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.

 

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.

Fear is the greatest motivator. Motivation is what it takes to find profit.
 
shark-monkey:
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.

 
Best Response
andres17:
Ok, I will take a cut on #1. This is what I would answer.

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.

 
SenhorFinance:
andres17:
Ok, I will take a cut on #1. This is what I would answer.

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.

  1. Imagine if you, or your parents, bought a house, for example, and before you knew it, it was worth twice as much as you paid for it. Now, you feel a lot richer of course, so maybe they go out and buy another one using money that they made from your first house. For each of these homes, your parents still have to make monthly payments to the bank, but now imagine what happens if you fall behind on the payments on both houses, and then lose your job.
  2. London InterBank Overnight Rate. It’s the interest rate bank charge each other if they need short term (overnight) funding. Right now it is at around 0.25%, and fluctuations in the rate can serve as a gauge of financial stress in financial institutions as a whole.
  3. Let’s see. Right now a 2 year bond is probably trading at around 1%, so that makes the 2% coupon bond worth $1.01M. Facebook is trading around $20 after they rolled out their gift service, so you could buy 50,500 shares of stock.
  4. Last week FB rebounded after the gift services rollout, but is still down after the lockup expiration last month where major holders like the fmr Paypal Executive sold nearly his entire stake
  5. An agency MBS carries the risk of the agency who issued it, like Annaly or AGNC, and has interest rate risk as well as risk in the underlying security, mortgages, defaulting. Right now, the risk of interest rates rising, and therefore making the security less valuable, is a much higher risk. (Was guessing and prb shat a few bricks on this one, will Google later)
  6. United States, China, Germany, Japan, and India? Not a credit guy but US is AAA/AA, China is AA, Japan is AA, Germany is AAA, and India is A?
  7. In order for the client to get his money back, the bond cannot go to zero each year for the four years, meaning there is a 6.75% chance of repayment. For 1M face value, I would charge less than $67,500 due to the risk-free rate (and forward rates), so taking off around 5% for four years interest leaves me around 62,500.
  8. Forward rates are the expectation of what rates will be in the future. For example, in the US, forward rates are higher than current rates due to the expectation that the Fed will raise the discount rate at some point in the future, affecting the entire curve (guessing again)
  9. Algorithmic trading is making trades without human input, or a significantly reduced level of human input, using a program designed to make money in the current market environment, using past data as a guide. HFT is a type of AT that focuses on nano or millisecond trades that try to front-run orders and provide liquidity to the market.
  10. Beta-neutral refers to the portfolio not being more exposed to a rise or a fall in the market. Dollar neutral, I believe, refers to having matching dollar amounts long and short in a portfolio at the moment. How did I do? Great article, I appreciate the exercise, SB.
 
mrktmaker:
Let me take a shot at all ten (no googling, obviously). Please correct me where I am wrong.
  1. An agency MBS carries the risk of the agency who issued it, like Annaly or AGNC, and has interest rate risk as well as risk in the underlying security, mortgages, defaulting. Right now, the risk of interest rates rising, and therefore making the security less valuable, is a much higher risk. (Was guessing and prb shat a few bricks on this one, will Google later)

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.

Here's the thing. If you can't spot the sucker in the first half hour at the table, you are the sucker.
 

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.

 
prospie:
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.

  1. Lots and lots of people wanted to have their own houses. Lots of and lots of people also wanted to give people money so that they could own their own houses. But something went wrong. Lots of the people who wanted to buy houses couldn't afford to pay the people who gave them money to buy a house. And so when people stopped paying their house bill, all the financial markets stopped working. This caused many people to lose all their money and lose their houses too.
  2. It is the London Interbank Offer Rate. It is based in London, but used as a benchmark interest rate by banks all over the world to determine loan rates of all kinds.
  3. 40,000 to 50,000 shares of FB.
  4. FB has settled around 18-20 a share after losing more than half it's market cap since the IPO. Recent statements by Zuckerberg committing to not selling his shares have somewhat stabilized the stock, though it will probably be quite a while before it regains it's IPO valuation status.
  5. All categories of risk are important here. Default risk, interest rate risk, reinvestment risk, prepayment risk, and several others. The risk most relevant in our current environment is inflation and interest rate risk. Rates have been suppressed for too long. Money supply has been ballooned to astronomical levels due to QE, and we will see the result of these actions. Which is why it is more important than ever to keep a watchful eye on developments.
  6. 1. U.S.; AA- 2. China- BB+ 3. European Union- B 4. Brazil- BBB 5. India- A (totally guessed on the credit ratings)
  7. Total Guess even though I am currently taking Fixed Income class. I could do it if I took the time to work it all out but my intuition on this question is still nascent. I would say, charge around the 300k range?
  8. Forward rates are the future yield rates derived from today's spot rates. Calculated what the future rate will be on say, a T-bond, by using the spot rates from various maturities today.
  9. Algorithmic trading takes a mathematical algorithm that trades based on patterns. High speed also uses algorithms but it is not the same. High speed algorithms are much more complex due to the high velocity of the transactions. A conventional trading algorithm may only make trades periodically when market perameters are triggered within the algorithm.
  10. Beta neutral portfolio focuses on neutralizing market risk with it's mix of assets. Dollar neutral portfolio would focus on neutralizing cash flow risk rather than exclusive market risk.
"Everything comes to those who hustle while they wait." -Thomas Edison
 

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

 

Wow!! Do one for BB IBD...

If you ain't gettin money dat mean you done somethin wrong. " If you have built castles in the air , your work need not be lost; that is where they should be . Now put the foundations under them." - Henry David Thoreau
 

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