Picking the right Trading jungle

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"I want to be a trader"

You hear that often when you talk to future financiers at target schools. Of course, the less informed the candidate, the more they talk about things such as "moving markets" and "taking positions" and the less you hear about what actual products they want to focus on, or anyone actually having a clue about what the differences between different types of trading there are. In a previous thread ("The Sell Side 15 How to Stay Fit Yet Still Fit In"), I discussed people who simply did not fit into their trading roles on their desks because their personality or goals did not match the reality of the desk they were on. Someone who should be doing equities shouldn't be in distressed...nor should someone who should be structuring exotics be in equities.

When asking a candidate what kind of things they'd like to trade, the most common response from the totally uninformed is "stocks." If the candidate is at the intermediate level, they've read "Liar's Poker", they say "mortgages".

Of course, there is no right answer. In trading, every product is a different ecosystem – with different types of personalities, different pace of work, different clients, different work flows, and different exit opportunities (or lack thereof). The key is to make sure you work in the jungle that's right for you.

On the investment banking side, while work my vary to some degree, I'm guessing there is significantly more homogeneity between groups in terms of the types of people, pace of work, and end products. To me, at least, most personalities across groups seemed relatively similar – with maybe the FIG guys being a little more intellectual than the rest.

In trading, every group has significant differences, and here I'll go over some of the key aspects of each team from the perspective of someone who worked in bond trading. I'll talk about these groups based on the liquidity spectrum – starting with the most to least liquid (though I'll discuss sub-segments of each product as well). Then I'll talk about my views about what is happening to each of these segments in terms of my medium-term view for the product's outlook. You do NOT want to pretend like you are a fit for a group solely to get the job - burnout occurs very quickly when you dislike what you do.

DISCLAIMER: I might be totally wrong in some of my statements and assumptions, particularly with regards ti exit opps, which is where I'll be happy to let others step in and share their own experiences/opinions – most of my knowledge outside of where I work directly is based off of colleagues and my brief rotations on different product desks, as well as my limited interaction with them from my role on the buy side.

Rates trading - Vanilla

WHAT: Trading of products such as interest rate swaps (fixed-to-floating, vice versa) and forward rate agreements
WHO: The people working on this team are usually pretty diverse, but you don't have many people who aren't good with numbers. It is not a relationship business as much as it used to be, due to the market becoming extremely transparent. Must be quick thinking, and most be able to go off your gut as opposed to taking time to read deeply into things.
UPSIDE: If you are good, you can exit into a macro fund – you learn about rates movements around the world, central bank policies, and learn how to react to news quickly and efficiently.
DOWNSIDE: You don't learn corporate valuation, but rather you take a macro view. Your trades are based on central bank policies as much as anything, meaning that even if you have a fundamentally correct view an irrational act can ruin your trade. You will be glued to your desk, with very little room to take a break or potentially miss a market move. This is a low barrier to entry business, and the role is becoming increasingly focused on market-making as opposed to making a bet on a directional shift.

Rates trading - Exotics

WHAT: Trading bespoke products such as Bermuda swaptions which are customized for certain outcomes
WHO: Much more of a quant product than vanilla rates trading, and much less liquid. Here, you typically structure products based on more complex models. You see PHDs and Masters of Finance migrating here. Honestly, I have no idea how any of this works.You never really see or interact with these people.
UPSIDE: You typically work on fewer, larger trades that require more in-depth modelling work. This makes the lifestyle marginally better, and in some cases you are capturing a significantly larger fee for the type of work you do.
DOWNSIDE: You are not interacting with the market as directly as vanilla rates, which means an exit to a macro based platform is more of a step removed.

Equities - Vanilla aka "in Dallas"

WHAT: Selling individual stocks.
WHO: These guys are typically ex-jocks. Known to get drunk at lunch with PMs. Its becoming increasingly automated so relationship is more of a differentiator than risk propensity. One equity trader might cover several industries. If you like networking, going out a lot, and don't want to spend too much time reading reExecu|Search reports, this is a great spot.
UPSIDE: Your life is a lot of drinking and cocktails, and if you can build a relationship with a major PM this is where you can make a mark. Of course, the business is increasingly electronic, making your role redundant…leading too…
DOWNSIDE: Its become much more automated, and your role does not give you many skills outside of Execu|Searchtion and marketing. You aren't a reExecu|Search analyst understanding a sector/company, and you aren't a PM who manages a book – you trade volume and take a shrinking commission fee. Very suspect to headcount reduction in bad years.

Equities - Options and related derivatives

WHAT: Trading options and related products such as ETFs
WHO: These guys are extremely quick. Very intellectual, and a lot of poker players here. Options trading is a high-intensity role, and the people who do equity options are among the absolute smartest I have encountered. You are trading a very high liquidity product that requires constant engagement. Need to have a sharp attention to detail - if you like deep thinking, this is not a great fit.
UPSIDE: You are taking lots of risk and you can quickly move up if you are a natural. These guys find easier paths to becoming a PM at macro shops using their ability to look at options movements and comparing such movements to macro trends.
DOWNSIDE: Very intense life style, and many 1st year analysts burnout pretty quickly unless they rapidly prove themselves

FX and FX options

WHAT: Trading currencies or currency baskets, as well as forward products related to them
WHO: Similar to options trading, these guys are typically very intelligent, very sharp, and learn a few products extremely well. I actually worked on an FX desk for 2 weeks as part of a training program and cannot explain one single thing they did. Gamma decay or something.

UPSIDE: Similar to rates trading and options trading, you gain significant exposure to macro patterns, which is a great skillset. If you are talented, you rise quickly. If you are not, you burn out quickly.
DOWNSIDE: Hard to break in to a more senior level – you start with menial tasks and you face the potential for burnout. The FX market is here to stay, and the levels of automation have hit FX only marginally compared to what people thought ten years ago. At the same time, if you become extremely specialized in one product, and volume shrinks in that product, you are going to be hit hard. On the flip side, if you work in USDEUR (the most common cross) you will have almost nothing that differentiates you.

Mortgages:

WHAT: Trading mortgage related securities (MBS, collateralized mortgage obligations)
WHO: The people here require both a fundamental skillset and technical perspective. You need to understand collateral, refinancing risk, and macro trends which affect the fundamentals of your securities. Understanding geographic trends and income levels of your underlying assets is key, and you'll be running a lot of models at a junior level. You see a combination of ex-jocks and intellectuals, depending on where on the spectrum they fit in between trading and structuring less liquid products.
UPSIDE: Valuable skillset in a fundamentally-driven product. A lot of distressed mortgage opportunities exist, and I've seen people exit to interesting opportunities.
DOWNSIDE: Lifestyle is grueling, and at beginning levels you'll be basically creating databases of mortgage data. Once you get more senior, lifestyle dramatically improves.

Investment grade:

WHAT: Trading investment grade rated bonds and derivatives.
WHO: The people here are generally more similar to equities in terms of how much they go out and their backgrounds are rarely quantitative….some can be intellectual, but it's a very relationship driven business – IG bonds are fairly liquid, and you work with people you like the best, because bid/offers are not significantly different across trading desks.
UPSIDE: Combination of good technical learning experience (rates moves, hedging, basis trades) and fundamental learning (particularly in investment grade names that might become high yield aka fallen angels).
DOWNSIDE: Like some areas of equities, becoming very commoditized – and with the volatility in rates given the Fed, its hard to position yourself for long-term success. Also very limited exit opps outside of Execu|Searchtion roles unless you move up to a fairly senior role.

High Yield:

WHAT: Trading high yield bonds and derivatives.
WHO: The people here are generally more intellectual than their IG counterparts, and more similar to mortgages. You work with a very fundamental product, where sector/industry knowledge is actually very important, and in some time periods more relevant than technical pressure. So you have to have good risk tolerance and need a fair bit of intellect/patience.
UPSIDE: Strong understanding of fundamentals of your business, and because of the lower liquidity in the product, you gain a better sense for learning how to handle risk.
DOWNSIDE: Capital constraints from regulators are reducing the ability to take proprietary positions, so its increasingly becoming a market-making role. A lot of big traders made their names with absurd PnL levels, but the ability to do that anymore has been largely constrained.

Distressed:

WHAT: Trading distressed securities, typically loans, bonds, and special situation equities
WHO: Very intellectual, often coming from a banking/restructuring background before joining the trading side.
UPSIDE: Very strong understanding of fundamentals, with large proprietary positioning driving the need to understand all aspects of a security (industry, balance sheet, corporate organization, cash flows, covenant structure)
DOWNSIDE: Very cyclical. Often, high yield will encroach on your names during a market rally. Currently, there is simply not much to do in the distressed space.

OVERALL

Trading has many different types of products. For people interested in understanding fundamentals, the best places to start your career on the trading side would be distressed, high yield, and mortgages. If you want to focus on macro, you can't beat the experience gained from FX and interest rate swaps. If you love risk and probability, options trading are a great fit. If you want to be a trader without actually trading, exotic interest rate products is the place to be. If you just want to go out drinking as much as possible, equities is a great spot.

The key is to finding a product set that you are interested in, and going into the interview process with this in mind. In general, equities is becoming much more automated - I would not recommend equities trading as a starting point to anyone right now. The ability to take prop risk is rapidly declining in HY, mortgages, and distressed due to the high cost of capital in fixed income. However, these roles still remain among the best places to learn.

In general, trading is shrinking. Automation, lower prop risk, and less movement at senior levels are the driving forces here - however, learning trading as a skill is very valuable, and you'll want to make sure that the desk you join is where you'll be able to make the biggest impact while being happy about your environment.

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