trying to see what kind of size/product mix a bank book might look like.
What might a customer order look like size wise? I imagine if you have someone call in and ask to sell 4k 10 yr futures, you would be able to get short somewhere in middle of the eurodollar curve ahead of such an order and capitalize. Not sure if that crosses the line of front running but wouldn't access to customer flow information give a trader a significant leg up on hedging away risk?
How do traders price out their trades? Do they rely on models or is it less sophisticated. For example, if I see an uptick in the 5 Yr, I may get long 10's or 30's below, which is not particularly sophisticated.
What sort of risk/size is available to a trader after 3 years? Again, I know this varies but any sample you are familiar with would be insightful.
Any idea what front end software is used by the rates guys?
As far as breaking in, I'm not necessarily looking to leave my shop. I'm just looking to see what options might be available to me. To that end, what can a trader at a bank do that I cannot from a skill set stand point? For example, if trades are based on models that they create, that would be something I have little experience with.
Thanks again
1) it depends on the bank. Some London traders have/keep their own book, and the 7:30am switchover is just "who gets the new flows". Other banks, the london trader empties their book to the appropriate NY trader at mid-market prices. And the inventory varies based on what overnight customers did. Maybe its 300mm deep old 5yr notes vs 5's...or some equivalent on deep old 2yr/1yr sector. Its all off the runs. tho On the runs and futures, the london guy is expected to hedge in the screens just like everybody else, except for off the run hedges of course.
2) customer orders (really, not orders but inquiries....such as "bid on 500mm old 2yr notes") run the gamut...from 5mm old 2yr notes to a billion...even bigger in bills. Bid on 7000 10yr contracts....or Bid on 10,000 5yr contracts vs offering 2300 classic bond futures. Make me a market in the 10/30 curve...you are in comp. And yes, as a dealer, if you are idding on 500mm 10yr notes, since that is not an "order" you can absolutely trade in front of the inquiry, because you do not have a hard order...the customer might not actually do a trade just because they asked you to bid or offer on something. I've seen this a lot...you just don't know.
You RARELY get orders...its mostly inquiry bid/offer based. However, these inquiries still can have value. Its just more difficult to extract that value.
3) all banks will have a baseline model for mid market pricing the off the runs...usually nothing too complicated...spead / liner interp/ factor model based. However, where YOU will bid/offer a security is your personal choice. you are always in comp...so you want to quote the widest bid/offer you can to make money, but still win the trade from your competition (the other dealers). How you trade, and how you make trading decisions is totally up to you, so long as you stay within your risk limits (40k-100k/bp is generally where junior guys start in terms of prop risk limits). In geral tho, you can't just rely on a model....you must take into account what is happening right now...and there are just too many things to allow a model to do it all. Thats why these traders get paid the big bucks..its hard work.
4) it depends on how much money you make...40k-100k/bp is standard..but the more you make, the higher your risk limits. I've seen a guy with 3yrs experience get a 5mm PnL stop when he was the senior market maker for his sector on a treasury desk...and the desk head had a 15mm PnL stop (these are for the year).
5) btec/espeed...sometimes an aggregator like Ion or Broadway...or some firms have developed internal aggregators...some guys like TT for futures...some just use the firm aggregator, and futures become just another line item. You will have choice here. Every bank has their own OMS booking system..they are all different, but similar.
6) this is highly personal...some guys use models, others its all in their head...some (most) guys are a mix. Take everything available to you...make it your own, always be on the lookout for new ideas..evaluate them...determine if you like the idea or not...decide if its worthwhile for you or not. (hence, make them your own). Every trader is unique...and the learning process never ends.
regarding career options...if you are making money, the more you make, the more you have...and vice versa. Personal relationships are the key to lateraling into the industry. If you want to startover, then its the MBA. You could try a different prop firm (and some hedge funds, like Millennium, are really just very large prop firms)...and each has their own unique hiring process / requirements.
Whether your skill set is transferable depends... What is your skill set? Why do you make money? What's your edge?
Given that the magnitude of your PNL is not that large (and it's not even the PNL which matters), your answers to the above questions are even more crucial.
Thanks for the respoonse.
Your first question is actually the same for which I am seeking an answer of traders at banks and funds, so that I can distinguish how it differs from my own.
Broadly, my skill is being able to predict how the market will behave, before it behaves that way. This is due to:
What is the skill set of a trader at a bank (trading interest rate futures), and how does it differ from mine? Also, can you please elaborate on what you mean when you say its not even the P&L that matters?
Banks don't have dedicated prop interest rates traders anymore...at least not like they used to...now they have market makers, who also trade prop. Its a small distinction...but an important one...because your customers are mostly not just asking you for block size trades in futures (although...they do ask). They also want to trade off-the-run cash securities with little to no visible tradable market...or for you to provide much more liquidity than you yourself can find in the screens...you are expected to "trade out of it" whatever that means...or you are expected to "pre-hedge" because you are supposed to predict what customers will do, before they do it. Being a market maker, a real market maker in the big leagues, is incredibly difficult if you can't predict the future with a high degree of accuracy.
Your strategies may indeed make $$...but they will need to make A LOT of money (millions...tens of millions) in order to be worthwhile on an institutional dealer bank trading desk.
Bank rates traders are expected to each make 15mm+ per year. Some make more, some make less and are eventually fired in search of someone who will make more.
You seem to have a good start...but that's just a baseline. You need institutional experience if you want to get one of VERY FEW seats on bank dealer rates trading desks.
There are no traders at banks who are JUST trading interest rates futures. If you are a eurodollar expert, then you would be on the STIR desk...essentially part of the Swaps desk, focused on the front end. This is the hard thing...at a bank, you are expected to trade MANY things...and its very hard to focus on just one, when market making is pulling your attention to other unrelated things. This is why its hard, and a specific skill, to be a market maker.
If you were on the STIR desk, you would be trading all 8-12 of the front eurodollar contracts, and OIS swaps, basis swaps, curve & butterfly trades. There will be days that you don;t have the time to focus on your strategy because you are making markets, and then hedging those positions, when you would have rather been trading your prop strategy. Well, recall that the seat exists first to make markets for customers (making money is either tied, or slightly less of a priority...sadly...but thats the result of DoddFrank).
It will be hard to convince people on the basis of what you've written above, tbh, as it's not specific enough.
The skill set of a trader at a bank is likely to differ from yours in some key ways because of the setting (it would also have some similarities). For instance, a trader at a bank is likely to have a longer-term sense of direction (whether based on their judgement of macro fundamentals or their sense of what the flows are).
As to the PNL, like I mentioned previously, it's like a sausage. The way the sausage looks doesn't provide a lot of insight. What matters is how it's made and of what ingredients.
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