Credit or Commodities Trading
I will be a senior next semester at Cornell. I know I want to go into S&T, I just don't know which specific area to pursue. Credit derivatives seem very interesting as does energy trading. It would be awesome if anybody with any insight could answer the following questions
1. Which is more quant, credit derivs or energy? (I know that's a ver general question)
2. Least likely to bubble in the near term
3. Most room for growth
4. Avg weekly hours
5. For energy, which area do you see as growing the fastest? nat gas, oil...?
6. Same for credit derivatives
7. Bonus potential
i can answer this stuff from the credit side
credit derivs, especially exotics/correlation/CDO tranches stuff are pretty quantitative, my group is about half math majors and half engineers
credit derivs are absolutely booming right now, some would argue it is a bubble, will be interesting to see how credit derivatives fair after turblent credit times
i know credit has lots of tons of new products and surely many more in the future
depends on your role, structuring CDOs could be 70-80, trading CDS could be about market hours + 2 per day
no idea
i'd say correlation stuff/single tranche CDOs
tons of money to be made
Energy:
Very quant and there are sooo many variables that go into working this stuff out - just off the top of my head a small change in temperature will affect the amount of energy required and also change the efficiency of delivering that energy....
Booming and more will always be needed for the future
Lots of room for growth as banks only recently got into the field.
No idea sorry
Nat gas? oil? electricity? sugar? biofuels? hydrogen? uranium? go take your pick!
Bonus potential is huge - this is where the 100 millon dollar payouts happen - don't think it does in credit
Thanks for the info, guys. Skins1, i've read that you're in commodity sales. Can you comment on commodities trading?
Structured credit is a great field to go into. I won't compare credit vs. commodities, but I'll comment on commodities by itself.
1) Very quant. Even the most basic products are derivatives (swaps, forwards). Also a huge focus on structured products (CCOs, commodity linked-notes, dispersion options, basket options, etc. on the investor side, and bespoke hedging strategies on the corporate side). And to tell you the truth, it's getting to the point where sales and structuring are doing the more complicated deals, not trading. Nothing against trading, it's just a function of the industry. So strong quant skills are a necessity across the desk.
2) I personally think it's very unlikely that we have a "bubble" situation in commodities, because it's not the high price levels that are driving the growth (even though the media portrays it that way), but the absurd volatility levels. Commodities is far and away the most volatile asset class (esp. power), so the need for corporate hedging will be there as long as vol is, regardless of whether prices arer up or down. Plus, there is so much growth potential in commodities--I'd argue more so than on any other desk at the bank. As long as China, India, and other developing nations are still developing, I don't think there will be a "bubble".
3) Follows on from my comments above--the growth opps in commodities really can't be matched anywhere else. First, there are entire commodity classes that are still almost untouched (emissions, ags, pulp & paper, weather, etc.), and plenty of growth opps in the ones that are common (energy). Then you have the fact that there are still many investores who have never touched commodities before and are now getting involved (either real-money funds that weren't allowed to before, to HF that are just now getting interested). Also, there is unlimited room for new products because of the opps in corporate structuring.
4) Hours--longer than standard S&T desks. Oil and gas traders probably work regular hours, while power traders work longer hours (because so much more in power is structured). Sales will work longer hours than most other desks (nothing crazy, but probably 12-13 hrs/day). Structuring is similar to other structuring desks (i.e. cash/corporate products--you'll get killed with IB hours; synthetic/investor products--same as sales).
5) Biggest growth area is power, far and away. New growth areas would be emissions, ags, etc. Oil is not really growing that much. Nat gas is growing, but not in the same way as power.
6) N/A
7) Pretty damn high. Like a previous poster said, the top-paid people in S&T on the street were in commodities. BUT, they were doing prop, so they were allowed much more proprietary risk than the avg desk trader (who will still spend 50% of the time doing prop, but who still has risk limits). Honestly, I think all the growing areas (credit, EM, commodities, etc.) all have about the same bonus potential--i.e. really, really high if you're good. With the emphasis being on the "if you're good" part. If you suck then no one's going to be handing you a large paycheck, no matter how good the desk or firm did that year.
Skins, you out did yourself. Thanks, bro.
what exactly is structuring? you have people who trade credit derivatives like CDS, what do people who "structure" do?
I don't work in the industry right now but I think can still help. CDS, from what I gather, is treated like a vanilla security and traded around as such. When you get into more complex CDOs and other credit derivative bespoke hedging for institutional clients, structures come in. There are many financial and legal aspects of these "trades" that sales and structuring work out. As far as trading is concerned, banks will usually take a proprietary slice if the pie. For example, for a single tranche CDO, the offering bank may choose to bear some risk to help sell the product. I think this is where the traders come in. This is what I’ve gathered from my internet research. I could be right on or I could be very wrong. They just don't teach this stuff in college, or b-school for that matter.
The structurers literally "create" the products. Initially they invent them, then going forward they financially engineer each individual structures. For example, with a CCO, the structuring team will literally engineer the CCO--decide the makeup of each tranche (i.e. which commodities to use), number of tranches, returns possible on each tranche for a given credit rating, what kind of underlying structures to use (commodity trigger swaps, other CCOs, etc.), etc. On trading floors these days we are starting to move away from just the typical products that were created years ago and standardized on exchanges, to new products or products that have never even been done before. That's where the structurers come in.
I will admit that if you're new to the industry and have never seen this stuff before (or think that finance is the very simple, basic world that investment bankers play in) then it may seen a little arcane at first.
what good books can i read this summer to understand all the different credit derivatives and more exotic fixed income products? i want to be prepared next year when i interview
I wouldn't worry too much about it. All the really cool stuff is far too new to have any books written about it. Plus, I highly doubt you will encounter much of that in interviews. Even interviewing at the MBA level most of my interviews were fit/culture, and the ones that were technical were all basic stuff--duration, convexity, where's the yield curve, macro views, etc. No one's going to be quizzing you on what you think the proper rate of return is on the AA-rated tranche of a synthetic CDO made up of a bunch of synthetic ABSs.
I agree that it wouldn't be expected knowledge, but I'd be impressed if someone came in knowing a good amount about correlation trading for example, and could talk about the importance of convexity, correlation, iGamma, etc. from independent research.
structure what kind of desk are you on?
CDO (plus a few more products) structuring, and we have a correlation trading group within us.
"What you say about volatility is very true. In the internship I had last year we did some kind of research into that, and using some econometric paradigm we concluded that what affects most the inflation levels is not the absolute levels of crude prices but its volatility."
This is econ 101.
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