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Volatility can be good but too much of it has been a problem as clients don't want to trade. This means lower volumes and tighter spreads.
Oil price shock playing a major role as well.
The reason is that oil crashing leading to a disinflationary environment, yield chasing here in Tsys which forces rates so low that when FI sales guys offer bonds to clients yields are simply too low to be attractive. Also, demand for Tsys leads to a vicious cycle since German 10-yr bund and Japanese 10-yr bond yields are so low to be almost at zero.
One word: regulation...
Some firms have partially exited fixed income trading. It's a shame that people neglect FI trading these days.
Guys, FI trading has been on the decline for years now. The 30 yr bear market in bonds is just the tip of the iceberg. A flight to equities / traditionally riskier assets doesn't help either.
Kruzon, what do you mean when you say traditionally riskier assets? Would you say its wise for someone who is new in the industry to still go into the industry to learn from the experienced guys? It seems that the bear market is for here to stay for at least a few more years but I feel that FI trading will never actually go away.
My view is that in the short term profits will pick back up. Regulations may ease especially if we get a Republican president and there are a lot of desks that are putting on prop views anyway through their hedging activities (JPM made like $300mm on the franc collapse). Banks are still very much in the public spectacle but if/when that isn't the case they will have more room to maneuver. So I think FI revenues will do better 2-10 years out.
On the other hand, shit is becoming more automated. That's what scares me. I'm not worried about low interest rates or regulation fucking up my career. I am, however, worried that technology will eventually put me out of the job and I'll be left with a skill-set that doesn't get me a super high salary in another area of finance.
Regardless, I am still very happy I'm going into FI trading rather than IBD. I'm making a great living in NYC in my early 20s working only 65-70 hours a week and getting weekends completely free. I also absolutely love what I do and am literally excited at my work place sometimes. I don't think many people in IBD could say the same. I feel like a lot of people shit on S&T as of late, but the fact is that at least for now it's a great lifestyle for very smart people who like markets but don't want the risk/stress of being at a prop shop. Besides, even if trading actually does die, as long as you went to a good school and got a killer GPA (which you should have if you're at a top 3 BB in S&T) you can get into a decent MBA program and go from there.
The stuff I am referring to here isn't the Volcker rule and its impact on prop activities. That may or may not come back, but it's not particularly relevant, at least for the moment.
The bits that are killing the FI mkt right now are all the new "anti-leverage" provisions. Abbreviations like SLR, LCR, NSFR etc are what it's all about. The end result of all these regulatory changes is that the low margin, high balance sheet usage activities, such as FI trading, become non-viable for a simple reason that it now requires too much costly capital. Are these rules likely to be relaxed going forward? Doesn't look too likely right now...
Interesting, I didn't know about the JPM trade. I heard about the concerns from FI traders of technology, but wouldn't you say your skill-set is still sought after in HF?
What about a commodities desk? I am still a student so I am trying to learn. It seems that the desk deals with a lot of FI products but you have to deal with actual clients as well for long term contracts (Power Plants and such) so the human element is needed.
Trust me, regulation should be a much bigger worry than automation in S&T. As i have written on here many times, if you trade any product with complexity automation actually makes your life easier (i.e. as an options trader working delta's is super easy with all the DMA algo's). In order for automation to occur you need liquidity, symmetrical information and fungible products, something that FI isnt known for. If anything, regulation actually delays automation by driving down liquidity.
I agree, in a more holistic sense, AI at some point can and will takeover, but at a much later stage than most people on this board think. People here talk as if you are going to get laid off in 5 years because of it, which just simply isnt the case. FFS there are banks still using old versions of windows!!
The real risk is regulation/risk limits/capital constraints etc etc. About 10% of my job I spend trading HY credit, and trust me when i say that it is not easy to be on the sellside right now.
You are right, its a fun job and pays well for your standards you have now, but those increase quite quickly as you get older.
The risk isnt that you will be left with a skill set that isnt transferable. The risk is that you will no longer have the upside that was previously there, and management realize that they dont need to pay people that well because theres just not that capacity to make money.
I just meant stocks instead of bonds. FI trading won't go away, but you would do well to enter a position where you work with more complex products. Less competition and more job security
Huh? 30 year bear market in bonds? Flight to equities/traditionally riskier assets? FI trading on the decline for years? In which alternative universe are you observing these phenomena?
I agree that my first point was pretty vague. I was referring to the reversal of the 30 year bull market in bonds that is now reversing (I misspoke when I mentioned 30 year bear market, not sure how long this will last).
Bill Gross called it and basically predicted his own demise in 2013. (http://blogs.wsj.com/moneybeat/2013/05/10/bill-gross-bull-market-in-bon…)
The other two points are pretty self evident so I'm not sure where the confusion is coming from. By years I'm talking the last two, no longer than that. Fixed income desks got killed across the street in the second half of 2013. Taper tantrum anyone?
So how does ficc sales for corporates comparing to ficc sales for hf? Is it a much more stable career? thanks!
Very timely: http://www.bloomberg.com/news/articles/2015-02-18/jpmorgan-weighs-leane…
Yeah I don't see any reversal of regs coming from the policy-making side. Balance sheets are already winding down in preparation of LCR and SLR and by the end of this year NSFR will become a focus. Doubt anyone will challenge the Fed on this either. Monetary policy is obviously the most important thing to get right, and the Fed has been getting a lot of it right (cynically speaking, at least better than most CBs). Their mainly potential flub right now is hiking too early. Either way it seems the current FOMC will remain relevant, and most of them lean left on the political spectrum since the hawks pretty much lost credibility and/or will be replaced. Not that I think a repub president will matter, but the candidate list doesn't seem too impressive.
As for trading implications, it's not just about market makers in the cash product. If banks reduce footprint in market making, yes prop firms and the like could conceivably step in and continue to make firm markets. But pray tell how exactly will all these activities be financed? Fast money accounts rely on prime brokerage and repo desks for financing, where do they go when banks step back? Real money accounts and money market funds have both collateral and cash, but care greatly about the credit of their counterparty. Either way financing costs have room to rise, which could make certain trades very onerous or infeasible. You can always try to do trades in the synthetic space, but the shadow cost of capital and its financing implications will play a larger role in pricing. In fact, there's a lot of trades in synthetic space that implicitly take a view on potential implications of regs (namely Basel 3 and MMF reforms) but many of them are getting crowded.
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