S&T Interview Coming Up? Read This First
mod note (andy): this was originally posted 9/30/12
It’s interview season, time of great joy and nostalgia: over the past decade, I have been in both sides of many interview tables, BB, consulting, HFs, you name it. If you are interviewing for S&T, today is your lucky day, I will share a few thoughts and tips on S&T interviews.
But remember: this is only my opinion, and I make no claim as to the helpfulness of any of this. Plus, I accept no responsibility for anything that happens to you if you take my tips at face value. That’s for symmetry: you won’t send me a check if they get you to your dream job.
Lessdoit.
You may have heard that the most recurring phrase in IBD is “this is very interesting” whereas in S&T, it is “fuck you”. Maybe that’s why I am so fond of S&T people. Sales and Trading is a true relationship business. You may have heard that electronic trading does most of the work a broker does, at a fraction of the cost, and this is true. Why are there still a good bunch of brokers (although way less than before)?
Because if you’re an investor, the average algorithm won’t tell you how it’s feeling about the stocks X, Y and Z. It won’t give you trading ideas involving EM currencies. Hell, it won’t even encourage you to tell your adultery stories or pay you Thursday drinks.
In other words, unless we’re talking about a hardcore quant fund with no subjective inputs in its models, talking to brokers and running ideas through sanity checks is part of every PM’s day. If you’re good at math but you dislike heavy networking and goofing around at the phone, you don’t belong here. Maybe ER. Certifications, credentials, financial proficiency, it all helps, sure. But being likeable is rule #0. Period.
Also, when you look at the typical “trade idea”, you will sometimes see stuff like DCF, multiples and technicals all mixed up. This doesn’t mean S&T people despise any form of the EMH, but rather that the client is always right. It doesn’t matter whether the client is a hedge fund based on pseudoscientific futurology, or an UHNW individual who claims she contacts alien civilizations on a daily basis before deploying her cash. If you relate to them, you get their business. That understood, you do need to know some stuff.
Think an equity desk: as you may know, stocks are a residual claim of investors in the assets of an issuer. Big deal. How does it work? It goes like this: the desk sells to investors whatever crap IBD originates, and then encourages them to trade with each other. You need to know your sector/region quite well, but unlike people in ER or IB, you can forget about profitability levers, deal synergies and all of that crap.
What actually makes a difference in equity is having an awesome price memory (1 week high/low of VOD LN, down to the penny, AAPL yesterday’s close?) and knowledge of the market’s trading dynamics (volume curves, order sizes, preferred trading venues). The day you realize you actually know a lot of clients, and on top of that, you can tell which like or dislike each name you cover, you know you are on the right track. Don’t fight the tape.
Another example: FX. Huge. Around 4-5 trillion USD change hands every day in those markets. FX traders see themselves as arbitrageurs par excellence. A successful FX trader is a cold-blooded bipolar (nice with clients, psycho-killer with everyone else) individual with a huge ability to focus, and makes a ton of cash. But no jokes, no lunches, no small talk. In that desk, you need fast risk assessment skills, on the fly calculations and very little to no fear.
Knowing this sort of stuff in advance will save you a lot of guesswork. If you can only take away one idea from this entire text, take this one: in S&T interviews, reading the Vault guide and memorizing the answer for the most common questions is far from enough. Why?
Because unlike in IB or even consulting, there isn’t such thing as “the right answer”. Different interviewers will expect different answers to the same question, and you need thoughtful prep and amazing people-reading skills to go well. Makes sense, as this is the bulk of the work.
Now, to wrap up, a few sample questions I would use in an S&T interview this week. You can actually post your answers here (or PM me if you’re too shy) and I’ll give you a two-line feedback.
1) Explain the 2008 market crash to a 9-year old kid in
2) What is LIBOR? Where is it at? Why does it matter?
3) I have $1M face-value-worth of a 2% coupon T-bond maturing Sep2014. I want to sell them and buy FB stock. How many shares can I buy?
4) Speaking of, how did FB trade last week? Month?
5) What risks does an agency MBS carry? Which of those are more relevant in the current environment?
6) Name the 5 largest economies in the world. (Credit kids only: give me a ballpark estimate of their sovereign rating)
7) (Structuring kids only: a risk-loving client wants a fancy 4-year zero-coupon bond. At the end of every year, the bond either doubles in value or goes to zero, 50%/50%. How much would you charge for $1m face value? What is its duration upon issuance?)
8) Explain forward rates.
9) What is algorithmic trading? What about high-frequency trading, is it the same?
10) What is the difference between a dollar neutral and a beta-neutral long/short portfolio?
Good luck.
I love it, especially #1. Stumped me there.
Would love to see a post detailing "What to do on your first week intern in S&T".
I thought Algo Trading = HFT Trading.
Also, can you please post answers to your questions when this thread runs its course.
Thanks.
Would anybody be interested in starting a continuously updated thread filled with technical s&t interview questions?
9) HFT = starving geeks going for the crumbs (=exchange rebates). Algo Trading = guys who do the very opposite of what's written in the fineprint (you know, "past returns don't guarantee future results"). An british word might be "wankers". In either case, social ineptness mandatory
(Disclaimer: sort of self-bashing)
I don't work in S&T, nor do I want to, but its nice to see topics like this instead of bankerella's "how to answer 'what's your biggest weakness?'" type posts.
Algo is not HFT. Almost all equity buy side traders use Algo's to execute normal positions which they intend to hold(not exclusively). HFT guys, are the firms that buy office space next to the exchange so they can be a millisecond faster in buying and selling a position which they hold for a second.
Aside from TWAP and VWAP execution algos, algo trading also constitutes to any strategy that can be translated to a decision tree, programmed algorithmically, and executed without human intervention- it could be something as simple as a 5 and 25 moving average crossover to a medium term statistical arbitrage strategy.
Ok, I will take a cut on #1. This is what I would answer:
Americans began speculating on the housing market. Investment banks created instruments that allowed them to pass the risks of the loans to outside investors. The rating agencies gave these instruments investment grade ratings. Mortgages default increased to levels never seen before. Banks were left holding those securities, as nobody wanted to buy them. Some banks went bankrupt. The government issue a bank rescue package. Banks stopped lending one another and credit dried. The economy stopped. Companies began cutting workers, resulting in more mortgages default. The stock market crashed.
Thanks for the answer, but that is a helluva 9-year-old kid you're explaining this to! You may not notice this but there are many layers of complexity under terms such as "investment grade", "bank rescue package" and "mortgage default".
In an interview like that, I would be expecting something more along the lines of "Houses were getting more and more expensive, and whoever owned houses was getting richer. So everyone decided to borrow money from the bank to buy another house - maybe one at the lake - and at some point everyone owed the banks so much that people started missing their payments blah blah...".
Don't be afraid to tone down a lot and perhaps even to sound sort of retarded in questions like this, they're not about whether you own the lingo, they're about whether you have a good grasp of the basics.
You're right, I don't think a 9 year old would follow that haha. I guess I just forgot how to think like a 9 year old. It's been so long.
I wanted to ask you about the LIBOR question. Do you need to know only the 3-month LIBOR or all of them? Also, I know that LIBOR is some sort of interest rate banks charge each other for repo lending, or something like that. Why is this important for traders? Pardon my ignorance.
I'll take a stab at a few questions.
2) Banks' unsecured lending rate, up to 1 year. Not necessarily actual funding rate since a group of banks simply report a rate on a daily basis. Rate determined by taking out outliers in the low/high and averaging the middle. Very important because $350T+ notional of interest rate swaps use LIBOR as benchmark floating rate. Under the spotlight these days because some banks allegedly conspired to manipulate it to under-report true borrowing costs.
3) Yield curve close to zero out to 2-year, so assume discount factor = 1. Then price of bond is $1.04M. FB at around $20/share so approximately 52,000 shares.
5) Backed by Uncle Sam so virtually no default risk. Primary risks is interest rate risk and negative convexity (refinancing risk). Given that the Fed is buying $40B/month worth of agency MBS, yields and vol will likely stay low. But if housing market picks up there will be more and more borrowers refinancing, so negative convexity is the most relevant today.
7) Expected Value = $2M (assuming zero rate down to 4-year). Duration is just 4 years. Not quite sure about this one - I'm sensing there's some sort of trick question here..
8) Forward rate = future interest rate based on current zero curve. This is NOT an expectation of future rates, merely a non-arbitrage rate given current shape of yield curve.
10) dollar-neutral = L/S equal dollar amounts. So long asset 1 short asset 2 is equal amounts. Hence portfolio should consist of securities with similar characteristics in terms of beta. Beta-neutral just means portfolio is weighted such that portfolio beta = 0, i,e, uncorrelated with market.
Let me take a shot at all ten (no googling, obviously). Please correct me where I am wrong.
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I think number 5 is the only answer I haven't seen with a solid answer.
Agency MBS mostly refers to debt issued by GSE's (government sponsored entities) such as Fannie's, Freddie's, Fed home loan bank etc. Annaly and AGNC are not agencies. They are mortgage reits who use leverage to purchase agency MBS and other mortgage products.
The biggest risk IMO with agency products is not their credit or default risk but interest rate and prepayment risk. On the credit spectrum most agency debt is going to be Aa or better credit. Obviously because agency debt is a rate sensitive product, rate risk is there. Prepayment risk is the risk that the underlying mortgages begin to pay down the collateral of the MBS (principal on their homes) faster than expected.
Oops, misread 7) to be double/halve each year. mrktmaker's answer looks correct to me.
Amusing and very fun post, thought i'd chime a few cents to the questions.
1) Explain the 2008 market crash to a 9-year old kid in assume FB is trading at $20/share, you get around 50k shares....(but this is a good question and also another interesting opportunity in the reverse..pool funds for face value, go long coupon T-bill, make bets interim and hope it pays with coupon investment (def not FB) otherwise get full refund and return funds)
4) Speaking of, how did FB trade last week? Month? - falling stock from the day it was born, 3-6% daily vol avg but downward trend...good short since IPO day.
8) Explain forward rates. - what the general population believe the future value will be
9) What is algorithmic trading? What about high-frequency trading, is it the same? - algo=automating your mind for consistent patterns, HF=eating the pie as it moves....no its not the same thing although HF is a form of algo.
and now to hedge...
But remember that this is only my opinion. I make no claim as to the helpfulness of any of this. I accept no responsibility for anything that happens to you if you take my tips at face value or for any misinterpretation.
go into S&T these days without an understanding of what the algorithms do at your peril. You will be eaten alive.
on the flip side, if you have a decent strategy in the flesh, which you can quantify the inputs for, you can automate it and make money while eating pizza.
Question #1 to the 9 y old kid.
Basically, the economy is like a big balloon with people on board, and there is a cool guy called SuperFedMan filling this balloon with hot air. More people want to get in the nice balloon, so SuperFedMan inflates the balloon harder. But one day the balloon exploded and everyone crashed.
S&T seems too varied and diverse. If you're talking to a desk that trades soybeans and pork bellies, are they really going to ask you how Facebook traded over the past month?
Unless it is a very specialty desk and you are an experienced hire, yes. Recruiters and interviewers are trying to assess your interest in the markets and your ability to think like one of them, they usually price whatever you think you know about any market at zero. 101 out of 100 college kids who are asked relevant questions for those markets, such as "how is the weather in Cedar Rapids, IA?" or "how is the Primal Butt trading relative to Picnic, in the Omaha FOB market?", would answer "what the fuck, compañero?"
Alright, for the best answers so far, with a short comment. (1) mrktmaker, although Zafrynex's could work with a sociopath MD, (2) msmandoo, especially regarding the fact that it the rates swap benchmark par excellence, (3) msmandoo, precise, (4) mrktmaker, I like the real-life examples, if you know the thesis or market rumor for the price action, definitely spit it out, (5) msmandoo, although you could get some heat from the "virtually no credit risk" part, (6) no one loves France, (7) mrktmaker, correct, but aren't you charging fees? you're in this business to make money, not to offer parimutuel odds to compulsive gamblers, (8) msmandoo, I like the assertiveness, forward rates and market expectations are not the same thing, but there's some relationship between them. remember the YC theories? brush up on that, (9) sharkmonkey, (10) mrktmaker.
Nice one folks!
I answered all these off the top of my head based on the most recent knowledge I could trace inside my head, without going on google journey to find all the answers, except for refeshing myself on what MBS stands for. There is a big possibility I don't know all the acronyms yet. So if I am way off on some questions, I accept my noviceness and please correct me and give me advice! I am a senior Finance at Texas Tech.
yikes. been reading through this thread and i could answer maybe 2-3 questions... im still in undergrad looking for an internship? should i learn all of this b4 my interview? O_o
Great guide, thanks a lot
Great guide, thanks a lot
Wow!! Do one for BB IBD...
Should I be worried if I don't know the answer to the majority of these questions as a sophomore?
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