Sales and Trading - What Is It?
There are two primary functions to sales and. Here is a basic idea of each of those functions:
- Sales: Pitch the firm's ideas to clients to sell securities and build relationships with clients.
- Trading: Trade securities, typically in two ways (there are other 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 , respectively).
Prop Trading vs Hedge Fund Trading
Prop shop trading and hedge fund trading are two different beasts that are frequently mixed up. Here are the differences between the two, explained succinctly, from @derivstrading.
Prop shops, in general, are smaller and more nimble, and try to extract nickels from all over the place due to inefficiencies. (Some do it with statistical models; some with speed of execution; etc.) That is why you usually find prop shops in liquid and exchange based products, such as options and cash equities, for example. They tend to have very low overheads and capital requirements and are therefore usually seeded by the guys that started it/run it. There aren't outside investors, such as pension funds. Therefore, the absolute amount of money might not be huge compared to HFs but it stays in the firm. If you have anthat has 1bln of capital and they make 20% or 200mln, they get to keep 40mln in performance fees for compensation. For a self-funded prop shop with no outside investors, to get the same comp payout in total for the same 20% return on capital, you would only need 200m of capital. Prop shops tend to be smaller, however, but you can see why payouts can be quite high for them.
So why are hedge funds all the buzz in the finance world instead of prop shops? There's less influence on your trading from outside forces, less overhead, and less capital required for the same returns.
One huge difference between the two is in the investing style. Hedge fund trading is more along the route of what is traditionally known as investing, while prop shops operate more along the line of short-term trading. Prop shops hold securities for a much shorter period of time, and they try to squeeze out a quick profit from those holdings.
Another reason is that trading, in general, is a dying field.
Why Is S&T a Dying Field?
S&T has been a shrinking field for years now. Here's the main determinant from @big unit, who refers to the trading floor as the shrinking jungle.
The trading floor is an awesome place, but it's shrinking. Regulations are putting a cap on how much risk many desks can take. The risk appetite for many products is gone. Prop desks have gone on the sell-side, and have been replaced by small directional bets within flow trader books. I think the people I've met, and am friends with because of my time on the trading floor, are some of the coolest people - the personalities, the passion, the angry yet festive nature of most comments. However, I wouldn't want to go back.
Because of this, fewer spots are available. While the number of students looking to get into S&T is only slightly decreasing, senior traders remain in the same position as there are fewer openings at other firms. Beyond regulations crushing trading desks, technology is adding a major strain.
Yet, trading will never cease to exist as many tend to believe. The above isn't to scare you away from trading, simply to warn you of the fact that the industry is changing, and with those changes, headcount is decreasing. Securing a job in S&T is becoming increasingly competitive, so if it's something that you want to do, you better go all out if you want a chance at securing a job. Here's @Kassad on why the sentiment that trading will be eliminated entirely is incorrect.
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."
S&T vs Investment Banking - Salary, Lifestyle, Role, and More
People love comparing S&T to investment banking - they're both highly prestigious jobs that pay great. But they don't come without their differences, so if you're considering a career in either of these fields, then you need to consider what separates the two.
Compensation in S&T is roughly comparable, if slightly less, than the compensation in IB. At the analyst level, you can expect to make around $120k first year. As you move up, that figure increases significantly. Managing directors in each field make around $700k - $1m. That said, IB all-in compensation tends to be a tad higher than S&T, and that difference grows a little as you move up the ladder. The top performers in S&T certainly make more than IB, but those top performers are becoming rarer and rarer, more on that later. In both fields, bonus makes up the majority of your all-in compensation by the time you're a vice president.
Investment bankers, at least at the analyst level, are known for being mostly grunts. The type of work analysts do is almost entirely mundane. Sure, there's some exciting work dabbled in there. Executing that mega deal you've been working on for months is exhilarating, and there's no doubt that it's a time of immeasurable learning. Beyond that, camaraderie tends to develop with your team considering you spend 80 hours a week with them, and those are bonds not easily broken. But, by and large, IB is a grind at the beginning, and anyone who refuses to acknowledge that at the start is lost.
The work S&T analysts do is highly variable once they reach a certain point, but at the beginning, it's comparable to IB (the key difference being the fewer hours). For first and second year analysts, it's a lot of the same stuff. Similar to investment banking, the work of S&T analysts is mostly grunt work. Here's @Gekko21 on what that includes:
Learning the product, sending out reports, conducting research, making spreadsheets for the desk, answering phones, and sending out early morning offer sheets are all things you will be doing for the first year or so.
The difference is that after a period of time - anywhere from 3 months to a couple of years, depending on your performance - you get significant responsibility, and your role changes.
On the sales side of things, once you start dealing with clients, you'll spend far less time in the office and far more time building relationships with clients and negotiating with them. So the question remains: how do you go about securing clients? It's not an easy process due to the shrinkage of the industry. You're all competing for limited clientele. Here's @Disjoint on the dynamic clients create within the sales group.
MDs and Ds were seeing their clients die by the day; they would hold on to whatever they could. If you were a junior and hoping to survive, you had to have an extremely strong back to break off all the blades that were smashed on you. You had to go and find your clients, make alliances with some salespeople, and fight. Fight. Fight every single day. You had to learn how to go after accounts, and sometimes nick accounts yourself from weak salespeople - and it will be good, and you will learn to like it. Now sometimes you are lucky, and someone will take you under his protective wings. Just don't expect it; business is dying by the day. And the last thing we need is another salesperson on the desk to compete with. You will learn that salespeople are all for me, and all for me again.
On the trading side, the work greatly depends on one factor: getting your own book. Some people get their book within three months; some get their own book after a couple of years. It all depends on how much responsibility you shoulder, how capable you are, and how well you're received.
Hours and Lifestyle
Everyone knows IB hours are brutal, typically 80+ hours a week. How does S&T compare? S&T analysts typically put in around 60 hours during the week, with some weekend work depending on how motivated you are. Once you start working with clients in sales or get your own book in trading, your hours and lifestyle are determined by you. Generally, it's around the typical 60 hour week with no weekend work. Of course, the less you put in, the less you'll likely get out. With fewer hours comes (in most cases due to relatively weaker performance) a lower compensation.
How to Start Trading
If you actually do all these steps, you will be a better trader and know more about markets than most kids do AFTER they complete an analyst or associate stint on a sales and trading desk... I guarantee it.
How do basketball players get better? Practice. How do investors get better? Practice. If you want to pursue a career in trading, start trading. If you do so sometime in college, you'll be putting yourself in an excellent spot for S&T recruiting (assuming you're on course in terms of GPA, internships, and school). You'll impress in interviews, and you'll probably get your own book much quicker than your peers if you apply the knowledge you've developed. So what exactly is the right way to go about trading? Here's @Revsly with a chronological set of things you should do to start trading.
Before you get into that, you're going to want at least $5k to trade with. Set up an account on Interactive Brokers that allows you to trade futures. Then pick your product. That product needs to have a small-sized contract. @Revsly used Hang Seng Index Futures.
Read up on the leverage inherent in futures, and create a risk management plan, i.e., how you are going to size trades, use stops, add to positions, etc. Notice you do this before you know anything about the market because it is, by far, the most important part of being a good trader. Discipline is what is going to make you a good trader, not brilliant ideas. On 5k, you will probably be trading 1 lots, i.e., 1 contract. That is fine.
Learn how to account for your performance. Every day you should know how much you made or lost and have a good log of it. Not what the broker sends you. You should do it yourself and use them as a check. You are your own back-office and middle-office.
Learn the interactive broker's execution platform inside and out. The IB platform is not much different then one I use at a large hedge fund, so when you're done with this, you should be able to execute in a professional manner.
Up to this point, you've just spent your time learning and preparing to start trading. You're sharpening the ax before you start swinging. Now you're going to learn everything about the market you're trading in. Political climate, economics (think regulations, etc.), composition of the stock index, and pretty much anything that could be of value to you during your trading. Then you start trading with preservation of capital standing as the most integral principle. You don't think, "How much could I make off this trade?" You think, "How much could I lose off this trade?"
Getting into S&T
If you're looking to get into S&T, there are two things you should do, in particular, to prepare (outside of preparing for interviews and such): reading and trading. See "getting into trading" below for a guide on getting into trading. It's something that you should definitely look to do if you have an interest in trading, and it will give you a massive edge come recruiting. Reading to prepare is another beast. It's something you should do to expand your breadth of knowledge as much as possible. Here's a list of books you should read before you hit the desk (if you have to prioritize one, we recommend @Ironchef.) from
All junior traders on my desk were told to read the following:
2) Fooled by Randomness
3) Reminiscences of a Stock Operator
4) Trading in the Zone
5) Market Wizards (all 3-4 books)
6) Liar's Poker
7) Steidlmayer on Markets: Trading with Market Profile
8) Technical Analysis of the Financial Markets by John Murphy
Agency trading is fairly simple to understand: it's all about executing the trades of your clients. Thus, the only way agency trading makes money is through commissions. Agency traders do not have their own books, so they don't have market risk. Their sole purpose is to execute trades at the behest of their clients. Here are some retail examples of agency trading from @Boothorbust.
Macy's is like a principal dealer, maintaining an inventory of goods to sell to customers. They carry the risk of the goods depreciating because they own them until they are sold. To compensate for this risk and make money, they charge more for the goods than the price they paid for them (the spread).
eBay is an agency trader, facilitating trades between members of the market, carrying no inventory, and making money only on commissions, charged as a percentage of each sale.
Original Thread - Difference Between Sales and Sales Trading
What is the difference between Sales and Sales Trading? I know what Sales and Trading is, but I don't understand the difference between the roles called sales and sales trading. Does sales only speak to the client to get the best market prices or does sales trading do that? Can't tell the difference from this description:
As a sales person, you're the link between our researchers, traders and the client. Building great relationships with clients is essential, because you're there to provide analysis, insight and solutions to their needs. Some of these issues are hugely complex and you'll be required to provide up-to-date market information at the drop of a hat.
Your day starts early as your first task will be to review overnight market activity and form your own independent views. Then you're on the phone, calling clients to give them fresh ideas and news, which they cannot get from our competitors. You'll also be working proactively to get the best market prices for your clients, so they trust and value your advice.
As you can guess, you'll be treading a very fine line. Naturally, you're representing J.P. , but on the other hand, you're representing the clients' interests and building long-term relationships. So tact and diplomacy are pretty critical, as well as a good sense of humor.
This differs from the classic sales role, in that sales traders speak directly to the dealing desks of our clients, who range from institutional investors to hedge funds.
As a sales trader, you'll liaise with these dealing desks and traders to facilitate client business either via block, single, electronic, or program trading. You'll give the best description of the flows and themes occurring within the marketplace, and you'll need to ensure that clients are aware of any news flow that may be relevant to their business, so they are in the best position to make decisions.
As clients are getting more sophisticated, so are our sales traders. We are looking at more asset classes with the aim of generating better returns for our clients as well as.