MUST READ! What makes a good trader, fund manager, hedge fund manager, salestrader, and buy-side trader

Shorttermbuy's picture
Rank: Orangutan | 263

Very good article I stumbled upon on Financial News:

What makes a good trader? (FN)
He is the fabled icon of Wall Street. He's hyper-confident, decisive, unemotional, and prone to bouts of egotism. He (and more often than not it is a he) is a trader. Traders sit at the coalface of the markets, glued to their screens, executing orders either on an agency basis or through the use of the firm's risk capital. For these beasts, P&L is the only thing that matters. Cash traders have to be smart but, unlike their colleagues on the quant desk, they don't need to be rocket-scientists, say trading chiefs. Trading fixed income and derivatives requires more mathematical capability, however, due to the number of variables involved. One former trader tells of a large bank that used a jigsaw puzzle-ball test to determine who could trade what. "If a trading intern could solve the puzzle ball in less than 10 seconds they were deemed smart enough to trade derivatives. If it took longer than 10 seconds, they could trade cash."

Above all else, successful traders have to be able to handle stress and think clearly under pressure. Richard Peterson, MD of behavioral finance consultancy MarketPsych, and a part-time trader, said: "To be successful, short-term traders need to score low on the emotional scale. They need to recognize their emotions, but not let them affect their judgment. People who get stressed out easily tend to burn out. A certain amount of introversion is also useful, as that allows a trader to block out market noise." A trader's capacity to handle the stress associated with riding the highs and lows of the market is the subject of a recent book by John Coates (The Hour between Dog and Wolf), senior research fellow at Cambridge Judge Business School and former derivatives trader at ML and DB.

According to his research, it is as much a trader's physiological make-up as their psychological profile that determines their ability to operate effectively when the going gets tough. He said: "The evidence suggests that good traders would have a very similar physiology to an Olympic athlete: someone who has a good ratio of anabolic to catabolic hormones and whose steroid hormones spike when required. Unfortunately, this isn't something you can pick up from a CV. And if you can't ask someone's age in an interview, you certainly can't ask for a DNA test." Resilience and the capacity to leave losses in the past is also critical, according to Peterson. "People who mull over past losses are always looking for the next time they're going to get hit: you have to be able to roll with the markets, stay fresh, and keep going. That actually requires traders to keep their ego out of the picture."

What makes a good sales trader? (FN)

In the third installment of a four-part series on what characteristics make the best traders, we look at those working in sales trading. Imagine a typical trading floor on an active trading day when, for example, the Federal Reserve or the Bank of England has decided to raise the base rate higher than expected: hear all those people shouting? Those are your sales traders. Despite the misleading title, the sales trading function does not typically involve trading. Sales traders intermediate between traders who sit at a screen and interact with the market and the firm's clients. They sell the firm's trading expertise, ideas, trading tools, internal liquidity and its risk capital. The role involves 5.30am starts and working closely with clients, calling them several times a day to apprise them of market movements, keeping them abreast of the firm's daily research, and alerting them to potential trading opportunities: in short, they serve as their clients' eyes and ears in the market and act as a vital link between them and the bank's marketing, sales, research and trading teams. Sales traders need to be sociable, gregarious, charming, and possess the necessary diplomatic skills to manage the conflict between the demands of the client and the constraints of the trader, who will be asked to make markets for client orders and manage the resulting risk.

"On the sales side it's very much about your ability to hold a conversation," said Simmy Grewal, an analyst at Aite Group and former equities and equity derivatives trader at Morgan Stanley. "In sales, the person on the other end of the phone has to want to talk to you - so they have to trust you." A thick skin is also handy, she adds. "A sales trader has to take the flack from clients when a trade goes wrong, even though it's not their fault." Most sales traders will entertain clients several times a week, making stamina and a sturdy liver must-haves too. The traditional sales role is rapidly evolving amid the increasing automation of trading, putting a greater focus on technological muscle. Increasingly, sales traders are taking on roles on the electronic side of the business, acting as so-called execution consultants to help clients choose the right execution mechanism - be it an algorithm, program trading, or through risk capital. Dipesh Patel, head of European equity sales at Espirito Santo IB, said: "Historically, the job has been about relationships. In the new world, sales traders need to have a much better understanding of market structure, of compliance and of regulation - and they increasingly have to be able to operate across asset classes."

What makes a good quant? (FN)

"I once took a quant to a client meeting and he turned up wearing a suit," recalls one head of quant services at a major bank. "You could tell the client was a bit disappointed: he was clearly hoping the guy wouldn't be wearing any shoes." The trading quant, the ample brains behind a firm's trading strategy and its algo trading tools, may illicit images of a socially inept, basement-bound boffin, but the reality is rapidly shifting. Although quants are, indeed, laden with PhDs and typically fall within the top 2% of their academic peer group, according to IT recruitment firm Nicoll Curtin, being a hardcore geek is only half the required skillset. Social skills are becoming increasingly important as quants spend more of their time working with buyside clients to recalibrate trading algos to their specification. Empathy for the less brainy of this world (a quality historically in short supply among the quant population, according to heads of quant teams), along with communication skills, are growing more important. Quants need to be able to translate an extremely mathematically complex concept into layman's terms and, in turn, listen to, and act on, client feedback.

Mark Goodman, head of quantitative services at Soc Gen, said: "We need people who can talk to clients. In that respect, one of the most important skills is the capacity to listen, to understand a client's problem and come back with a solution. It's actually quite an interactive process. It's no good having a quant who is super-bright but cannot understand what a client wants to achieve." In the front office, the best quants have experience on the trading side, and many move into trading roles. Soc Gen, for example, recruits quants from its internal statistical arbitrage desk, giving them experience building algos for trading on a proprietary basis. Goodman said: "That experience produces a higher quality of quant. We don't want pure mathematicians, we want guys who have worked on the trading side." However, for all quants - front and back office - the capacity to think creatively is key. One head of algo development at a bank said: "We want people with a fresh mindset, who don't have pre-conceived ideas about the way the market works. The absolute worst thing to do is hire someone who thinks like the textbook. We want people who are innovative, and who can challenge the status quo."

What Makes A Good Buyside Trader? (FN)

Many are called but few are chosen. What attributes are shared by the very best in the securities trading industry? In the third of our summer series, we canvass the opinions of those in the industry about what marks out the stars in their field. This week, we examine the trading business. In the world of trading, the buyside trader is where it all begins. He or she receives an instruction from the fund's PM and then sets about executing that instruction in the market - with more than a little help from the fund's brokers. In the past, the role was regarded as a relatively straightforward and relaxed affair, frequently characterized by leisurely lunches and populated, in the words of one buyside trader, by "noisy, arrogant people". "People used to joke that an idiot could trade on the buyside, since all you have to do is receive an order and send it to the sellside," said one pundit. "But that's not the case today. The role is all about understanding and improving execution quality."

Today, buyside traders are confronted with a vast array of trading choices, particularly when operating in cash equities. These include a raft of electronic trading tools provided by the sellside, which allow a buyside trader to send an order straight to the market, as well as the use of the sellside's internal liquidity, including their dark pools and cash desks. Brian Williamson, senior US equities analyst at buyside trading network Liquidnet and formerly a trader at Boston Companies, said: "Today, we see a shift whereby traders are now order handlers whose actions have an impact on the PM's performance. Buyside traders more than ever require an expanded skillset, as well as a thorough understanding of global market structure." This makes quantitative analytical skills absolutely crucial. Gone are the days when a buyside trader could impress with his "instinct" for the market and his track record of making waves with blocks. In a world in which every tenth of a basis point can be tracked, buyside trading chiefs are increasingly looking for traders with backgrounds in maths, science and engineering - disciplines that mitigate against biased or assumptive thinking.

Nick Nielsen, head of trading at Marshall Wace, said: "In the past, the buyside has arguably been characterized by some egotism and arrogance. People sometimes say, 'I have a feel for the market', but in my view that type of psychology is very vague. It can't be quantified and ultimately detracts value from the investment process." He added: "When you actually begin to look at the data around your trades, you find that a lot of the results are counter-intuitive. Therefore, as a trader, it's more important to think systematically and to be able to develop repeatable processes that can be benchmarked so the results can be proved statistically. This means that, in my view, individuals with software backgrounds make better buyside traders: that analytical background means that they don't think in stereotypes, and they are able to adapt to the process."

What makes a good equity capital markets banker? (FN)

Imagine you are sitting with an M&A banker, an equities banker, and a fixed income banker, talking about the Olympic Games. In the time it takes you to drink one Martini, could you tell what each banker did for a living? One senior European banker said: "The M&A is easy to spot. He is the one with the very big ego and wants his name associated with everything. You might take longer to find out the equities and fixed income bankers. They are a bit more complex." Senior equities bankers across Europe believe the best of their kind need to have resilience, imagination and a good understanding of risk. One equities banker said: "In equities, life is tougher. In debt, there is business everywhere. For ECM, there is one product, which is equity, so your potential client segment is much smaller." One former Wall Street banker added: "Resilience is a key characteristic for in ECM. Some days markets are fun, other days they are not. You have to be a strong character for yourself and for your clients, otherwise you will break in this business. I have seen people literally breakdown from losing mandates and having deals that didn't get away." One head of ECM at a European bank said: "There are two characteristics we are looking for constantly, what we call calm/assertive."

ECM bankers must remain calm in the face of angry clients and volatile markets. There is no place for anxiety. The ECM head said: "In this environment, there are thousands of reasons not to do something and be anxious for the reasons why things cannot get done. We need bankers who do not get worried or anxious." One executive tells of how a graduate emailed his future boss because he found out, in an equities training scheme, that his firm had a different business model to GS. "All I saw was someone that was worried before he's even started the job." The graduate didn't get hired. ECMers' assertiveness comes to the fore within their own organizations when they have to convince risk managers to take millions of dollars of a client's stock on to their own balance sheets. One ECM head at a large European bank, who has worked on in both equity and debt, said: "The risk in equities is probably bigger than in M&A and in debt. You have to have a good understanding of risk, and the desire to fight and win a lot of battles internally to make sure everyone is on board. "I know how to fight with traders, with the market risk team, and everyone else, to win the deal."

What makes a good equities fund manager? (FN)

Good PMs need an inquiring and analytical mind, according to Leigh Harrison, HOE at Threadneedle. They also need interpersonal skills to elicit information from people, and persistence. He said: "In this job, you have to put up with a lot of pressure and disappointment, so you have to roll with the punches, remain stoic and continue to be able to think. If you're superficial or prone to panic, AM is not for you." Malcolm Smith, HOE at Inalytics, a firm that specializes in rating PMs, said: "You can identify a good manager by their hit rate - the proportion of investment decisions they get right - their tendency to hold on to their winning stocks and their tendency to cut their losing positions. Those three take you straight to the nub of it." But hit rates do not have to be as high as many assume, said Smith. He added: "If you get just 53% of your decisions right, you are doing well." And buying the right stock is only half the battle. Many PMs come unstuck on their selling decisions, Smith said: "A lot of managers snatch at outperformance. They say, 'I've hit my price targets on this stock, I'm going to sell it.' But the most successful managers run with their winners." The reverse is also true. Smith said: "It is surprising how many managers cannot bring themselves to sell loss-making positions." Threadneedle's Harrison said stock-pickers needed to guard against overconfidence: "A manager can become so sure the market price is wrong that he buys a stock even if he doesn't like the company. He takes bigger and bigger bets. But the market can humble you very dramatically." Taking emotion out of the process helps. Harrison said: "Good PMs never fall in love with the stocks they own. It's the easiest thing to carry on holding a stock that's made money for you. You need a streak of ruthlessness."

What makes a good hedge fund manager? (FN)

The CEO of a multi-billion dollar global macro fund said that it piques his interest when he hears about a trader who has just blown up. He said: "We should interview that guy. The main thing that makes a good trader is a very high risk tolerance. There are only a limited number of people who have the mental fortitude to run a lot of risk. Most people we hire only run about a third of the maximum risk we allocate them." Nine times out of 10, the manager has blown up (industry parlance for losing a lot of money) because they made a mistake, said the CEO, but that 10th time they discover a great trader. As well as having the nerve to run risk, being contrarian is another quality that is highly rated in a hedge fund manager. It takes a certain type of person to hold a position when everyone is saying you are an idiot for doing so. But there is a fine balance between having the courage of one's convictions and pig-headedly refusing to admit when you're wrong. Malleability is also important. Nagi Kawkabani, the CEO of Brevan Howard, has said of the firm's founder and principal risk-taker Alan Howard: "What sets Alan apart as a trader are his discipline and his intellectual agnosticism... Alan has a great ability to change his mind as more economic data comes out. He has no intellectual stake in any predetermined position."

A relentless work ethic bordering on obsessiveness also tends to help. Philippe Jabre of Jabre Capital is known for waking up in the middle of the night to trade the Japanese markets. Greg Coffey, Jabre's former protege from GLG Partners who is now at Moore Capital, sets up his screens and computers even on skiing holidays. These traits mean many hedge fund managers keep going long after they have earned more money than they can ever spend. However, one hedge fund manager says he believes that some traders will spend millions on material goods just to keep the pressure on themselves to continue making money. Industry insiders say there are certain personality traits shared by great hedge fund managers. One partner at a large hedge fund said: "The best risk-takers have something psychologically 'off' - they are introverted to the point of shyness but with the courage of their own convictions. Taking risk is an incredibly solitary event. When you are making or losing money, you are the only person you can count on." The qualities required of a great discretionary trader are, however, very different from the more scientifically minded individuals working in quantitative firms. Erich Schlaikjer, a founding partner at managed futures firm Cantab Capital Partners, said: "In discretionary firms, it's an eat what you kill model, here it's sharing the intellectual property that we slowly build up in our software."

All Europe
United States - Northeast

Comments (12)

Aug 24, 2012


"...all truth passes through three stages. First, it is ridiculed. Second, it is violently opposed. Third, it is accepted as being self-evident."

  • Schopenhauer
Aug 24, 2012


Aug 24, 2012

Actually an interesting read. thanks for the post

Aug 24, 2012

Please dont post 'MUST READ" for articles that are 2 years old...

Aug 24, 2012

Interesting Read. Thanks

Aug 24, 2012

Good read nevertheless.

Aug 24, 2012


I was taught that the human brain was the crowning glory of evolution so far, but I think it's a very poor scheme for survival.

Aug 24, 2012

I know they didn't teach you this in public school, but the rest of us learned what plagiarism is in 3rd grade.

All I care about in life is accumulating bananas

Aug 24, 2012


Sep 8, 2012

Good read.

Sep 10, 2012

That was a good read. The most interesting parts for me were the traits of an equity fund manager and the traits of a hedge fund manager.

Sep 11, 2012

All I care about in life is accumulating bananas