So confused about the sales and trading business as a whole

I'm a student entering my junior year at a target school in the US and am hoping to recruit for the investment bank. Right now, I have my eyes set on the investment banking/capital markets businesses, although I am still heavily researching these roles. However, I cant seem to find what on earth S&T does...say for example at a bank such as Goldman, or a canadian big bank such as RBC Capital Markets.... what does the trading floor even do?

I dont understand this idea of market making... why would someone call you to conduct a trade for them? If someone could explain the entire point of this, that would be great.

Also, when someone says they trade "(insert product here)", is there any sort of analysis they do beforehand that requires quantitative skills? I have a tough time believing traders just click random buttons and hope for the classical buy low sell high kinda shit.

TLDR: What does a trading floor do and what value does it add to its clients? Any other details would also be appreciated.

Cheers

 

From my knowledge, S&T matches buyers and sellers, take a fee, and also hold inventory on their own books and mark up/down. They use research from the research departments to pitch stocks (whether buy or sell) to clients.

 

This is an oversimplification but here goes:

The edge the bank has is their massive balance sheet.  So, say you're an airline in normal times, and you're operating expenses are seriously badly impacted by a rise in fuel prices.  A bank can offer you credit (i.e. their balance sheet) to place hedges on the price of jet fuel.  The bank takes the other side of this position, and tries to find a way to hedge it.  Maybe they find a refiner who's scared the price of their output goes down, and finds a clean offset.  Maybe they dirty hedge it against an oil producer who's scared of the price of that tanking.  Maybe they just keep the risk.

The way S&T makes money is that the bank charges a fee, known as the "spread" to these clients.  For example, say jet fuel is $2/gal in the market.  Maybe the bank charges $2.05 to the airline, in exchange for access to the balance sheet, and managing the costs of the transaction.  In the real world, everyone has a bid/offer (a price they would buy or sell something), but the edge the banks have is they see a lot of deal flow and potentially can offset some positions with others.  SO the bank is up 5c on this trade on day 1, but has to invest time and money to managing the risk.  At the end of the day, they hope to show a profit as a sum of all the risks they've managed and "fees" they've collected this way.  

Compare this to IB, where they provide a service and get paid for it.  IB is more stable (it's hard to lose money), but S&T provides a somewhat diversified cash flow with positive EV, but higher variance.  

 

retail trader wants to buy 100 shares of WRAP (its a stock...live market is 5.75 bid for 10k shares   5.76 offer for 8k shares)  is so they open ETrade and click 100-Buy and poof...they buy 100 shares of WRAP

Mutual fund with $50bln wants to buy 500k shares of WRAP at 5.76..and they want to buy it NOW..immediately...but there is only 8k shares sitting on the offer...if the mutual fund tries to click "500k-buy" on ETrade, they will only get 8k shares (what's currently on the offer) and then most likely the stock price will shoot up and they won't be able to buy their full size at what appears to be the current market price.   

So, what can this big fund do?  They can call the trading desk of an investment bank, and ask them to offer 500k shares (shares they don't own)...and if the bank trading desk is willing, then the customer is happy...and so now the bank is short 500k shares, and needs to figure out a way to buy them without losing money.  

If EVERY customer who trades WRAP stock in large size comes to this bank trading desk...then the desk sees lots of "2 way flow" (both buying and selling) and they will make the bid/offer spread...AND know the direction of the stock before the rest of the market...because they see all the large orders (ideally) and that is powerful information.

just google it...you're welcome
 
Most Helpful

Great question(s). If any of the below isn't clear, please let me know.

1) What is sales and trading (S&T), and what role does it play at an investment bank?

S&T is one of the core functions of any investment bank, and refers to the buying and selling of financial instruments. The "sales" side of S&T is covered by "sales traders" (sometimes simply referred to a "sales people"). These people take no financial risk (i.e. do not run actual positions that are affected in value by market movements) but do own the relationships with clients (e.g. asset managers, hedge funds). It is their job to manage that relationship by understanding their client's needs, helping them to formulate relevant trade ideas, and assisting with the execution of trades by liaising directly with the floor's traders. Traders, predictably, cover the "trading" side of S&T. These people actively engage in financial markets by buying or selling the aforementioned instruments, and so run live risk. Prior to the regulation enforced in the wake of the 2008 financial crisis, these traders could operate on what's known as a "proprietary" basis. This means taking outright views on the direction of markets, making or losing money accordingly. Now, however, this is heavily regulated, and so the vast majority of activity on bank trading floors now stems from "flow" or market-making activities (described below). 

Trading floors are usually divided by product (i.e. an area for credit, an area for FX, an area for government bonds, etc.) with equities and FICC (fixed income, currencies, and commodities) on different floors (generally because the trading floor would have to be massive to house everyone on the same level and it's more important that, say, the government bond guys are near the FX guys). These divisions with then have sub-divisions within them to cater for different specifics (e.g. within FX, the desk may be additionally divided into majors, EM, exotic derivatives). The main purpose of S&T for a bank is to provide a platform for clients to transact in public markets according to their needs, so enabling the bank itself to earn income through transaction fees.

2) What is market-making, and why do clients trade through market-markers (i.e. banks)?

Market-making, in the simplest sense, means providing prices to clients. A customer may ring their sales trader asking to buy $50m shares in AAPL; the sales trader will then ask the trader where they are offered (that is, willing to sell) for $50m of AAPL. The trader will reply something like, $100.10. If the price of the share is worth $100.00, this means the trader is offered $0.10 above the market, and so - on paper - would bank $0.10 immediate profit from the transaction. It is then the trader's responsibility to manage that short position risk: if they run it and the price rallies, their losses will surpass the immediate value gained from the "spread" (i.e. $0.10) of their offer. Market-making, in this sense, is the provision of liquidity - a service which comes with a charge (the spread).

Why, then, would a customer trade through the bank? Why wouldn't they just buy the $50m of shares themselves and not pay the fee to the bank? Well, this reverts back to the concept of liquidity. The last traded value of AAPL may be $100.00, but there could only be $10m on the offer there. The client buys that, with the next level being $100.50 for $10m. The client buys that too. Very quickly, they've only bought 40% of their desired size at an average fill $0.15 worse than the bank was able to provide. The ideal scenario for the bank is that the trader already has a long position in AAPL from $90.00, has ridden it higher to $100.00 and is then able to exit that position (and diminish the risk warehoused on the bank's balance sheet) for the benefit of a client. Now, not always does the bank have an offsetting position in the asset of interest, however this just returns us to the value of a trader in prudently managing the bank's risks. 

Finally, it's also worth considering that, unlike for stocks and FX for instance, there may not be a central exchange for a given product: think securitised products, fixed income derivatives, exotics - less "liquid" stuff. In this case, the bank is likely the customer's best port of call to build a position in reasonable size within a short timeframe. They can literally call the trading desk direct, give them the size and specifics of the trade, and - often within minutes - receive a price from the trader stating at what level they would be willing to get long / short that exposure. 

3) What kind of analysis goes into trading at a bank?

A lot. The bulk of this analysis will be conducted by the bank's research department who, as the name suggests, run all research for the bank. This is both for the benefit of clients (by sending out analysis to, say, portfolio managers at funds) as well the traders themselves, so keeping the trader informed about dynamics and risks the research department - a team of dedicated subject matter experts - think are relevant. This could span from macro analysis, to fundamental analysis, to increasingly quantitative analysis. The traders themselves will take this feed of analysis and supplement it with their own work. This on-desk analysis tends not to be structured intervals of assessment but rather an ongoing and iterative process of examination.

This more or less condenses into traders having a constant, albeit changing, "view" of their market. They will have an idea of what positions they like and what positions they don't like (or rather, what positions they would like to have or not have and why), and will operate accordingly. This is why different banks sometimes offer different spreads from the same trade (the trader at one bank as a different view of the transaction than another) as well as why, sometimes, liquidity is very thin: the market as a whole has a fairly similar view, and so most traders are reluctant to transact at the current price, so incurring a wide bid / offer spread.

"Work is the curse of the drinking classes" - Oscar Wilde
 

This is such an informative and insightful explanation. Thank you very much. I was wondering if you could expand on exactly how technical roles are in S&T. Specifically from the perspective of a salesperson, as well as from a trader. (Not quant or research roles). What sort of analysis would you do day to day. Is being a salesperson as non-technical as it sounds? I love the idea of building relationships and working with clients, hence why I like the idea of working in sales in S&T, however I have read a lot that S&T roles have become very technical, however I prefer a more client-facing environment. For this reason, I'm trying to learn more about sales roles in S&T vs sales roles in AM. Would you be able to offer any guidance? Thanks again for all the help.

 

Another good question. I think it's worth emphasising that, first and foremost, a salesperson's primary role is relationship management. This means speaking with that client every day to make sure their needs are taken care of and that they use your bank for all, if not most, of their business. This, however, leads to your second query: how technical is the role? In this sense, the role is as technical as your clients need you to be. Here, there's a huge spectrum. Some clients will want very little technical input from you: they want someone who is always available, is able to get them a better-than-market price, and - ultimately - is someone upon whom they can depend. Other clients, however, will want a salesperson that knows the market inside out, sees trends well in advance, and is able to produce interesting and well considered trade ideas. In this respect, it's difficult to say how technical sales roles are becoming - it's largely dependent on your clientele.

I will, however, postface this with one comment: the best salespeople I know are those who go the extra mile and make a concerted effort to know their market inside-out, and who pitch intriguing trade ideas. If you genuinely have no interest in this (which, ultimately, seems like little interest in "markets" in the first place), I'd consider alternative careers in finance that aren't on a trading floor. 

"Work is the curse of the drinking classes" - Oscar Wilde
 

i am an incoming summer intern for a international bank which has about 20 S&T in the U.S office ( who are all seniors) , initially i recruited for IB but took the ST offer. I have very basic knowledge of what ST is, so going into the internship what should i expect.. what can i do to prepare for fixed income and equity desk. Any advice would be helpful lol.  

 

Normally banks run a week prep course for incoming summer interns, with the option for an additional, week-long "introductory" course earlier in the year (usually around Easter). Taking up the option for both courses and paying good attention would serve you best in terms of getting up to speed. Otherwise, I think there are classic books you can always read: namely, "Liar's Poker". Yes, it's now a very old tome, however it's still considered "the Bible" on most trading floors - it will give you an idea of the formative culture of these places and what sort of personalities, at their rawest, pursue these careers. That said, it won't offer you masses of technical insight.

In terms of regular reading material, I wouldn't necessarily be concerned with - at this stage - differentiating your focus between fixed income and equities... Just focus on "markets" as a whole. The expectation when you start the internship isn't necessarily that you'll have masses of knowledge (however the expectation is certainly that you'll have some), but definitely that you'll be curious. I strongly recommend reading Dealbreaker.com and, when he's back from paternity leave, Matt Levin's "Money Stuff" column on Bloomberg. This will keep you up to date with general trends in the market and mean you may have the chance to at least understand what's being discussed around you early doors. 

"Work is the curse of the drinking classes" - Oscar Wilde
 

You didn't ask me but I would say that sales can be quite technical as well. But it all depends on the desk. Some roles can be fairly technical such as structured derivatives, while others are not. Example of sales roles that aren't typically considered technical are platform sales, or cash equity/research sales. Those roles are much more focused in getting to know the bank's platform and suite of services, and then selling those products/services to clients. 

Also, each person has their own view of what "technical" and "technical difficulty" is. But there is definitely a spot for you. 

 

PaulEvansLoafers

You didn't ask me but I would say that sales can be quite technical as well. But it all depends on the desk. Some roles can be fairly technical such as structured derivatives, while others are not. Example of sales roles that aren't typically considered technical are platform sales, or cash equity/research sales. Those roles are much more focused in getting to know the bank's platform and suite of services, and then selling those products/services to clients. 

Also, each person has their own view of what "technical" and "technical difficulty" is. But there is definitely a spot for you. 

 

i am an incoming summer intern for a international bank which has about 20 S&T in the U.S office ( who are all seniors they have no juniors) , initially i recruited for IB but took the ST offer. I have very basic knowledge of what ST is, so going into the internship what should i expect.. what can i do to prepare for fixed income and equity desk. Any advice would be helpful lol.  kind lost on wtf to do so imnt lost on my internship

 

No worries, thank you for the advice! Would you be able the provide some information on what sort of "technical" aspects a salesperson might use or do day-to-day? I have tried to do some research but I'm not really getting anything of value. Thanks again.

 

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