Ask me any question you have about Prime Brokerage
(Senior Monkey, 67
Points)
on 3/6/10 at 6:10pm
I realized that there really isn't much information on prime brokerage on this site, even though it has been a significant source of revenue at bulge bracket banks under the S&T umbrella. I currently work in this industry (one of the big players GS/MS/JPM/DB) and am here to answer any question you have about prime brokerage. Silly or not, whatever question you have, shoot them my way.
In what order do prime
In what order do prime brokers typically do their gym, tanning, and laundry?
The Situation wrote: In what
In what order do prime brokers typically do their gym, tanning, and laundry?
Looks like we got a situation.
haha
The Situation wrote: In what
In what order do prime brokers typically do their gym, tanning, and laundry?
Gym first. Being fit is important. When a prospective client asks all the major prime brokers to do a beauty contest, the more fit ones get the business. This is why the people (guys and girls) on the prime floor have better physiques than traders/salesppl on other floors (I am very serious).
After gym, laundry follows.
Prime brokers actually don't tan all that much...this is influenced by the vacation schedule. Prime brokers's vacation schedules are dependent on their clients. Most hedge funds rarely make decisions to change prime brokers toward the end of the year (Nov-Dec), so a lot of ppl take time off then, and it's hard to go somewhere with a lot of sun around those months. As a result, most are very pale.
You're right in that Prime
You're right in that Prime Brokerage isn't discussed all that much on this site, thus I don't even really know too much about it. So could you just briefly go over what you actually do in prime brokerage? How is it similar and different from S&T (if they're even related at all)?
What are the good groups
What are the good groups within PB and what are the shit ones? How do PB bonuses compare to S, T and IBD?
I know a lot about coloring.
I know a lot about coloring. If anybody has any questions, feel free to ask. I own multiple crayola box sets, if that helps my credibility, and I won the coloring contest in third grade, which netted me the first book in The Boxcar Kids series. The key is to outline the image in a marker, then color it in with a crayon, this helps mask mistakes of going outside the lines, and really adds some definition and tone to your colorings. But that's all you get for now. I was going to make up a cool acronym for coloring, but C is takes by Citi, CL by crude, so I'll just stick with coloring, I don't want there to be any confusion.
downtown22 wrote: You're
You're right in that Prime Brokerage isn't discussed all that much on this site, thus I don't even really know too much about it. So could you just briefly go over what you actually do in prime brokerage? How is it similar and different from S&T (if they're even related at all)?
Let me give an overview of prime brokerage. Will be a long post. Prime brokerage is really a huge bundle of services provided to hedge fund clients and these services can be very, very different from each other.
At first all it had was the most basic function, that is custody: asset servicing and clearing. It was very ops-like. You were basically earning a fee to do ops. Nowadays these services are provided free (and done by ops at BBs), as the real money comes from other, more sophisticated services. Even though the work is actually done by ops, you still need front office people (usually in product management) supervising them. for example: there are some countries you can clear securities of and countries you can't. there are some legal entities you can clear certain securities in, and some legal entities you can't. So these ppl try to constantly expand the asset servicing ability/etc. They work a lot with back office teams, technology, and legal, but generatig revenue for the firm meanwhile. (without full asset servicing capability, some HFs wont want to PB with the firm and the big sec lending revenue is gone). You gotta get your basics right before talking about more advanced stuff. Is it really finance work? related to finance yes, but doesn't match the typical "finance job" description WSO-ers aspire to.
Then PB developed a bit more and it had more functions, such as execution (latency sensitive clients such as stat arb funds needs lightening fast execution speed these days), financial reporting (that's like accouting), and capital introduction + consulting (finding institutional clients to complete fund raising efforts, finding new office space for startup funds). Cap intro is pretty self-explanatory. A very salesy role. Financial reporting is all automated these days (ops may have to manually fix it if there's a system error). Creating execution platforms is a real challenge. HFs want their futures, options, stocks and other exchange-traded product executed within a few milliseconds. Product management people work really hard along with IT to develop better and better systems to satisfy clients' needs. PB makes execution revenues from clients (especially stat arb and global macro ones).
After that, PB developed into more sophisticated functions like security financing and security lending services. Financing is basically a lending business, a bank within a bank. They basically lend cash to HFs against a portfolio of assets as collaterals, therefore giving the HFs leverage. HFs have to post a margin and it is up to the PB to determine what the margin is. Margin is usually risk based, therefore a high risk/volatility strategy like activist/concentrated investing would have to post a lot more margin than a low risk/volatility strategy like stat arb. You have margin team that develops margin methodologies that capture the risk of different HF strategies. On equity side, You have collateral traders looking at the rehypothetication market for funding levels (how much does it cost to raise cash from collaterals). On fixed income side, you have traders who participate in the repo market. Sec lending is basically borrowing securities from asset mgrs (think fidelity who HAS to hold everything in an index to replicate index fund like returns) and lend it out at higher rate to HFs, making a cut in the middle. that spread depends on how hard it is to borrow the stock so sec traders spend all day looking at supply and demand of short interests. Synthetics/equity swap trading is also part of the PB business in a way: total return swaps allow a client to go long/short something without committing much cash upfront, it is basically a form of leveraged financing. Financing and sec lending is where the big bucks are and PB actually takes on risk to generate these revenue. You never want some hedge funds to blow up and blow you up in the process, that is why there is a huge emphasis on risk in PB.
Then you have the PB origination/sales people. They own the relationship with the HF clients and wine/dine/golf with them so HFs would use the PB instead of its competitors. Rather than selling financial advices, PB origination people sell the strength of the bank (big balance sheet, good counterparty to have), the range of product and services it offers, its execution ability and operational capabilities, the aggressive margin methodologies it offers, and etc.
Then you have client services reps. Client service reps get a not-so-good reputation in PB, as the work is more mundane. They usually recruit from non target schools for these positios. They are assigned to individual clients and take care of all daily requests of the clients. Clients reach out to them on every question they have (book this trade for me/how to login to some portal/why is my MBS marked so low) and client reps have to coordinate with other functions in PB to answer the requests.
Most BBs have prime brokerage as part of S&T. It is different from S&T as you are not really following a particular asset class (stocks/bonds/fx), but rather trying to offer the best products/services for the buyside. At the same time, there are roles (repo trading, sec lending, etc) that are market related.
Brown_Bateman wrote: What are
What are the good groups within PB and what are the shit ones? How do PB bonuses compare to S, T and IBD?
By "good groups", i am going to assume you mean groups that pay well, have better exit opportunities and more analytical.
Origination sales gets paid really well. I think it's a great job if you have a talent for selling. You just gotta get clients to sign with your PB and you own the relationships. If clients you bring in are big revenue contributers, you are in luck. If you can sell PB, you can sell anything. You are not selling your own expertise/financial advices, you are just selling the products and services the firm offers, and the financial strength of the firm. In addition, you build a great network.
Other good groups are like the trading groups (repo trading, sec lending, etc). It is market related and you get to take some risk. If you have a view that IBM will be shorted heavily by hedge funds starting 3 weeks from now, you can accumulate IBM inventories and hedge your market exposure by selling synthetic forward on IBM (long a put and short a call at same strike). This way, when every HF in the earth wants to borrow IBM in a few weeks, you have all these supplies and can lend it out at high rates and make bank.
the product management groups are good if you are into project management, system design, and IT stuff. I also heard cap intro can be a lot of fun.
In terms of bad groups, i'd say client services is probably the least analytical role...you will just be answering clients' day-to-day request and i don't think that really build the best skillset...some of the product development roles can be mundane too, like less finance related.
Regarding bonuses, it really depends on the group lol. The trading, origination people are going to get paid on par with other areas of S&T, especially if the PB is a big market share taker (like GS/MS back in the day). You'd be surprised how much revenue PB rakes in in a good year... Other groups get a slight discount in pay, as they are not directly contributing to the revenue.
If you are a senior person (SVP/MD) within PB, you get paid pretty damn well no matter what group you are in. PB is a group-work business, and no revenue can happen unless everyone works together. Like, no matter how well a salesperson can pitch, if the execution platform can't deliver/is too slow, or if there is always operational failure, client will not sign with the firm/give a lot of business to the firm. On the junior level, i feel you don't get paid as well as the guys in a trading desk that is doing well.
GoldenEagle2009 wrote: I know
I know a lot about coloring. If anybody has any questions, feel free to ask. I own multiple crayola box sets, if that helps my credibility, and I won the coloring contest in third grade, which netted me the first book in The Boxcar Kids series. The key is to outline the image in a marker, then color it in with a crayon, this helps mask mistakes of going outside the lines, and really adds some definition and tone to your colorings. But that's all you get for now. I was going to make up a cool acronym for coloring, but C is takes by Citi, CL by crude, so I'll just stick with coloring, I don't want there to be any confusion.
LOL. but is it necessary?
PB is under the S&T umbrella of a bank, and this is an S&T forum, just trying to be helpful, not ridiculed.
Very good, informative post.
Very good, informative post. Ignore the idiots.
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thank you very much... is it
thank you very much...
is it fair to say the majortity of the money is money is made lending out (throug SLA agreements, i imagine) the HF securities?
and can you elaborate the SL part...explain it, if you can, as if i was an idiot.
thanks for posting this..very informative...
Very informative, Thanks!
Very informative, Thanks!
Batrick Pateman wrote: thank
thank you very much...
is it fair to say the majortity of the money is money is made lending out (throug SLA agreements, i imagine) the HF securities?
and can you elaborate the SL part...explain it, if you can, as if i was an idiot.
thanks for posting this..very informative...
So PB has two parts: equity and equity linked products (think convertible bonds, warrants, options) and fixed income side (rates, credit and ABS)
In the equity space, the most basic way to make money is financing client's positions (leverage). BBs can take the client's portfolio and raise cash from it (collateralized financing) at attractive rates, let's say some basis points over libor/fed funds/other reference rates and lend this balance out to HFs at a mark up as HFs are less credible counterparties than investment grade rated BBs. This represents part of the revenue. So PBs want large AUM clients that need massive leverage. (fundamental equity l/s funds like Greenlight doesn't really need much leverage and doenst turn over portfolio very often meaning no execution revenue, plus risk is high as they can be wrong in the short run, thus they aren't profitable clients).
Then stock loan plays the next part. When you short a stock, you borrow it from someone and sells it on the open market to raise cash. Then you pledge that cash to the lender as collateral. The lender puts that cash into the repo/fed funds market to earn risk free rate, and "rebate" part of that interest (let's say risk free- 30bps) to you. That 30bps is effectly the cost to borrow. It's pretty easy to borrow stocks with a lot of float out there, but when things become "hard to borrow", it is a "special" stock, like AIG a while ago coz everyone wanted to short it. The rebate rate could become risk free - 1000bps, that means you get negative rebate (you actually have to pay the sec lender almost 10% a year). The stock better go down hard for you to justify this high cost of borrowing. Obviously the PB takes a cut in this: if the sec lender (vanguard) is rebating PB risk free - 30 bps, PB is rebating the client risk free - 50 bps to make 20 bps for themselves. Sec lending guys spend all day analyzing stocks and try to source shorts for their clients (they have databases are are plugged into other banks' inventories), building relationships with the big sec lending firms (asset management companies) so they get good rates. Since you make the most money in "specials" book, traders try to forecast what stocks will be shorted heavily in the future and try to accumulate the supply beforehand. If you wait until a stock goes special, it is not great opportunities anymore as it costs you a lot of money to borrow it from asset mgmt firms. So you want to have the supply before it goes special, the easiest way is to buy it. But then you worry about it falling in value on your book, so you hedge it with the short position in synthetic forward. You can't short stocks in forward market so you use options to construct the same payoff.
Put call parity
Long stock + Long Put = Long call + PV(Strike price)
So rearrage equation
Long Put + Short call = Short stock + PV(strike price) = "synthetic forward"
This way, you own the shares, you can lend it out and you are hedged if the price goes down.
If a client longs a stock that another client wants to short, then it's golden situation. This is because 1) PB can just lend out the long position to the other guy and no need to borrow it from sec lenders (0 cost), but still rebate standard rate to the guy who wants to short. 2) PB doesn't have to raise cash to finance the long position/doesnt have to fund it, because the HF that shorts it already raised cash in the open market and pledge it to PB as collateral (meanwhile the HF still paying standard interest rate on the balance). Basically PBs can make huge spreads when this happens. This is why PBs want a lot of clients/balances/awesome long and short books, so they can monetize from these opportunities. The majority of revenue in the equity business comes from this as well as SL fees.
In the fixed income space, it is basically the same thing. Financing and lending bonds, instead of equities. But the economics is very similar. The FI market is obviously much bigger and much more liquid (like govie stuff).
A significant stream of revenue comes from execution from options/futures, too. Faster systesms are always in demand. You can make great money if you can design good systems.
I currently work in the product management/development team.
Question for you DrNo. I
Question for you DrNo.
I feel like PB has been getting more attention post-financial crisis. My impression was that this is two-fold.
First, banks like Barcap, DB, CS, and UBS are all trying to build out their presence in these areas (in contrast to, say, MS and GS that have always been big in prime finance), so a hiring spree + laid off people = increased interest.
Second, it seems like PB offers greater work/life balance than many trading desks (I'm coming from the commodities viewpoint where sales, for example, could average 65-75 hrs per week), while still being front-office and still paying quite well.
Do you think these are fair statements, particularly the second point? I'm asking for all the areas you mentioned--sec lending, sales, cap intro, prod dev, synthetics, and risk.
skins1 wrote: Question for
Question for you DrNo.
I feel like PB has been getting more attention post-financial crisis. My impression was that this is two-fold.
First, banks like Barcap, DB, CS, and UBS are all trying to build out their presence in these areas (in contrast to, say, MS and GS that have always been big in prime finance), so a hiring spree + laid off people = increased interest.
Second, it seems like PB offers greater work/life balance than many trading desks (I'm coming from the commodities viewpoint where sales, for example, could average 65-75 hrs per week), while still being front-office and still paying quite well.
Do you think these are fair statements, particularly the second point? I'm asking for all the areas you mentioned--sec lending, sales, cap intro, prod dev, synthetics, and risk.
Yes that is right. Post crisis landscape is very interesting, gs/ms clients all started to diversify in their PB selections and it is not uncommon for a big AUM fund to have 3-4 PBs. The european banks trying very hard to expand PB. A lot of people who had groups blow up/restructured moved over to PB, and some of them do so to pay the bill temporarily and move to whatever they were doing earlier (trading/research/sales) eventually. A lot of movement around, people quitting and people interviewing, quite a scene.
PB does offer fantastic work life balances. a lot of the roles are basically 8-6 jobs, the trading guys like 6:30-7 to 5. No weekends, relatively less pressure, easier products to understand (especially to people who never had finance experience before). It still generates a huge chunk of revenue and pays well relative to the hours you work. The downside is that the skillsets aren't as transferrable, cap intro guys can move to HFs as investor relations guy, the traders can go work for HFs as execution traders, or work with CFOs to determine how to finance trades/which PBs to choose. The analytics/risk team can do risk mgmt at HFs, and don't know what the sales can do...i guess they can sell other products? the product mgmt people actually have wide exit opportunities, they can go into product development for anything, finance or not. Overall, it is not too easy to move into other parts of S&T, due to the fact that it is not a very market driven role, and it doesn't involve much risk taking. some of the synthetic traders/salespeople can go into cash equity trading/sales, or become salestraders.
omg, DrNo you are such a
I must say, DrNo you are the
Thanks for the overview,
mctsun wrote: I must say,
I'd also like to add that PB
I just got offered a PB
I know a lot about coloring.
jauunny wrote: I just got
Thanks for your reply! I just
jauunny wrote: Thanks for
hi, do you know what fees do
Dr No (or anyone else), I
How long does it take for
I'm looking into IB Prime
"hi, do you know what fees do
This is an amazing post, and
Hi DrNo. Thanks for such a
Thank you DrNo. This post is
Actually I got an offer from
Hi there, Through networking
Hi Dr No. I am preparing a
I guess Dr No lost patience.
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The financing and risk
What are the benefits of
"I create nothing, I own."
Also what are the advantage
"I create nothing, I own."
Dr. No: Can you explain the
dollarst: What are the
Hi Senior Monkey, Can you
Can you explain what the
Basic queries on
are most of you guys really