10/11/10

Fixed Income (FI) - What Is It?

Fixed income is a type of trading that falls under the sales and trading umbrella.

Traditionally, fixed income trading meant trading investments that had a fixed income. This means that the borrower paid a fixed amount of money on a fixed schedule.

Over time, fixed income branched off to include a bunch of different products that aren't quite as straightforward as the traditional products (bonds and loans, notably). Fixed income involves the trading of these more traditional products, as well as newer products.

Fixed Income Sales vs Fixed Income Trading

The difference between FI sales and FI trading is quite simple and uniform across S&T. What separates the different types of desks is moreso the type of trading that they do. To quote the WSO guide on S&T, here's the difference between sales and trading summarized:

  • Sales: pitch the firm's ideas to clients to sell securities, and build relationships with clients.
  • Trading: trading securities, typically in two ways (there are others means of trading, see "Different Kinds of Trading" for more on that), trading for the client or trading with the firm's capital (called agency trading and prop trading, respectively).

Fixed Income Hours and Compensation

Fixed income hours and compensation are roughly on par with S&T, so if you know those general figures, this section should look familiar.

Hours

During the week, FI S&T workers put in around 50-60 hours. There's typically no weekend work, which is always a huge positive. Generally speaking, the lifestyle in FI and S&T as a whole is very doable.

Compensation

Compensation in FI, in both sales and trading, averages out around $120k out of undergrad. Salary grows significantly as you climb the ladder, reaching $700k-1m at the managing director level. By the time you're a VP in S&T, you make more from your bonus than your base salary. As always in S&T, performance plays a massive role in determining your all-in compensation, especially at the higher levels.

Preparing for a Career in FI

There is a huge amount of information that needs to be understood if you want to be competent in FI. You'll learn a lot on the job, but it's expected that you have a working knowledge of FI. By failing to prepare and learn about FI long before recruiting for FI begins, you're potentially setting yourself up to fail. Of course, entry interviews aren't exactly filled to the brim with technical questions. It's understandable if you haven't done much learning up to that point, but if you've identified FI as something that interests you, then you should prepare for it as early as possible.

FI is somewhat different from general trading as the types of securities you trade in FI are less comprehensive initially, so you can't just dive right into trading and expect to learn a ton (although trading on your own accord is indeed en excellent way to learn). Before you dive in, you must develop a surface-level understanding of FI.

For that, you need to read. It helps if you have somebody knowledgeable to mentor you and help clarify any concepts you don't fully understand, but not everyone has that luxury. If you don't, YouTube is your friend; search for any concepts that cause confusion. Before reading any books on the topic, it'd be helpful to watch Big Short. It'll give you an idea of the latest instruments traded in FI, and why the traditional interpretation of FI no longer applies. Without further adieu, here are three books to read from @NGTrader3.

Big Short, Liar's Poker, and Flash Boys (All by Michael Lewis) are great reads. It will be very beneficial to understand inflation, interest rates, credit ratings, and their relationship to the bond market (or issuing debt in general).

These books are quality reads that will provide all the basics you need to know for FI. In addition, The Handbook of Fixed Income Securities by Frank Fabozzi is a highly recommended book among professionals in the field.

After telling you to read a few books on FI to really develop a deep understanding of it, we feel obliged to include this tidbit of advice from @TheKing as a sort of disclaimer.

The biggest point I want to make here is that aspiring finance professionals, whether in trading or otherwise, must avoid being one dimensional. Being a boring number-cruncher is not going to distinguish you in any way, even if you are good at it. In trading, you spend 10-12+ hours a day sitting next to the same people, 5 days a week. They see you when you're at your best and your worst, and you use them to talk out ideas, get fresh opinions, and seek market advice, regardless of title. No one in trading will hire someone they wouldn't sit next to.

What Makes a Great Fixed Income Trader?

Prior to 2008, the best traders were the hardest swinging, the ones who took on the most risk. That trader is a dying breed, as banks are cutting back on risk and regulations are limiting the number of desks. @TheKing
conducted an interview with a fixed income trader at a major bank, who gave four traits that make great traders post-2008.

  1. Be a student of history: The best traders today have a keen understanding of market patterns, a result of being a student of the market's history. It's amazing how few traders keep a data history, despite its incredible value.

    For college students, the best way to do this is to read, read, and read some more. Any resource you get your hands on that sheds light on the history of the market will be tremendously helpful in your endeavors as a trader. Utilize your school resources to build a history of data, as such information can be incredibly empowering; something like historical oil prices, SPX prices, treasury bond yields, are all very much available, and are great ways to analyze trends in each asset class and relative value between them.

  2. Be patient - look for big margins of safety: Seth Klarman and Ben Graham both wrote about the margin of safety in analyzing value stocks, but the philosophy is connected to trading as well.

    Sometimes a trade you put on today looks great today, even better tomorrow, and magical 2 weeks from now. In the meantime, you will get stopped out. With risk-taking much more regulated, the best traders are going to be ones who do the most with the limited balance sheet available. Be patient with a trade, and never chase it.

  3. Be disciplined: Good traders define their entry points, stopping points, etc. Great traders adhere to them. After hours and hours of research on a trade, it's easy to fall in love with an idea. When that idea goes haywire, it's hard to let go, and that's why only the best traders have the discipline to get out.
  4. Be humble and confident: Confidence is a driver of success in trading, but arrogance is equally a driver of failure. Any one trader who thinks they can take down the whole market is fooling themselves and setting themselves up for disaster (see: London Whale). Learn humility, learn when to wait, and test your ideas religiously. When you've done that and your idea stands, then you have something, and it's time to be confident - don't be afraid to dedicate risk to it accordingly.
  5. Fixed Income Interview

    FI interviews can be a little tricky depending on how technical they get. For entry level roles, banks shouldn't get too technical beyond the surface-level. Here are example questions to understand going in (@MonkeyBusiness):

  6. What is duration? How is it calculated?
  7. Term structures? Yield curves, their shapes, and how do you make money on the various ones?
  8. What's the present yield curve look like here (Canada) and there (USA)?
  9. Tell me some of the different bonds you know about... what about their prices with respect to each other? (Plain vanilla/convertible/callable.)
  10. If interest rates go up/down... what would you do with a bond that is presently variable in coupon rate that has a convert option to a fixed coupon bond?
  11. Show me how to do a DCF.
  12. You'll likely get asked these technical questions in some form or another. One questions you'll undoubtedly get asked is, Why trading?

    Here's a great sample answer from an interview conducted by @TheKing.

    I love the allure of working in an environment where success is determined by your ability to deploy risk intelligently on ideas generated by you and your peers.

    If you're interviewing for the sales side, here's a sample response from @fishbeancake (applies to trading as well).

    You are paid/promoted based on your skill in generating investment/trading ideas for your clients and finding value where others fail to do so. I stressed that it was less political than other areas of the bank and that it was more fair/meritocratic, thus appealing to my personality, etc., etc.

    Another part of S&T interviews is the pitch. Pitching a bond is a little different than pitching a stock, so here are some things to focus on for your bond pitch from @joey joe joe shabadoo.

    I would focus on the following:
    - Company overview - how it makes money / key markets of operation
    - Investment recommendation - do you like the fundamentals of the company looking out into the future?
    - Fundamental strengths and weaknesses
    - Financial summary with several years of the key business drivers
    - Relative valuation - who would you compare this company to, what are their financial metrics, and where are their bonds trading?

    Is Trading for You?

    Regulations have put a cap on how much risk desks can take. As a result, desks can't take on as much risk. The industry is shrinking, although it will always exist in some form. The most critical thing to understand is that it's a changing industry. The days of making millions in bonuses are largely over, so you have to assess whether you're in it for the money or in it because you love sales/trading.

    For those of you looking to get into trading, know that the industry is changing. Banks are taking less risk altogether, and right or wrong, the scope of the trading seat is changing.

    This isn't necessarily a bad thing. From a regulatory perspective, the market needed reform. The old model was unsustainable, and market structures must modernize just as their products have. As the market has just undergone a period of intense volatility and de-risking, it is natural for an industry to consolidate. That's going to mean fewer job opportunities, period of illiquidity in many once-Liquid Trading areas, temporarily reduced product innovation, and a generally less obvious appeal to the industry.

    This likely will continue, possibly for a few more years. But working in these temporary down-cycles of stress, you actually can find out if the job is for you or if you were just chasing the glamour.

    Equity Sales vs Fixed Income Sales

    Hey all,

    I am wondering what you guys think are the advantages/disadvantages for Equity/Fixed-Income Sales?

    What are your experiences?

Comments (15)

10/11/10

First, it really depends on the specific type of desk. For example, equities can be divided into Cash Equities and Equity Derivatives. On the other hand, fixed income can be divided into Gov't Credit, Corporate Credit, Rates, Currencies and Money markets. I may be missing a few but those are just the main ones off the top of my head. For the sake of clarity, I'm referring to bonds when I say credit.

If you're a big picture type of person, then you may be more biased towards Rates and Foreign Exchange. If you're more into the nitty gritty details of specific companies, you may be leaning towards Cash Equities or Corporate Credit.

The biggest differentiator within asset classes, in my opinion, is the client type your sales desk covers. Most banks divide their sales teams into two separate groups (i.e. Institutional Sales & Corporate Sales). Institutions mostly take the form of pension funds, mutual funds and hedge funds. Corporates are just Main Street companies looking to hedge their market exposure.

If you want something more fast-paced and challenging, then I'd go institutional.

Hopefully this serves as a good starting point for your question.

Financial Modeling
1/30/12

If you go into Institutional Equity Sales, can you do both cash equities and equity derivatives as well? I personally really like both.

2/9/12

A lot of banks I know divide Cash Equity Sales/Sales Trading and Equity Derivatives into two groups.

2/10/12

So if a client wishes to buy 10000 shares of stock and then get 100 puts to protect the position, he'd have to deal with two different salespeople. One for the stock and one for the puts.

2/10/12

So if a client wishes to buy 10000 shares of stock and then get 100 puts to protect the position, he'd have to deal with two different salespeople. One for the stock and one for the puts.

2/10/12
TraderDaily:

So if a client wishes to buy 10000 shares of stock and then get 100 puts to protect the position, he'd have to deal with two different salespeople. One for the stock and one for the puts.

No. One salesperson.

2/10/12

Go with the most illiquid. In my opinion you'll have a longer career ahead of you and there's greater scope for value add.

"After you work on Wall Street it's a choice, would you rather work at McDonalds or on the sell-side? I would choose McDonalds over the sell-side." - David Tepper

2/10/12

How does equity derivs sale look into terms of future prospects in the US? (considering maybe clearing all options of an exchange?)

2/10/12
dmackorth:

How does equity derivs sale look into terms of future prospects in the US? (considering maybe clearing all options of an exchange?)

Well you cant put exotic products on an exchange...you'll always need a person

2/10/12

Do cash equity salesmen rely solely on their ER analyst's advice or do they take the reports home and really dig into the companies and input their own advice into the mix when dealing with their institutional clients?

2/10/12

Do cash equity salesmen rely solely on their ER analyst's advice or do they take the reports home and really dig into the companies and input their own advice into the mix when dealing with their institutional clients?

2/10/12
TraderDaily:

Do cash equity salesmen rely solely on their ER analyst's advice or do they take the reports home and really dig into the companies and input their own advice into the mix when dealing with their institutional clients?

They need to be aware of what's going on but sales men usually don't have the same amount of detailed knowledge as the guys in research. Sales people need to be able to give their clients market colour but ultimately it is about recognizing which stocks fit the client's portfolio and strategy in order to close the deal. Own insights can be thrown into the mix but these should never go against the bank's official publications

2/11/12

lol this thread amuses me. The blind leading the blind.

"Oh the ladies ever tell you that you look like a fucking optical illusion" - Frank Slaughtery 25th Hour.

2/12/12
trade4size:

lol this thread amuses me. The blind leading the blind.

OK. what's your advice?

9/14/17

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