The Types of Monkeys in The Trading Jungle

Mod Note (Andy): #TBT Throwback Thursday - this was originally posted on 1/23/14. To see all of our top content from the past, click here.

The investment banking side of the business is pretty well-known - you have the overworked analysts, the jaded associates, the pushy VPs, and the directors/MDs at the top. However, all these guys are the same species - they are all bankers, and while they have very different roles, they ultimately are all investment bankers at the end of the day.

The trading floor is different - you have the alpha-male trader banging his phone down on one side, the over-eager sales guy shmoozing with clients hungover but desperate to move an axed trade, and the quiet research analyst hunched over reading a 10-k from 2004 in between. Yes, the trading floor has many different types of monkeys wandering about, and its fun to see where traders, salespeople, and research analysts all fit within the beautiful ecosystem known as a trading floor. Lets take a look at each of these roles, how they fit in, and what the future holds for young monkeys of each of these unique specimens.

I’ll be talking about things from my perspective on a credit trading floor, where I interacted with people across investment grade, high yield, loan, and credit derivative products. I’m sure the roles/culture is different on other floors like equities or FX, so I will try to be more general when possible. I’ll talk briefly about each of the roles, the career path, how the world has treated the species, and the exit opps.

Traders :
These guys make the markets move. Traders typically are the ones who buy or sell the securities, and position their trading books to minimize risk. The more senior the trader, the larger positions and trades you can do. Your day starts with coming in around 6:45am, sending out updated prices to clients based on macro data, and taking orders from clients throughout the day. Then at night you are either going out with clients, smashing your keyboard, or berating a sales person or your junior for making a mistake. But at the end of the day, you are the one driving revenue for the firm, and you will be treated like a rock star if you do well.

The hierarchy starts as a first year analyst, fresh out of undergrad. At that point, you’ll be backing up a few senior traders. You’ll be booking trades (basically entering in the trading tickets), which is mostly just double checking and data entry. You’ll be doing things like P&L, which is using the trading desk’s software to run numbers against market values to see how the book’s positions have done on the day.

As a junior trader, you’ll also interact more frequently with the technology teams – its not glamorous, but its needed. You’ll be making sure senior traders have all their tech issues fixed quickly. You’ll be getting coffee at least once a day, and often lunch too.

You grow as a trader in two ways: meeting clients, and stepping up for senior traders when they are out of the office. The more clients you know, the more familiar you will be with the personalities on the street, and the chances of you knowing who to contact to make a trade increases.

When senior traders are out of the office, you will have your chance to shine. You will send out runs on behalf of traders (for those that are not familiar, runs are market prices for securities sent electronically to clients who will then decide if they want to transact), you will make trades that are small at first, and then increasing in size.You will also be responsible for communicating with sales - specifically, you send them a list of axed positions (high priority) that you want to sell in order to either fill a client order, or de-risk your trading book. The more axed trades you make, the better you look.

The world of trading has been hit hard though. Because of the smaller number of sell-side firms and lower risk taking propensity, the days of traders taking $100mm bets on the sell-side are gone (and they were gone before I got there myself). Instead, the job is much more managing risk and increasing volume, as opposed to making a true fundamental call.

Because the number of firms has declined, you also see less senior traders moving around. Because of the annual purging of a few unfortunate underperformers (or least liked by senior people…or simply too expensive), there will always be a few opportunities for a junior trader to move on up. But this is getting harder and harder, as traders who have their spots typically don’t want to move given the high levels of risk.

Exit Opps: If you have 2-3 years of trading experience, the main move you can make to the buy-side is as an execution trader. You have to be fairly senior to become a PM on the buy-side if you come directly from sell-side, and that’s becoming less and less common. Its rare to go into an investing role from a trading spot. Instead, the most common path is to stay in trading, or lateral to a different role within the bank, or to leave the industry entirely and reset. Few analysts who within ~2-3 years of joining the street have exited to the buy-side DIRECTLY from a trading role – there was always a stop in banking, strategy, or research first.

Sales :
The town drunks of the trading forest, these guys are the ones who maintain relationships with the clients. Relationships are underrated on this board. Knowing a portfolio manager and getting a high volume of low risk trades is always preferable to transacting with a hedge fund you don’t know well. Consistent, profitable business is the way to win in the days of reduced risk tolerance, and sales people are ironically becoming MORE important as a result.

So the sales monkeys are a little more sway than they used to. Its still a gritty job – you get in around 7am at the latest, but your nights sometimes don’t end until 2am depending on how often you schmooze. You have to be on the phone all day, even if you are hungover, even if you have the flu. Your job is to find out what types of trades your clients want, and then negotiate with the traders on how to get your clients exactly that.

In sales you start as a first year analyst as basically an assistant – booking trades, making sure your order tickets match those of the traders, and one of the biggest things you do is help host client events. You are constantly organizing client dinners, getting people to attend events, and also getting coffee/lunch, similar to junior traders.

You progress by meeting more clients on behalf of your senior sales staff, and eventually picking up a few accounts of your own. This is going to be really tough – no traders want to waste time talking to little accounts, yet at the same time you have to make these little accounts do something useful for your team or you won’t advance.

Exit opps: In my own experience, almost all junior sales staff have a tough time – going out 2-3 nights a week, waking up early, and doing somewhat menial work can be a drag. In my experience, the most common moves for junior sales staff is to research, capital markets, or business school. Again, most senior sales staff are pretty comfortable where they are, so spots rarely open up.

Research:
The quiet, helpful research analysts are probably the least likely to fit in to what most people’s perceptions of what a trading floor is like. Research analysts typically scour through financial documents and models throughout the day, don’t do much talking, but are the ones who provide research and in-depth analysis to clients and the desk on their positions. While I’m not talking about publishing analysts, the work is similar – putting our repots electronically to clients, and having clients call you for feedback.

In many ways, research analysts are second class citizens in every way – they don’t get invited to drinks as often, they typically work longer hours, and they don’t actually generate revenue. You also don’t have as much fun during the day, as looking at 10-Ks takes more focus than trading par bonds.

You start as a junior research analyst, out of undergrad, and usually work directly with a senior on a fixed number of industries. You usually get really in the weeds with a few different positions the desk is actively involved with. However, over time you begin to speak up more, and if you show the willingness, you eventually get your own coverage of a few names.

However, the exit opps in research to get to the buy-side are superior, and even if you aren’t the coolest monkey on the trading floor, you have the best chance of getting out of the jungle, if that’s your goal. Because you have a combination of modeling experience, experience with the public markets, and knowledge of industries, you can typically get recruited to be a junior research analyst on the buy-side after putting in a solid 2-3 years. Unlike banking, you also work with clients on a daily basis, so you can also get your name out there.

The shrinking jungle:
The trading floor is an awesome place, but its shrinking. Regulations are putting a cap on how much risk many desks can take. The risk appetite for many products is gone. Prop desks have gone on the sell-side, and have been replaced by small directional bets within flow trader books. I think the people I’ve met and am friends with because of my time on the trading floor are some of the coolest people – the personalities, the passion, the angry yet festive nature of most comments. However, I wouldn’t want to go back.

Its also harder to advance up in S&T than ever before – less senior people are leaving, because there are less spots at other firms. Many of the big Euro lenders have shrunk their staffing numbers as well, leaving laterals to upstart firms becoming rarer and rare.

While it’s a great experience, I’d recommend people who want to go to the buy-side to focus on Research and Banking roles, NOT TRADING. Unless its for an execution role, a junior trader as very few skills that are relevant to a hedge fund. Further, if you are in sales, you might be able to exit out to IR, but its not easy to move to the buy-side.

I just wanted to open up some discussion on the topic if anyone had any more in-depth questions about any of these roles, and if anyone else has had a different experience on their desks, feel free to add in. I realize my experience might have been product or firm specific.