Q&A: Former BB Rates Trader - Now a prop trader
I've enjoyed this forum, and I see lots of people without a clue asking questions about trading, so I thought I'd do a Q&A... My path was non-standard, but I've seen others with a similar path to my own. My Path --> Non-Target state school --> Job in BB IT (programming) --> BB Rates Trading Desk Quant --> BB Rates Trader (market maker) --> prop trader I have also watched many of my former colleagues (both quant and non-quant traders) over the years move to hedge funds and asset management firms as traders and PMs (PM = portfolio managers). For people new to trading, this video series is pretty good. There is a lot of macro fluff...but there is also some good technical trading info with charts (starting 8-10 videos in)...you just need to have the patience to get thru the fluff.
at the banks, i was a market maker (so, most positions are those customers force you into)...so i focused on RV...trying to prepare for flows that i didn't want (so, sell things that are rich...buy things that are cheap...in anticipation of customers doing the exact same thing.
Over time at the dealers, i learned how to prop trade on a larger macro scale (curve, butterflies) but still in the Rates space.
Then eventually, i learned how to trade outright direction.
Each level from micro-->macro required a slightly different skillset. I spent about 3 years at each...
Could you elaborate? You lost me on the second sentence haha. You wrote this on a different post, asking martinghoul and trust me... I've tried re-reading but I have no idea what the hell this means.
"Since you've mentioned that you trade rates RV....what are your thoughts on the US Treasury 10yr-US (20yr)-30yr fly (PCA DV01 weighted: 30k-90k-70k) ?
US (20yr bond future...essentially the Feb2036 bond) has been cheapening the last month in the 30yr bond selloff (market assumption is that speculation of BOJ curve steepening will flow to foreign markets, so that drove large long end selling flows...and the preferred hedge to these flows is the classic bond future...which has caused this cheapening).
I'm personally waiting for the BOJ to pass and see what they actually say/do before i touch this thing for anything more than an intraday scalp. Thoughts? Do you intra-day-trade these types of structures?"
first look at things in yield to determine your baseline view of RV. 10yr - known 20yr - ZB CTD...assumed Feb2036 bond for convenience...although now its the May 2037 bond (May37) 30yr - known
So, May37 (20yr) yield - (0.5 x 10yr yield + 0.5 x 30yr yield) = level of 50/50 DV01 neutral fly You can plot this using 3pm daily closing yields from any ibank.
This assumes a 50/50 weighted DV01 neutral fly.
50/50 = the wings have equal weight (each wing DV01 will be 50% of belly DV01). DV01 neutral = the sum of the wings DV01 are equal to to the belly DV01.
So, lets say you want to put on 100k the belly for this 50/50 fly. You would need to calculate "how many May2037 bonds gives me 100k of DV01?" Then you would say, ok, now how many 10yr notes gives me 50k DV01 (50% of 100k), and also 50k of 30yr bonds. This tells you how many bonds you actually need to trade to put on your position.
Lets go back to the 50/50 yield chart from up top...and plot it with the 10yr yield. Do you notice any correlation? aka...do they trend together? If so, how much? Here you would use PCA to find the correlation coefficients..to tell you "how correlated is this fly to the level of 10yr rates?"
the answer in this case is about 10% over the medium term. Depending on what timeframe you look at might change these correlation % numbers,
PCA doesn't tell you what will happen next...it just tells you, for the period you are looking at, what happened? Its up to you as a trader to decide what you think will happen next, based on all the available information.
In the case of this fly, after the trump election win, ZB richened a lot (the curve flattened at the 7-15yr point)...the market was betting on instability, and a new level of stability for this fly was found (about 60 ticks richer = 8 basis points)
trading a fly (3 points) is less directional than trading curve (2 points)...so it should be easier. Look at some charts to prove/disprove that statement. That said...a fly move less...so there is less PnL potential. This causes guys to lever up and trade bigger...which usually works just fine...until there is a blowout and then leverage kills you. Nothing in trading is easy....trading a fly you are sacrificing liquidity for stability. Eventually tho, all flies have moments of instability.
my personal PnL fluctuates...i have good days and bad days. i have a daily PnL...as does every trader i've ever known. I actually have a realtime PnL...i know exactly what my PnL is with every tick of the market...as does every trader i've ever known.
Thanks man, I actually used to prop trade in Philly for a small firm. It was cash equities and equity options for the U.S. market only. Net-net I made 150k in 3 years, which is really nothing... But Jesus, that was close to 4 years now... Given the screen time and the intuition that I've gained since then, I've tried so hard to get back into prop. I've interviewed with FNYS at their office and I even told them I didn't want any salary. I mean I have a son who is 16 months old and asking for no salary is big deal. That's how much conviction I had to know I can make money. Gelber, Ronin, Traditum, BlueFin, Quad Group won't even give me a call. Peak6 did call me back but if I took it, might as well stay where I am now. I know I can make hell of a lot more now but no track record. After I left the firm, I didn't print it and the firm shortly closed. Which completely sucks. I wanted to expand to different products, that's why I've been killing my self to learn rate products. Although I did end up joining the index vol desk for a bank, just not for me man.
prop firms (where you don't deposit any money) either want to see 1mm+/year over 2-3+ years (a consistent track record...maybe some would settle with 500k/year for 3-5+ years) or they want to see a detailed trading plan, with research to backup the validity of the strategy, for a more junior role. You must be able to explain "why should we let you risk our money, vs the other guy who can explain exactly how he plans on making money?"
So, what exactly is your trading strategy? How do you make money. Explain it to me like i'm 5.
1) become an excel and VBA master. start doing excel projects now. regressions, organizing data, build a "whats priced in to FOMC expectations" spreadsheet. Learn how to program in VBA (not recording VBA macros..but actual programming). Learn how to do PCA analysis in excel of something vs something else (like the 5-10-30 fly vs 5/30 curve and level of rates...just as a starting point)
2) statisiscs and math. the more the better..learn how to apply advanced concepts, and actually do it...analyze the current market...that's the job of a trader. Look at technical studies like bollinger bands, and ask yourself...what could be done to imprive the study....how would you change it. what else can you add. Try to create a predictive study of your own...perhaps just with small modificatios to existing studies...perhaps something new. Learn everything about technical analysis. John Murphy's book is a good place to start.
i could go on...but this is more than enough to get you through the summer
i don't have a STEM degree...just economics...but i learned a few things over the years while i was working in IT with a bunch of real quants (Phd types). most finance math doesn't take a PhD...it just takes patience and the will to work thru a problem until you understand all the necessary aspects. Sure, this might take me longer to work thru a problem and figure it out than someone with a degree in the relevant math...but that's usually all i need...time. I've found myself reading thru research papers and academic texts on more than one occasion trying to understand some new math (well, new to me). Often, the 1st time i look at an equation, i go blank and understand none of it....but then you break it down into smaller more easily digested chunks, and work my way up until i understand the whole thing. This process takes time, and can be very frustrating at times..but this is how my brain learns.
i'm generally more visual, so i prefer charts over numbers...but both are necessary. I'm sure that the more simple the product, the less intense the math...but even the more complicted stuff is mostly just the same math with more iterations. You probably can't get a job by saying "i don't understand this stuff, but given enough time i'll be able to learn it"...this was all stuff that i did on my own while having a "dumber job" (aka, programmer), which eventually led to a promotion after i learned what i needed to.