Is S&T a dying business?
Hi I'm doing an IBD internship in one of the BBs, sophomore summer. Since I got one more summer left before looking for FT, I'm carefully deciding whether IB or S&T is my trade. I'm trying to talk to everyone I meet at the bank, not just bankers but also people from PWM, S&T, ER, etc. From my communications with these on-the-job professionals so far, I got the impression that the IB business is "timeless": as long as capitalism lasts, people will be selling and buying companies. Can't say that for S&T. Also there seems to be a consensus on this forum that S&T business is in its downturn. It would be nice to compile everyone's views with regards to this topic. Thank you.
S&T might be in a downturn but to say IB is any more "timeless" is preposterous. Last time I checked, capital markets were here to stay.
Okay, to think that any of these businesses will be "gone" any time soon is to lack an understanding of what they fundamentally are/do.
All of these businesses will change and continue to change for as long as capital markets exist - M&A will always be necessary in some form, the S&T function will be a necessary tool for moving capital, Research will be a necessity to transmit information from originators to clients, and all the other core functions of a bank will continue to fulfill their purpose as required. All of the roles will change with the coming of new technology, laws, and industry standards, but they will not "disappear."
Headcount may be shrinking but definitely wouldn't say it's dying. Fixed income trading especially is still the area where banks make the majority of their revenues
tell that to gs or ms
It would appear you have a decent chance at getting a position in either stream, so what do you want to do? You will most likely fail at either (especially trading) without some interest.
On the whole though it would appear that there are fewer seats going around in S&T, being staffed by increasingly better educated/trained people, who are getting paid relatively less than their peers from 'the glory days'. So be wary.
S&T isn't dying, but changing. The days when traders can prop trade in BBs are mostly gone, with the exception of some desks (mostly in Fixed Income and derivatives). It is turning more and more into a sales-driven business, with algos taking over on the cash equities side.
stick to sales/banking
S&T in an OTC product is still a sweet gig.
IBD is more timeless, but it's facing some of the same pressures as S&T. How long will you be able to get paid 7% to raise capital for an IPO?
Would you care to explain why?
Small exaggeration here don't you think - I would say for this to be true you need to work on a desk that sees strong flows in products with relatively large spread cross. Obvious ones being the difference between spot FX at some 4th tier geocentric bank versus long-dated multi-asset structured products at a proper IB. However client demand for these types of structures/deals has been waning since the GFC with little reason to expect they'll return to those days. Let alone any upcoming regulatory and capital requirement impact(s). As to whether those areas are still exceedingly lucrative I am not sure however I would think not judging by the cold resume drops I have seen/received.
There is a widening gap between the top 4-5 banks per asset class and the remaining competition, barring certain nuances about markets that give a domestic player or higher credit rated bank more pull. So those positions are hard to get.
If you can land the latter position I mentioned in my first paragraph, then definitely go for it - means you are most likely smart enough that you'll be successful at something even if it doesn't work out.
If I had my time over again, would go into corp fin though.
S&T may not be what it used to be but it's not going away. At least for the "macro" products, think of it as a service to help corporate clients hedge their interest rate, currency, or commodities exposure. Imagine you get a client that wants to hedge a risk and you end up with a huge position on your books. Now you have to understand how to hedge all the different components of your risk, and what instruments will allow you to hedge most effectively and cheaply. Maybe you over- or under- hedge depending on which components of the risk you like (if your firm/desk lets you do that).
This seems to be what S&T is moving toward, less about you putting on big outright positions just based on your view. Of course, if you count holding inventory in anticipation of client flows as "prop", then sure. Maybe some desks at some banks will let traders have small side books where they put their views on. But there aren't many pure prop desks left (if any).
Personally I think if your desk mainly deals with corporate flow that can be somewhat boring. Sure if your desk sees deep corporate flow it may make it easier to hedge/match off positions, and it's easier to make money. But at the end of the day the skill-set you develop is limited to knowing these few instruments/markets really really well and managing risk. Not very transferable outside of a desk at another bank, a prop shop, or a hedge fund. That might be why some people here are advocating for IBD over trading (though I don't know why you would recommend sales over trading...)
Note that everything I said is limited to macro products; maybe credit traders understand company fundamentals and whatnot and have wider exit options.
I think this is a very interesting topic though, and would like to hear others in the business chime in. The title is a bit melodramatic as S&T will never "die" but it would be interesting to discuss how the business is evolving and how that varies across different product areas...
Headcount is down in some of the super liquid products but i dont see it disappearing. Real issue here IMO- S&T and IBD require very different types of people. What makes you think you'd do well in both. Not trying to be a dick but in my experience it's a different mindset and different interests, even different personalities.
Finally an insightful comment. Could you elaborate how s&t people are different from bankers , and where the differences come from?
well i know more about the s&t side- but it's very fast paced, you need to be more aggresive, be able to make good decisions under stress, lose a million bucks then walk in the next day and dont sweat it. Serious passion for the markets. Obviously there is some overlap there- but especially once you move up in the business, trading is still about trading, IBD is about selling work.
for what its worth, im still in school- so maybe someone else can chime in with their experience. But from the people ive met, once you discover what it really is like to work in S&T or IBD- you're not interested in both
Who loses a million bucks (or even anything close to that) in S&T nowadays with Volcker Rule and whatnot? S&T desks are taking less and less risk
First month in banking after spending a year in trading. TBH, I could see myself in both if I weren't so bearish on trading
Do you guys think the highly liquid products(like say equities market making/sales trading) will hit a saturation point? Obviously the head count has been cut drastically in the past few years, but at some point banks will only be staffed with the bare minimum to keep their business going. Has this happened already, just one hire for every person who leaves/retires? Would love to hear someone's opinion on that
In my opinion this has already happened for cash equities. This part of the business has been mostly taken over by execution algorithms and most marketmaking left in the business is in derivatives.
re-bumping this thread in light of the recent downsizing and all the mayhem
Definitely some good discussion here, wouldn't mind seeing it continued.
Party's over kids...there are some good spots left at certain banks out there but do you really want to roll the dice on those odds?
I agree. Trading is a TERRIBLE industry to go into, with very little transferable skills and exit opps. This explains why so many traders from banks and hedge funds are opting for an MBA.
Lol keep wasting your time... bad traders leave for MBAs.
For the record, not a single trader at my fund has an MBA.
I think you guys are little too straightforward on the subject. There are opportunities for those who are able to feel the markets and firms where there will be money to be made. A lot of people still don't know that S&T in Banks is ruined and that you have to network very hard to get an analyst position at a little prop shop and don't even think about HFs because they require track records.
Commo trading is my target on the long run. Anyway it's tough everywhere : IB, S&T, Audit, Consulting ... you just have to find your way through the sea full of sharks.
I think this really is a function of the headcount reductions across the street caused by the tightening regulatory environment and rising capital requirements. There are fewer seats everywhere and that means fewer summer analyst and FT positions. And I agree with you, it is ridiculously hard right now (I did a SA stint last summer and think this summer will be even tougher).
Disagree with guy who said hf trader is a bad gig. Bondarb will show up before long to tell you it's awesome and he makes money. Restrict it to sell side trading and I am on board with your assessment
Well, I think you have to distinguish between being a PM at a HF vs. holding a more junior role at a HF. I think leaving the sell-side to be a PM is a much more convincing proposition than leaving for a 30k bump up in base while remaining at the analyst or associate level. Also, you must consider that moving to a HF PM role could be a one-way road that is high risk. Once you move, you have to perform within a short period of time or you'll get laid off. At that point, it might be hard to get back into the sell-side. I don't know about Bondarb's background, but I assume he is one of the successful PMs. In that case, a HF gig is definitely the way to go.
Not dying. Become re-engineered.
The sales part will never die you always need interactions between client and seller.
Trading is going way of computer algorithms and technical quant based research, not human based judgement.
I am not going to debate this as i have many times but allow me to just say that this same argument (discretionary trading is dead) was being floated over a decade ago when i first got involved in the business and the intervening period i have seen the argument go in and out of favor at least twice. In 2006 it was actually worse then it is now...any discretionary trader had to make up some BS quant aspect to his strategy to raise money. Then in the crisis the quant funds performed horribly and some of the biggest names like GS Alpha were found to have been doing extremely simple things like buying stocks with low PE ratios...suddenly everyone wanted to do discretionary macro. Now we are back into the part of the cycle where quant funds are seen as ascendent. The whole cycle has a high correlation with volatility...when vol spikes the quant funds get blown out as previous relationships stop being predictive of the future and when vol grinds lower discretionary suffers because humans are just not as good at pattern recognition and finding mean reversion opportunities as computers. However I am quite confident that this cycle will repeat and that the future of trading is not entirely algo...there are many times when imagination is required and computers are not even close to being able to compete with humans in imagining things not contained within the historical data. Also the two strategies are coming together a bit as discretionary traders are employing more and more algo-like tools.
*plse note i am talking about non-HFT quant...I consider HFT a whole different animal
Bondarb, thanks again for your insight. We all appreciate it.
Just to add a bit on this though. If we limit our discussion to SELLSIDE S&T, I think one can make a pretty strong argument that this time is different. The primary reasons for why FICC desks at banks are getting slaughtered is due to the volcker rule and basel capital requirements. Yes, low vol and volume hurt as well, but that's not the primary reason. These new regulations are fundamental game changers, not merely aspects of the business cycle.
What do you think of Mark Spitznagel and Universa Investments? Do you see them more as a quant shop or discretionary macro?
Interesting piece from Business Insider. These charts show just how much vol and volume have declined. It's not looking good for S&T.
http://www.businessinsider.com/low-volatility-on-wall-street-2014-6?nr_…
I did hear from a couple friends that many sell-side options desks are struggling right now. It makes sense since the sell-side is generally long vol. However, I'm sure it will come back eventually, like this article mentions: http://macro-man.blogspot.com/2014/06/abandon-all-puts-ye-who-enter-her….
In my experience, a large number (not sure if it's the majority, so hard to generalize) of sell-side options desks are traditionally short vol. At least that's generally been the case in rates, to the best of my knowledge. Obviously, things might have changed and generalizations are hard. Furthermore, inasmuch as vol is a proxy for flow volumes, being short vol for a sell-side desk is potentially the right way to be. I imagine they're struggling now because there's too little flow, rather than because they're long vol.
sell side option desks are usually short vol clients more often than not buy options, hence dealers are usually short the general practice of being blanket long vol, is not a generally not a winning trading strategy
Universa is a quantstrat, has nothing to do with macro aside from macro usually being implicitly long vol. All they do is buy vol and bleed until shit hits the fan. That being said, vol is cheap right now, so I'd like to sit on some of those trades or at least be intelligent about selling vol directly or indirectly.
Had a great conversation with an MD in the FI branch of FICC at a BB yesterday, and we spoke at length about where the industry is going.
According to his view, there might very well be a large contraction if the regulatory environment continues as it has. Liquidity is not what it used to be, costs of complying with regs are increasing, the risk appetite is just not there. Profitability, from his viewpoint, will never be what it was ever again. At this particular firm, FICC has been the largest component of revenue in recent years, however our conversation led me to believe that this might not be the case in a few more years. I could tell he was trying not to be overly negative, but you could hear it in his voice.
S&T will never die...but it will never be like it used to be, not unless many things change.
Glad to hear your talk went well. Everything you heard is pretty much the same as what I've heard.
Thanks man, I appreciate it. Yeah it went very well, and it was great to get some insight into the industry. Actually met a VP and an analyst on the same desk as well, they all loved their jobs and seemed to have generally a positive outlook long-term...but it definitely seems like the high-riding days of S&T are over...for now at least.
Yup; you nailed it. S&T will always be around, but the glory days are not coming back, at least not in the reasonable future (next 10 years or so).
Guess everyone has a crystal ball these days...
The finance industry in general is a dying business, at least if you consider rising competition and smaller margins bad for business.
If I had to put money on it, I'd bet that IB experience and a target school education is going to have a lot more options and better career prospects than trading.
Without a doubt, doing banking at a good group opens WAY more doors than trading. It's not even close. Simply put, valuation is a more desirable skillset in the finance job market than say market-making. A guy who does say GS TMT for instance can do HF, PE, AM, top MBA, or even strategy. What can an equity derivatives trader from GS do aside from trading equity derivatives?
A guy who works his way up through FICC might have a great shot at moving to the other side at a global macro fund....not all S&T is equities.
Exactly!
Equity derivatives is not that uncommon a background at macro funds.
On the "Sales" role within S&T: Salesmanship is and has always been the single most valuable business skill one can possess in life. If you can 'sell', your upside is unlimited. Most of the mega-rich men in the world of finance are not 4.0's from Princeton or HBS Baker scholars. They're instead just salesman who chiefly sell themselves and their ideas. They in turn hire the brilliant guys out of the finest schools to help generate those ideas.
Read the chapter from Barbarians at the Gate about Ted Forstmann's PE beginnings - 35 yrs old, broke, no job, no prospects, and a failed career bouncing around as a mediocre banker -- until a buddy who knew Ted had serious charisma fronted a few bills to send him around the country raising money for a fund. The rest was history. That's just one example among many.
Ben Graham, father of value investing? A bond salesman. Dan Loeb, founder of Third Point? A bond salesman. Kyle Bass, founder of Hayman? A research salesman. David Rubenstein, the founder of Carlyle? Hah! The king of all salesman! The list goes on. It includes a lot of C students, and not a lot of geniuses. If you think they are geniuses, re-read my first paragraph.
I think getting into sales on a trading floor is a great start to a career in finance, in any product - just focus on the skill to sell and you'll have a good floor with unlimited upside.
As far as trading, I think you can't lose if you're young and want to go into FICC. You're buying low, and that's the first half of the equation. There's been a record issuance of bonds and loans, HY, LL, IG, year over year over year since the crisis. Electronic bond trading won't happen. You've got an ITM several year call option on vol pick up, spread widening, and then on the shift to normalization from there, you will have made a ton of money and you'll be set as a very valuable asset in a more right-sized industry, and if it has figured itself out, it will be hiring more than firing and you'll be way ahead. Or not, and you got to b-school. That looks very asymmetric to me.
Don't you mean otm? Bear in mind your option can expire worthless. Think about the premium you're paying for that option in terms of opportunity cost of better careers not pursued. A lottery ticket is also an otm call that is priced too rich.
Better careers not pursued? If you're into markets and particularly fixed income, banking and PE/corp dev are not 'better careers.' Different strokes for different folks.
agree to a certain extent...I consider myself far from a salesman but if I eve want to star my own fund or even when I ask for more capital at my current firm I have to sell...everyone should b able to sell themselves that's life.
As Bondarb said I agree with you to a certain extent. But if sales skills are key to sucess I wouldn't start right now in sales in IBD. All your examples are outliers and no one should think that being a good bond salesman is going to lead you to a wonderful career all the way up to "high finance". All the more so that sales in IBD are being more and more commoditized.
Generally life is one big sales pitch...no matter what you will have to do some selling if you want to get anywhere.
switch360, thought your post was fantastic.
one of the early comments in the thread touches upon what i think is the real question: what kind of person are you? most people are either banker types or s&t types, one or the other. (this is not to say you can't be skilled and successful at both, most people simply prefer one to the other)
another way to ask the same question is, how uncomfortable are you with uncertainty? banking is risk averse. fees will always be there. corp fin exit ops are well documented and the versatility and long term path you set yourself on are certainly unmatched. (as an added bonus M&A has never been hotter)
things look bleak in trading right now. the businesses that used to make huge money in the past (equities, some parts of FICC) will probably never make the same money again. so to that extent the people on here saying the "glory days" are over in trading are right in that regard. but banks are smart. they understand they make their real earnings in s&t, not banking fees. chances are banks will find innovative new ways to make money outside the bounds of regulation (history bodes very well in this respect). so while the WSJ is running new headlines every day about heads being lopped off in s&t downside risk has never been higher. but the upside is till there.
the painful '70s paved the way for Milken's HY empire. the early '90s recession preceded NASDAQ taking over the world and the tech bubble made billions for mortgage/ structured products traders on the other side. this crisis will give birth to a new product, a new cycle and a new batch of multi-millionaire traders in their late 20s who were on that desk for the boom. so i repeat my question: how comfortable are you with uncertainty?
I agree with the general premise of your post, mainly that things go in cycles, and smart people will figure out a way to adapt. Don't agree with some of the specific points you made.
you say that banks understand that they make their real earnings in s&t rather than banking. but historically banking has been the #1 driver of earnings, not s&t. the s&t boom of the past decade was an anomaly rather than the norm.
not quite sure the historical analogies you put forth in the last paragraph apply here. those examples you gave dealt with business cycles, whereby people can position themselves correctly properly and profit when things turned around. the s&t woe is mostly due to regulations that cannot be ignored, and people just can't sit and hope to wait it out. unless congress and a new president repeal dodd-frank (highly unlikely) prop trading isn't coming back to banks. and base capital requirements are not going anywhere either. meanwhile, automation continues to take over the markets, thus reducing headcount.
This simply isn't true. S&T's size relative to banking fees may have an anomaly over the past ten years but plenty of places like Goldman, Lehman, Bear or Salomon have historically been more about trading than advisory.
Dodd-Frank isnt even really written yet and all rules are open to "interpretation"...for example:
http://www.bloomberg.com/news/2014-06-25/citigroup-team-s-mortgage-bets…
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