Mod Note: Each day we'll be posting the top WSO forum posts of 2014. This one was originally posted on 2/6/14 and ranks #25 for the year by total silver banana count. You can see all our top ranked content here.
“I want to be a trader”
You hear that often when you talk to future financiers at target schools. Of course, the less informed the candidate, the more they talk about things such as “moving markets” and “taking positions” and the less you hear about what actual products they want to focus on, or anyone actually having a clue about what the differences between different types of trading there are. In a previous thread ("The Sell Side 15 How to Stay Fit Yet Still Fit In"), I discussed people who simply did not fit into their trading roles on their desks because their personality or goals did not match the reality of the desk they were on. Someone who should be doing equities shouldn't be in distressed...nor should someone who should be structuring exotics be in equities.
When asking a candidate what kind of things they’d like to trade, the most common response from the totally uninformed is “stocks.” If the candidate is at the intermediate level, they’ve read “Liar’s Poker”, they say “mortgages”.
Of course, there is no right answer. In trading, every product is a different ecosystem – with different types of personalities, different pace of work, different clients, different work flows, and different exit opportunities (or lack thereof). The key is to make sure you work in the jungle that’s right for you.
On the investment banking side, while work my vary to some degree, I’m guessing there is significantly more homogeneity between groups in terms of the types of people, pace of work, and end products. To me, at least, most personalities across groups seemed relatively similar – with maybe the FIG guys being a little more intellectual than the rest.
In trading, every group has significant differences, and here I’ll go over some of the key aspects of each team from the perspective of someone who worked in bond trading. I’ll talk about these groups based on the liquidity spectrum – starting with the most to least liquid (though I’ll discuss sub-segments of each product as well). Then I’ll talk about my views about what is happening to each of these segments in terms of my medium-term view for the product’s outlook. You do NOT want to pretend like you are a fit for a group solely to get the job - burnout occurs very quickly when you dislike what you do.
DISCLAIMER: I might be totally wrong in some of my statements and assumptions, particularly with regards ti exit opps, which is where I’ll be happy to let others step in and share their own experiences/opinions – most of my knowledge outside of where I work directly is based off of colleagues and my brief rotations on different product desks, as well as my limited interaction with them from my role on the buy side.
Rates trading - Vanilla
WHAT: Trading of products such as interest rate swaps (fixed-to-floating, vice versa) and forward rate agreements
WHO: The people working on this team are usually pretty diverse, but you don’t have many people who aren’t good with numbers. It is not a relationship business as much as it used to be, due to the market becoming extremely transparent. Must be quick thinking, and most be able to go off your gut as opposed to taking time to read deeply into things.
UPSIDE: If you are good, you can exit into a macro fund – you learn about rates movements around the world, central bank policies, and learn how to react to news quickly and efficiently.
DOWNSIDE: You don’t learn corporate valuation, but rather you take a macro view. Your trades are based on central bank policies as much as anything, meaning that even if you have a fundamentally correct view an irrational act can ruin your trade. You will be glued to your desk, with very little room to take a break or potentially miss a market move. This is a low barrier to entry business, and the role is becoming increasingly focused on market-making as opposed to making a bet on a directional shift.
Rates trading - Exotics
WHAT: Trading bespoke products such as Bermuda swaptions which are customized for certain outcomes
WHO: Much more of a quant product than vanilla rates trading, and much less liquid. Here, you typically structure products based on more complex models. You see PHDs and Masters of Finance migrating here. Honestly, I have no idea how any of this works.You never really see or interact with these people.
UPSIDE: You typically work on fewer, larger trades that require more in-depth modelling work. This makes the lifestyle marginally better, and in some cases you are capturing a significantly larger fee for the type of work you do.
DOWNSIDE: You are not interacting with the market as directly as vanilla rates, which means an exit to a macro based platform is more of a step removed.
Equities - Vanilla aka “in Dallas”
WHAT: Selling individual stocks.
WHO: These guys are typically ex-jocks. Known to get drunk at lunch with PMs. Its becoming increasingly automated so relationship is more of a differentiator than risk propensity. One equity trader might cover several industries. If you like networking, going out a lot, and don't want to spend too much time reading reExecu|Search reports, this is a great spot.
UPSIDE: Your life is a lot of drinking and cocktails, and if you can build a relationship with a major PM this is where you can make a mark. Of course, the business is increasingly electronic, making your role redundant…leading too…
DOWNSIDE: Its become much more automated, and your role does not give you many skills outside of Execu|Searchtion and marketing. You aren’t a reExecu|Search analyst understanding a sector/company, and you aren’t a PM who manages a book – you trade volume and take a shrinking commission fee. Very suspect to headcount reduction in bad years.
Equities - Options and related derivatives
WHAT: Trading options and related products such as ETFs
WHO: These guys are extremely quick. Very intellectual, and a lot of poker players here. Options trading is a high-intensity role, and the people who do equity options are among the absolute smartest I have encountered. You are trading a very high liquidity product that requires constant engagement. Need to have a sharp attention to detail - if you like deep thinking, this is not a great fit.
UPSIDE: You are taking lots of risk and you can quickly move up if you are a natural. These guys find easier paths to becoming a PM at macro shops using their ability to look at options movements and comparing such movements to macro trends.
DOWNSIDE: Very intense life style, and many 1st year analysts burnout pretty quickly unless they rapidly prove themselves
FX and FX options
WHAT: Trading currencies or currency baskets, as well as forward products related to them
WHO: Similar to options trading, these guys are typically very intelligent, very sharp, and learn a few products extremely well. I actually worked on an FX desk for 2 weeks as part of a training program and cannot explain one single thing they did. Gamma decay or something.
UPSIDE: Similar to rates trading and options trading, you gain significant exposure to macro patterns, which is a great skillset. If you are talented, you rise quickly. If you are not, you burn out quickly.
DOWNSIDE: Hard to break in to a more senior level – you start with menial tasks and you face the potential for burnout. The FX market is here to stay, and the levels of automation have hit FX only marginally compared to what people thought ten years ago. At the same time, if you become extremely specialized in one product, and volume shrinks in that product, you are going to be hit hard. On the flip side, if you work in USDEUR (the most common cross) you will have almost nothing that differentiates you.
Mortgages:
WHAT: Trading mortgage related securities (MBS, collateralized mortgage obligations)
WHO: The people here require both a fundamental skillset and technical perspective. You need to understand collateral, refinancing risk, and macro trends which affect the fundamentals of your securities. Understanding geographic trends and income levels of your underlying assets is key, and you'll be running a lot of models at a junior level. You see a combination of ex-jocks and intellectuals, depending on where on the spectrum they fit in between trading and structuring less liquid products.
UPSIDE: Valuable skillset in a fundamentally-driven product. A lot of distressed mortgage opportunities exist, and I’ve seen people exit to interesting opportunities.
DOWNSIDE: Lifestyle is grueling, and at beginning levels you’ll be basically creating databases of mortgage data. Once you get more senior, lifestyle dramatically improves.
Investment grade:
WHAT: Trading investment grade rated bonds and derivatives.
WHO: The people here are generally more similar to equities in terms of how much they go out and their backgrounds are rarely quantitative….some can be intellectual, but it’s a very relationship driven business – IG bonds are fairly liquid, and you work with people you like the best, because bid/offers are not significantly different across trading desks.
UPSIDE: Combination of good technical learning experience (rates moves, hedging, basis trades) and fundamental learning (particularly in investment grade names that might become high yield aka fallen angels).
DOWNSIDE: Like some areas of equities, becoming very commoditized – and with the volatility in rates given the Fed, its hard to position yourself for long-term success. Also very limited exit opps outside of Execu|Searchtion roles unless you move up to a fairly senior role.
High Yield:
WHAT: Trading high yield bonds and derivatives.
WHO: The people here are generally more intellectual than their IG counterparts, and more similar to mortgages. You work with a very fundamental product, where sector/industry knowledge is actually very important, and in some time periods more relevant than technical pressure. So you have to have good risk tolerance and need a fair bit of intellect/patience.
UPSIDE: Strong understanding of fundamentals of your business, and because of the lower liquidity in the product, you gain a better sense for learning how to handle risk.
DOWNSIDE: Capital constraints from regulators are reducing the ability to take proprietary positions, so its increasingly becoming a market-making role. A lot of big traders made their names with absurd PnL levels, but the ability to do that anymore has been largely constrained.
Distressed:
WHAT: Trading distressed securities, typically loans, bonds, and special situation equities
WHO: Very intellectual, often coming from a banking/restructuring background before joining the trading side.
UPSIDE: Very strong understanding of fundamentals, with large proprietary positioning driving the need to understand all aspects of a security (industry, balance sheet, corporate organization, cash flows, covenant structure)
DOWNSIDE: Very cyclical. Often, high yield will encroach on your names during a market rally. Currently, there is simply not much to do in the distressed space.
OVERALL
Trading has many different types of products. For people interested in understanding fundamentals, the best places to start your career on the trading side would be distressed, high yield, and mortgages. If you want to focus on macro, you can’t beat the experience gained from FX and interest rate swaps. If you love risk and probability, options trading are a great fit. If you want to be a trader without actually trading, exotic interest rate products is the place to be. If you just want to go out drinking as much as possible, equities is a great spot.
The key is to finding a product set that you are interested in, and going into the interview process with this in mind. In general, equities is becoming much more automated - I would not recommend equities trading as a starting point to anyone right now. The ability to take prop risk is rapidly declining in HY, mortgages, and distressed due to the high cost of capital in fixed income. However, these roles still remain among the best places to learn.
In general, trading is shrinking. Automation, lower prop risk, and less movement at senior levels are the driving forces here - however, learning trading as a skill is very valuable, and you'll want to make sure that the desk you join is where you'll be able to make the biggest impact while being happy about your environment.
Excellent post...I've frequently searched for a post like this on WSO that compares and contrasts the different products as deeply as you did, but to no avail. SB to you!
EDIT: Having said that, I just noticed you didn't have any description for the commodities desk. Any way we could get some words on commodities, whether physical/financial? Thanks!
Ah, I actually didn't interact with commodities at all unfortunately (ironic because I traded energy company bonds for a while). The reason was that our commodity team was primarily based out of a different office - in fact, I think most BB's dont have their commodity teams in NYC.
Commodities seems like a great product set though - its a combination of fundamentals (tracking inventories, weather patterns, supply constraints (natgas peaked at over $100 mmbtu in some parts of New England this past eek)) along with supply/demand factors. Its a very specialized, very awesome skillset that I think would have more buyside exit opps than other product areas/
Can someone please do a similar post for the investment banking product groups?
Nice post, good work. I think the key takeaways are that there are four main categories of products: macro, quant, fundamental, and commoditized (with some overlap of course), and each fit a different type of personality. Though the most opportunities to move onto a hedge fund/asset manager PM/analyst track come if you are doing something macro or quant...fundamental HFs/AMs will want ex-resaerch analysts or ex-bankers to groom into PMs/senior-analysts, though there may be some leeway if you are doing something like distressed/high yield.
Great writeup.
Boom, bookmarked and SB'd
Tone it back a bit! You're producing too many good posts too fast big unit!
Thank you though, love your stuff.
.
Really helpful being an MBA student and sometimes stumbling through the product question. Thanks!
Any reasons in particular why its harder to move into a senior role in FX compared to rates?
This is the case for the majority of products, not just interest rate swaps.
Assuming you are agnostic between asset classes, I would prefer an options product to delta one (e.g. equity options over FX spot, FX options over cash Treasuries, etc.) as long as it's not super exotic rates or something (like big unit mentioned you are structuring more than trading). The options skill set is just more valuable in general, and you don't have to be right directionally (as you do in delta one) to make money. A profitable delta one trader may just have been lucky, whereas skill at options is more easily discernible. Great exit opps exist for option traders (again, exotic rates and other less liquid options excluded). Not sure if that is attributable to the skill set acquired in options, or if there is a selection bias (option traders tend to be smarter than delta one traders, which may explain why they are able to exit to buyside roles in greater numbers).
Credit is a whole different beast and big unit has covered it well since that is his area of expertise.
Don't agree that the degree of difficulty of moving up varies by product. Just depends how many people above you are jumping ship/getting let go and how quickly.
Great description - in my analyst program (half a decade ago) I always thought the smartest kids were options traders during training. Also the least 'refined' - one of the guys was like 4-5 years older than the rest of us because he had been a poker player, for example - one of the coolest guys I've ever met, but I doubt he was getting 4.0s at an Ivy before he joined. In my limited exposure to options ponce I hit full-time, I did notice that the upwards mobility of talented young traders was higher than those of some of the other products. This might be just the case at my BB due to extensive personnel reshuffling.
Great post thank you
Thanks a lot for this post - something like this has been exactly what I've been looking for!
Just curious, but could you dive a little deeper into what kind of opportunities some of the mortgage guys had?
Mortgage investment funds which identify portfolios of distressed/stressed mortgages, which they then acquire from commercial banks. There are a few big standalone funds that focus almost exclusively on residential mortgages (Lone Star is one that comes to mind as one that primarily works with mortgages). However, most of the mortgage strategies are smaller portions of larger funds, rather than mortgage-only funds. The MBS market is typically less volatile and lower return than HY on average, but within the space you have the whole spectrum of risk/return - similar to high yield corporate bonds.
Great post!
I assume (as stated) that these descriptions are applicable solely to the traders as opposed to the sales guys. In your opinion/experience (or anyone else who can chime in) do the personalities and skill sets of the sales guys at all mirror the descriptions of the traders among various products listed above? Or rather are the sales guys more of a homogeneous group that are spread out across products? I've been told, and it would logically follow, that the sales guys going into areas like structured products need to have more of a quant skill set and understanding in order to be effective in meeting customer needs. Do the experiences of others support this?
Thanks!
Great post. A few other roles that you could add to this post to make it more comprehensive for future reference purposes.
Structured Credit: WHAT: Trading CLOs, CDO, Synthetic index tranches, credit default swaptions and structuring bespoke transactions WHO: These groups tend to be one of the most quantitative on the floor, but you can find a spot here if you're from a non-quant background if you go for the more vanilla products aka CLOs. Anything synthetics or options based tend to have your typical MIT PhDs. UPSIDE: Despite popular opinion, the space is still reasonably active and growing back, though nowhere close to the pre crisis levels. You gain very solid understanding of fixed income and credit products. A lot of hedge funds are still active in the sector and exit opportunities for these exist. DOWNSIDE: Well, to put it mildly, the sector could vanish soon and you can be stuck with skills in a defunct product. However, people in the area who got laid off during the crisis have generally fared (in the fixed income space of course) well given their strong fundamental and technical skills.
Algorithmic trading (sell-side): WHAT: Systematic trading in liquid products - could be treasuries, equity indices, fixed income indices, FX etc WHO: You almost always have to be master coder - having a finance background is optional. You need to figure out the logic of why, when and how much to trade based on a set of rules that you code. UPSIDE: Tremendous opportunity for someone with advanced coding skills. Work is intense but you have worry more about debugging code than where the 10YT is. Exit opps are options market making firms, quant hedge funds or even starting your own small shop. DOWNSIDE: Can be mind numbing, redundant and boring. Even if you think you like quant finance, do take time to re-think if you wanna code all day. Regulation against HFT seems to be affecting the buy side more. Increasing execution efficiently via algos is the way forward in a lot of liquid products.
any comments on money markets? a lot of big users here have described working on a money market desk to be the best training for macro pms despite how unsexy the role is perceived
Will give it a shot, having been on desk for repo, eurodollar deposits, CP, fed funds (somewhat defunct due to excessive reserves) and related derivatives products including ED futures and OIS swaps; includes securities lending I guess WHO: Less fundamentally driven thanks to ZIRP, more about understanding technical factors and reading the tape. Technical knowledge of products relatively easy to pick up. Need to understand supply/demand of short-term funding from perspective of dealers/hedge funds, money market funds, central banks, pension funds, and Treasury department. Consequently the role can be very relationship driven. Though a large component of flows can be the financing needs of other desks (e.g. rates desk financing tsys collateral), need to combine resources w/ bit of ingenuity to make spreads in this environment. UPSIDE: Good opportunity to begin trading relatively quickly with limited downside risk (usual caveat of 'depends where you are'). Good learning opportunity: understanding funding obviously important for trading more complicated products - can venture what's going on in cash markets from related financing product (e.g. trading specials). Some desks can trade cash/futures - opportunity to develop ideas here; maybe no one cares if you made or lost 50k after executing your first futures trade when desk is up 25 mm on steady accrual. More interesting trading opportnities if lift from zero bound. Develops basic understanding of various money market participants why they take the other side of your trade. DOWNSIDE: Earning potential limited - steady PnL is bread and butter, relatively low risk yet high balance sheet usage. Spreads ultra-compressed, front-end flat, see vol when debt ceiling debacle nears but also wipeout of PnL overnight. An actual hiking cycle may bring new life back to the markets, but you have to stomach it first. You provide a service financing the bank and various desks but they probably have no idea what you're doing (even though some of them should)so you actually have to market your desk which can take focus away from trying to make money. Exit opportunities hard to grasp if you care about stuff like that, but they might exist if you pay attention to the aforementioned upsides (EDIT: assumption here is exit opp is to a related trading role, possibly rates desk; I know of only one person who went from repo to rates desk to PM in a very different environment, hopefully someone else can shed more light?
would love to see a commodities one
This is great stuff - Snipez, Oliver, very useful. I wish I was more useful on commodities - in many ways (I think regulatory reasons?) its the most separated from the rest of the desks. Though look up John Arnold and read about his career - very interesting.
Thoughts/description regarding buyside trading at an AM or mutual fund as a trading assistant, out of undergrad?
One more
Credit Index Trading: WHAT: Trading flow on credit indices - both cash and synthetic indices. WHO: Even though grouped with the structured credit guys sometimes, these people are more akin to your traditional S&T folks. Not very quantitative but you need to understand the nuances of credit, especially synthetic credit UPSIDE: This roles give you an amazing opportunity to gain solid global macro trading skills. The credit market flows directly and indirectly depend on how investors in other asset classes (rates, FX, equities etc) move in and out of their positions. You learn how to interpret economic, government and policy news. I've seen several of these guys eventually leave for the buy-side in a PM capacity. Note this is unlike a lot of roles in the equities space where people move to the buy side only in execution related roles. DOWNSIDE: This didn't work for me personally as I like to sit down, think, crunch some numbers, run some regressions and formulate an idea instead of market making. Also, you won't be looking at individual names - that's for single name CDS traders. This is not really a downside but something to be aware of.
CMBS trading: WHAT: Trading cash CMBS tranches, synthetic CMBX tranches. WHO: The skills required in this sector as very varied. At the top of the capital structure (AAA-A) you're more of a agency RMBS trader as the credit risk is minimal. You worry about prepayment and duration hedging. As you move down the capital structure, you get closer and closer to the actual underlying real estate. At the very bottom of the cap stack, you are essentially re-underwriting the deals or at least the major loans in the deal, getting as much public info about the actual real estate as possible and then making markets in it. CMBX guys tend to be more quantitative that the others given the synthetic nature of the product. UPSIDE: Great role if you like real estate AND the markets. If you only like real estate you're better off on the private side - RE debt / special situations / REPE. Exit opps again vary by the skills you acquire and your customers. Top of the cap stack - insurance cos, pension funds etc - nothing sexy here. Bottom of the cap stack - hedge funds, structured credit funds with CMBS allocations, some REPE shops exploring the CMBS sector. Recently in 2012/2013 a lot of top names have entered into this space DOWNSIDE: Like any other sell side trading role, you can get stuck in a market making role. Not that market making is 'bad' or not rewarding. And you def have to like commercial real estate. New regulation can has both positive and negative effect on the sector, varying across the cap stack.
Would also add that mortgage guys that leaned toward the agency MBS camp sometimes ended up doing macro or RV as well. Understanding rates is somewhat of a prerequisite as these are the common hedging vehicles (e.g. mortgage basis defined as FN 3s vs. 10y swap rate). Moreover options knowledge is required to hedge convexity. Also, as big unit hinted at, there are relative value opportunities between mortgages and HY credit (e.g. mortgage index vs. CDX). The days of mortgage desks trading the entire spectrum of FI products are long gone, but the role used to be formidable preparation for relative value guys.
Hm, from the sounds of it, there seems to be a lot more exit opportunities for traders at some desks than is claimed.
What background do most distressed traders have and what are the hours like?
Was an S&T intern some years ago and searched the Internet far and wide for a post like this. Nothing that turned up was even close to as detailed or accurate as your post. Thanks a bunch.
No problem - unfortunately, most of the bulge bracket banks have very skewed descriptions of the trading role, and very little product-specific information. Happy to help. Did you end up joining full-time?
Interned during a rough summer where none of the desks I rotated on were handing out offers.
Currently in Institutional Sales at a large AM but thinking about how to get back on track to eventually having a research/PM role in the future. Not getting the offer was definitely the best thing to happen to me as the desks I came into the program wanting were the ones which would ultimately have been the worst fit for me given my personality.
double post
could anyone maybe shed some light on rates sales?
Great info! Thanks for the PM as well
Anybody shed some light on municipals? Vanilla and derivatives; I'd imagine derivatives in munis is a different animal than in other products.
Can anyone shed some light on EM/ EM Credit desks? Thanks.
what product is the heaviest on technical analysis compared to fundamentals?
Will echo what has already been said in that this incredible useful for someone in b-school. Great reference post.
can any light be shed on buyside trading?
Great post!
This post (great post) made me experience self-criticism, which is good
Awesome!
Awesome post, so much truth. Each type of asset class has its own required personality in my opinion. You can't force it.
Really helpful thank you very much!! :)
What are the exit opps for someone in listed futures & options S&T?
getting picked off by optiver/imc/akuna on a daily basis
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