mod note: this was originally posted on 9/4/12
I thought I'd switch things up a bit today. Rather than delve into a note-worthy news item or another Facebook discussion, I'd like to welcome everyone back from Labor Day Weekend with an awesome interview.
WSO tends to be heavy on content for banking, PE, and value-oriented hedge funds. I know there are a ton of aspiring traders reading the site, so I reached out to a good friend of mine who's spent the last 5+ years as a fixed income trader at a major bank.
If you're interested in a career in trading or just want to learn more about an interesting career path and the people in it, then read on for an in-depth and informative look into the life of a fixed income trader.
Q: Tell us about your group and the product you trade
FI Trader: I work on a "flow" Fixed Income Trading desk, where we buy/sell various products that are mostly vanilla in nature. I work with a predominantly macro product, which means my job consists of compiling and digesting global market data across asset classes (stocks, treasuries, credit, currencies, commodities - everything). Since I am client-facing, I use this information to make markets, basing my prices on how the overall market is trading. My job, aside from making markets, is to try to match client buyers and sellers and (ideally) extract some bid/ask margin. I am NOT paid by commission - because my product is still over-the-counter and not exchange-traded (like, say, single-stocks), there is live risk to every trade I do. My profit and loss comes from that bid/ask spread, managing the book risk and inventory I have, and putting on trades within my product scope that I feel will generate alpha.
Also, I put flow in quotations above to manage expectations - Fixed Income is not as liquid as Equities or Currencies are. Participation is down. Risk appetite, globally, is down. Therefore, there are periods where product bid/ask spreads are wider and work on less size. This is one of those periods.
Becoming a Fixed Income Trader
Q: How did you break in? What interested you in the field?
FI Trader: I was interested originally in trading from a young age. I grew up in a fairly small town in the south, in an upper middle-class family with little connection to Wall Street. So I found about what investment banks / hedge funds/ private equity was through its portrayal in the media. One day I read a Forbes article about a cabal of hedge fund managers and how they built their businesses - managers with names like Tudor Jones, Kovner, and Griffin. Many of the hedge fund managers were already on their way to being billionaires, but started off as ticket runners, entry-level clerks, and in one case, a taxi driver. The idea that a kid with little-to-no pedigree or trust fund behind him could succeed wildly based on his brain (and his balls) resonated with me. I wanted to be part of something like that.
Given I had no connection whatsoever to Wall Street, my first attempt at 'breaking-in' was to get a job in finance, somehow. I luckily found an after-school job cold-calling rich old people to buy annuities with spare retirement money. It was on the fringe of anything investment related, but that was the first step. I took the money I made from that gig, and opened up a trading account, and learned what it meant to have risk in the market. As college neared, I focused my collegiate choices to anything finance/business-y. Once in college, I worked to get internships and work experience. Ultimately, I ended up going to a school that recruited very well with investment banks, and very poorly with hedge funds. But by that point, I had realized that my path was going to be in trading - to develop a track record, build a product knowledge base, and develop a reputation that would get me into the RIGHT buy-side seat (and not just ANY seat). I had great grades, lots of extracurriculars, and by the end of my junior year had 3 summer internships under my belt. This got me into the seat.
How Your Education Plays A Role In Becoming A Trader
Q: Did your education play a role in your breaking into trading?
FI Trader: My education was helpful, but not in obvious ways. As a freshman, my focus on business and only business was highly immature, as it led to me being a very closed-minded and boring freshman. I majored in Finance, and became a die-hard finance geek, focused on piling my schedule full of finance and accounting classes.
And then I studied abroad. After spending 6 months outside of the bubble of college and America, I realized that the world is gigantic and much more interesting than just finance. I ended up adding a political economy degree, took an international non-profit internship and sought non-finance extracurriculars like writing and music. At first, one would assume that becoming an intellectually deeper person would turn one away from something like trading, but in reality it enhanced my interest. I thought about trading from a much more philosophical perspective, and having spent my sophomore year on 3 different continents gave me a strong interest on global economic policy. As such, I tailored my classes to reflect this, and worked the internship opportunities to find a job that would put me onto this path.
The biggest point I want to make here is that aspiring finance professionals, whether in trading or otherwise, must avoid being one dimensional. Being a boring number-cruncher is not going to distinguish you in any way, even if you are good at it. In trading, you spend 10-12+ hours a day sitting next to the same people, 5 days a week. They see you when you're at your best and your worst, and you use them to talk out ideas, get fresh opinions, and seek market advice, regardless of title. No one in trading will hire someone they wouldn't sit next to.
What makes a good Fixed Income Trader?
Q: What types of people do you think make the best traders? What can current college students do to prepare?
FI Trader: Until the 2008 crisis, the 'best' (aka most profitable) traders were the ones who swung the hardest. That model is largely dead - banks are cutting back on the risk-taking heavily, and with regulatory headwinds reducing the scourge of bank-prop desks, the role of trading is changing rapidly. Risk-taking will still exist, as it is and always will be the role of a trader. But with less rope to hang ourselves, there is a much higher hurdle rate for risk takers. So going forward, these are the types of traits the best traders have:
- Be a student of history. The best traders I have seen have a keen awareness of repeated market patterns, and this requires being a student of market history. Keeping a data history is extremely valuable, and it's very surprising how few bank traders actually do this. For college students, the best way to do this is to read about market history, and get a sense for how markets have evolved over the years. In addition to that, utilize your school resources to build a history of data, as such information can be incredibly empowering; something like historical oil prices, SPX prices, Treasury bond yields, are all very much available, and are great ways to analyze trends in each asset class and relative value between them.
- Be patient - look for big margins of safety. This is extremely important. Ben Graham wrote of the 'margin of safety' in analyzing deep-value stocks, and the philosophy absolutely connects to trading, even flow-trading. Sometimes a trade you put on today looks great today, even better tomorrow, and magical 2 weeks from now. In the meantime, you will get stopped out. With risk-taking much more regulated, the best traders are going to be ones who do the most with the limited balance sheet available. Be patient with a trade, and never chase it.
- Be disciplined. Good traders set defined entry/exit points, stop-out and double-down levels, etc before trading, but the best actually adhere to them. After spending hours on an idea, it's extremely painful to see it go so hard against you that you have to tap out. But no one is right 100% of the time, and if you can limit the magnitude of losses, you'll maximize the number of times you'll be allowed to play again. In the fixed income world, where illiquidity is a larger problem, discipline is even more important.
- Be humble and confident. Confidence is huge driver of success in trading, but arrogance is a driver of eventual failure. The market is bigger than any one trader, and anyone who thinks they can take down a whole market will get blown up (see: London Whale). Instead, be humble, know when you need to wait and do more work, and constantly test your ideas. When you've done that, and you know you have something, then be confident - don't be afraid to dedicate risk to it accordingly.
Life As A Fixed Income Trader
Q: What does a typical day look like for you? How about a typical week? (i.e. client interaction, internal meetings, analysis, trades)
FI Trader: Days are relatively routine (anyone who says 'every day is different' isn't really telling the truth...days can be mind-numbingly repetitive). In the morning, I get in anytime between 630-7, and the first thing I do is fire up my Bloomberg. I check where SP futures are trading, where the European indices in credit are trading, and what currencies are doing, all while digesting overnight headlines. Then I fire up my spreadsheets (everything we do is in Excel), and other related systems. I chat with clients, brokers, send out prices, and then take cues from the overall market to come up with ideas or change prices. I talk to clients all day, mostly through Bloomberg chat, and occasionally on the phone. I also chat with traders in other markets to get an idea of what's going on there.
As trades happen, I constantly look at my risk and differentiate between trades I have on that I want to keep ("risk I like") and trades I have done that I want to get out of ("risk I dislike"). The latter always takes precedence, obviously, so when I identify risk I dislike, I define a max-loss I am willing to have on it, and work to find an exit or a hedge that can mitigate and PL loss. As the day proceeds to a close, I close up any outstanding trades, estimate my PL, and leave. Face-time does not really exist after the first couple years; if nothing is going on, there's no reason to waste time/energy being at the office. During the week, I often have drinks or dinners with clients so usually, I will head to those directly after work. Since a lot of the older guys on my floor live out in the suburbs, these usually end around 8 or 9pm, at which point I will likely go home (or out later, if the mood strikes...).
I rarely work past 8pm or on weekends, but sometimes I will do so for longer-term projects or ideas. It's often the most productive time, because no one is around. When a trading floor is full, it can be very tough to concentrate, so longer-term things are best saved for when you don't have a row of sales people yelling at you while your phone is ringing off the hook.
Q: Did you ever consider working in a related field? Maybe banking or consulting? What made you stick to trading?
FI Trader: I have definitely considered working in a related field, and have not written it off yet. I would be open mostly to working in some capacity in the developing world, working in a startup environment, or potentially jumping into the political world. Right now, though, I haven't found another job that gives someone my age as much intellectual or financial freedom as this.
I think another part of why I stick to trading is the hesitance I have to more traditional work environments. Trading desks are arenas of computer power and testosterone. The environment can absolutely be electric in some volatile periods, and I don't know if there is an office that can match it in those times. Consequently, the other industries that I would work would have to have atypical offices, be fast-paced, and very much require making some quick decisions with limited information. That's the kind of workstyle that has kept me in trading, and so I would seek that out in any industry I may join.
Q: What sort of things do you do to take your mind off of work?
FI Trader: I love music, so I spend a lot of time listening to and working on music. It keeps me from going insane. I used to play a bunch of instruments (classical mostly) and was brought up on hip-hop, so that's what I mostly listen to. I also volunteer frequently - I used to do non-profit work in college, and now do more mentoring for underprivileged or immigrant high-school kids. I also like to cook, go to the gym, and go out often (3-4 times per week). Keeping an active life outside of work is paramount.
How To Stay Motivated In Your Career
Q: What keeps you motivated? Are there specific aspects of your job that you like more than others? Is it the money or the intellectual challenges?
FI Trader: New York, Investment Banks, and Trading especially, are all bubbles in which people think they are really smart but are actually just really lucky. Knowing this, what keeps me motivated is an understanding that I am inherently ignorant, and the more I work the less-ignorant I will become. If you approach the business with an understanding that you do not have all the answers, you will last longer, do better, and also actually make some important connections along the way.
Regarding the money, understand that trading post-2008 is a different world. The days of endless bottle service, millions in bonuses, and absolute extravagance are gone. The people still in the industry are on average now extremely smart, mostly because the stupid people were progressively laid off over the last 4 years (it's absolutely not that everyone who was laid off was stupid, but the large majority of those who were stupid were laid off). This means one thing - it is extremely hard to make money. There is a lot of capital chasing fewer and fewer ideas, and as such PL suffers. So if you come into the industry with the sole goal of becoming filthy rich, you probably will be disappointed.
What has kept me, and others, in the seat in spite of 4 years of total carnage has been the allure of working in an environment where success is determined by your ability to deploy risk intelligently on ideas generated by you and your peers.
Q: Any parting pieces of wisdom you'd like to share with WSO's readers?
FI Trader: For those of you looking to get into trading, know that the industry is changing. Banks are taking less risk altogether, and right or wrong the scope of the trading seat is changing. This isn't necessarily a bad thing. From a regulatory perspective, the market needed reform - the old model was unsustainable, and market structures must modernize just as their products have. As the market has just undergone a period of intense volatility, and de-risking, it is natural for an industry to consolidate. That's going to mean fewer job opportunities, period of illiquidity in many once-liquid trading areas, temporarily reduced product innovation, and a generally less obvious appeal to the industry. This likely will continue, possibly for a few more years. But working in these temporary down-cycles of stress, you actually can find out if the job is for you, or if you were just chasing the glamour.
Also, never stop working hard. Somehow, even with all that has happened, I have seen many interns who feel entitled to the job, for whatever reason. Not only is this shocking, but it's angering because there are a lot of smart unemployed traders who would kill for the same seat. No one is entitled to his or her job. It is a job that has to be earned, daily. Every seat costs money (beyond salary), and a trader earns his or her spot by constantly working hard, thinking creatively and critically, and seeking to work with smart people who make him or her better at the job. When you get that opportunity, work as hard as you can to make it count.
There you have it, folks. Hope you all enjoyed reading. If you've got follow-up questions for him, leave them in the comments. I can reach out to him to try and get some answers for you. No promises, but I'll see what I can do.
Read More About A Fixed Income Trading Career On WSO
- Fixed Income Sales And Trading 101
- Interview Question: Why Trading?
- Sales & Trading Lifestyle & Salary
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