Mergers & Inquisitions
Sales & Trading vs. Investment Banking – Part 2 – On the Job
Introduction
Brian: Welcome back to our second podcast in this series on sales and trading versus investment banking. This is Brian from Mergers
and Inquisitions. I’m here with Jerry, who has been contributing
to the site and helping me with some projects behind the
scenes.
He has worked in sales and trading at two bulge bracket
investment banks before and then started his own prop trading
firm, so he has quite a lot of experience in the realm of sales
and trading.
In the previous podcast, we spoke about the recruiting process
for both investment banking and sales and trading, and how it
differs depending on what you’re going for, what type of firm
you’re going after, how you network, how you write your
resume, and how interviews are different for these two different
fields.
This time around, we’re going to be going into what it’s actually
like on the job, what it’s actually like to work in both investment
banking and sales and trading, how you get assigned to groups,
how you interact with your co-workers, how working in Asia or
different parts of the world is a bit different, and finally, career
paths, exit opportunities, and what’s available for you in the
future if you decide to go into one of these industries.
To kick off this discussion and to get started here, people know
a lot about the training programs in investment banking. Once
you actually get a full time offer, there’s a lot of knowledge about
what you learn in training. It’s a lot of accounting, financial
modeling, valuation – those types of skills.
What is the training program like in sales and trading? Let’s say
you’ve gotten an offer and you’re about to start working. How
would your firm actually go about training you?
Sales & Trading Training Programs & Group Assignments
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Jerry: Let me talk first about how investment banks would train their traders. Since a trader, like an investment banker, is considered
front office staff of an investment bank, if this investment bank
has a global training program – usually American investment
banks will have a two month training program for all their new
hires all over the world. They all go to New York and get two
months of training. If it’s in Europe, then it might be in London.
That just covers a wide variety of basic financial concepts.
After that, the trader will go back to their trading desk wherever
they’re based. Then they’ll get training directly from their
manager. This is where you can get some variation on how this
works.
Some traders – they’re able to start trading real money on the
very first day, although, on a smaller budget, they’re only able to
trade a small amount of money.
Some traders – they have to trade with either fake money or not
trade at all for a long time. It may be for three to six months or
even longer.
Basically, the way that trading is different from investment
banking is you really can’t learn trading just by studying it
whereas in investment banking, you can learn modeling by
building models in class or on your own.
In trading, the psychology of trading fake money and the
psychology of trading of real money is totally different because
you might get really excited or nervous when trading actual
money. The only real way to learn trading well is to actually do
the trading.
Basically, your manager will try to ease you into the position by
first letting you trade with mock money and then letting you
trade with a small amount of real money, and then increasing
the amount of money that you trade. Basically, you learn by
doing.
Brian: That’s really interesting because I know that the process is a
little different but I didn’t realize that with trading, there’s much
more of that element of training once you get back to your real
desk, your real group, and once you start working.
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I know for banking, they don’t really do that too much. They kind
of just throw you into the fire and say, “We have to do a pitch
book, we have to do a deal. Figure out what to do and do it,” but
they don’t really give you any training wheels. It’s a little different
in that respect.
You brought up an interesting point, which is that in trading, you
start off with smaller amounts of money, or perhaps in the
beginning with nothing at all while you’re learning the ropes, and
then move up to trading larger amounts.
How does that process work exactly? I’ve heard before that
there are junior traders and then actual real traders. How are
they different? How do you move from a junior trader role up to
someone who’s making more significant trades, let’s say? Jerry: This varies widely among different investment banks, and
obviously among the different types of financial institutions that
conduct trading. Some investment banks will have a difference
between junior traders and senior traders.
Some banks will not use titles like this at all. Basically, you’ll
have the same title for a couple of years but the amount of
money that you’ll be trading will gradually increase as time goes
on.
If you’re at an investment bank, you prove that you’re able to
control risk well and that you don’t panic when the market goes
crazy. If you’re able to steadily make money, then the bank will
increase the amount of risk you’re able to take and the amount
of money you’re able to trade with.
This is also similar at a hedge fund or a proprietary trading firm.
You’ll start out with a smaller amount of money. Such firms
might have more simplistic rules for increasing the amount of
money that you’re able to trade.
For example, at a proprietary trading firm, they might just say,
“Okay, if you make over X amount of money per month for a
number of months in a row, then your trading budget will be Y.
The risk you’ll be able to take will be Z.” The set of rules and the
amount you’re able to trade is evaluated differs by organization.
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Brian: Okay, I see. Once you’ve gone through the training process and it’s time to actually pick which desk you’re working at for trading
for example, how does this process actually work?
I’m assuming that if you do an internship, and you work on a
particular desk, then you’ll probably go back to it but let’s say
that you haven’t worked at that bank before, let’s say you’re new
to it. How would they actually assign you to a particular group or
to a particular desk in trading?
Jerry: Most financial institutions will actually hire you directly to work in
a specific area in trading. For example, before you even enter
the firm, it will be decided that, okay, you will be doing credit
trading or you will be doing rates trading.
There might be some firms that just hire somebody as a trader
and then let them do a rotation in each of the different trading
desks, and finally let them settle down at one desk, but that is
pretty rare nowadays. You might get a chance to rotate around
the different trading departments if you’re an intern, but as a full-
time hire, that’s less likely.
A Day in the Life of a Trader
Brian: Okay, I see. We’ve covered the training program, how that
works, and how you actually get assigned to groups. One really
common question I get is: What do you actually do once you’ve
started working? You’re past the training phase, to kind of go
through a day in the life of both a trader and a banker.
There’s a lot of content on the site already about a day in the life
of an investment banker. I guess the way I’d summarize it, in
case you haven’t read it already, is that the days are very
random. Generally, you’re going to start off working maybe eight
or nine, 9:30 in the morning.
Usually, mornings are not too active. Afternoons are actually not
too active in investment banking. You might have meetings, you
might have calls with companies, you might be doing random
tasks and such, but actually what typically happens is that at the
end of the day, or at least, the end of the day for the senior
bankers, they all pack up, leave, and go home.
They drop a bunch of work on your desk and say, “Okay,
analyst or associate, here’s what has to get done by tomorrow
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morning.” They just expect that you’re going to stay there and
work on it until it gets done. Actually most of the time, you’re
doing the bulk of your work at night.
This is mostly true in the U.S. I know that in other regions it’s a
bit different. The lifestyle and hours can be a bit different, the
work style can be different but this is what I would say is
common at large investment banks, in the U.S. anyway.
For trading, we’ve discussed before, in the first podcast, how it’s
a little different in that the trader is very, very busy during market
hours but to go into more detail on that, what would you say the
average day in the life of a trader is like?
Jerry: Sure. Why don’t I take the most typical example of a proprietary trader working for an investment bank in New York doing
regular stock trading? The trader would probably get up in the
morning, about two or three hours before the market opens, and
get to the firm maybe one to one and a half hours before the
market opens.
There would be usually a morning meeting where all the traders
get together. It might be in a separate room or it might just be on
the trading floor itself where everyone pulls their chairs together.
The traders from the different markets will talk to each other
about what they think the movements will be today and
summarize the movements from the previous day so that way
everyone has a better idea of what the markets will do today,
since each market tends to influence the other markets.
For example, movements in the stock market might affect the
movements in the credit market. Then, during market hours – in
New York, at 9:30 a.m. – the stock market would open and the
trader would have to be monitoring the market at all times.
This actually makes it a little difficult to go to the bathroom
sometimes. It might be difficult to take a lunch break if the
market is especially busy on a certain day. There is always
pressure to be constantly monitoring the market while the
market is open.
A trader will monitor the market and, if a good opportunity
comes up, will make a couple of trades, and will also talk with
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brokers if it’s a market that involves brokers, and try to get more information from them.
If they have traders both internally and traders at other firms that they’re friends with, they might make a couple of calls, and try to get more information on the markets. They’ll just keep on doing that until the market close.
After the market close, the trader will have to work on wrapping up the trades for the day. If it’s a normal stock market, then most all of the settlement is either automated or taken care of by the middle and back office.
If it’s an over-the-counter market, like for example credit default swaps, then the trader might have to spend some time wrapping up the trades, making sure they’re all settled properly, calling operations and back office to make sure the trades are booked correctly.
Then the trader might spend some time analyzing stocks, preparing for the next market day, analyzing the trades they did for that day. Maybe after some analysis, they realize they need to rebalance their portfolio of stocks.
Then they’ll know that the next day they need to, for example, increase their allocation to a certain industry. They might even build simulations of stock trades – different sorts of analysis might occur later in the day.
There tends to be a trend where traders who make a lot of money actually work less and traders who are not making as much money work more because, even if the traders who make a lot of money don’t work that hard, there’s no way they’re going to get fired because the bank knows that they’re bringing in a lot of dough for the bank.
Also they know they’re going to get a big bonus just because they made a lot of money. The traders who aren’t making money are freaking out because they know that they might get fired if they don’t make money sometime soon.
That’s a basic wrap-up of what a typical day in the life of a trader is like.
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Brian: Interesting. Just a few questions on that because I’m actually kind of curious because I’ve seen a few trading firms but haven’t
really worked there at all. You mentioned the middle of the day
that it can be hard to take a bathroom break for example.
This may sound like a stupid question, but sometimes things
come up during the middle of the day – personal errands, or you
have to visit the doctor, or something like that.
With banking, it’s usually fine to step out for an hour in the
middle of the day if nothing important is going on because
chances are, you can just give work to someone else or it
doesn’t need to be done right this moment but obviously it’s
different in trading.
Just logistically, let’s say that you have some kind of personal
errand in the middle of the day. For something like that, how
would you deal with it? Could you do anything?
Jerry: The most common way to deal with a problem like that is just to ask a colleague to help monitor your positions while you’re
gone. It would be very dangerous in most situations if you just
left your portfolio there and the market is still moving, and
nobody is looking at it.
Let’s say one of the companies that you invested in or that you
hold stock in suddenly goes bankrupt or announces something
crazy, and you’re not there at the desk to take care of that
situation, then that could result in huge losses for the firm in a
very short amount of time, so you need to get somebody to look
at your positions for you.
Brian: I see. You mentioned that if you step away, something
disastrous could happen because of the volume of money that
you’re trading here. I know this varies a lot by groups and
banks, and different trading strategies, but on average, what
size trades are we usually talking about here?
People who are day trading might be trading hundreds or
thousands of dollars for example, but I’m assuming that it’s way
bigger than that at banks. Are we talking about tens of
thousands, hundreds of thousands, millions of dollars in single
trades?
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Jerry: It depends a lot in the market that you’re working in. For
example, I worked mostly in credit trading – the size of most
trades ranged from about five million dollars notional to about
$20 million notional.
If you were trading stocks, as a junior trader you might be
trading notional amounts of trades in the millions in your first
year of trading. Something like hundreds of millions of dollars in
stock? Well, that’s not going to happen in your first year of
trading. I’m talking about the notional amounts for single trades.
As a day trader for a proprietary trading firm, in your first year,
most of your trades will be under one million dollars. When I
was running my own proprietary trading firm, a lot of traders in
the very beginning got about $50,000 worth of buying power.
That increased more to $500,000 and a million after a couple
months on the job.
Brian: Okay, definitely a completely different scale from what people in their bedrooms trading on E*TRADE are dealing with on a daily
basis. You went over the day in the life of a trader, what you
might expect. The bottom line is it sounds like you’re working
maybe 12 or so hours per day. Would you say that is accurate? Jerry: Yes, I would say that’s a pretty good average for a lot of traders, both at investment banks and hedge funds. Since market hours
are a couple hours less than that, you only need a few hours
before the market opens and a few hours after the market
closes to wrap up your trades.
Then you can leave – unlike investment banking where right
before you try to leave the firm, you might get a ton of work
dumped on your desk at that moment. The work hours every
day are usually pretty constant.
Sometimes you might have to stay late if there’s a specific type
of analysis that you want to do, and you want to get something
ready for a big announcement that’s coming out the next day.
Or if you’re the type of trader that has to work with the
salespeople to make trades directly with clients, you might have
to work indirectly with a client that’s in a different time zone.
That might make you stay later at work but most of the cases,
it’s pretty normalized, the work hours.
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Brian: It sounds like the bottom line is you would expect maybe a 60 hour work week for sales and trading whereas investment
banking is really all over the map, but I would say expect maybe
80 to 100 hours on average with a lot of unpredictability.
It’s completely unlike trading. You might have a day where you
go home at 7:00 p.m. and the next day you might have to pull
an all-nighter for no apparent reason.
You brought up an interesting point there with the possibility of
having to work with the salespeople. When you went through
the average day in the life of a trader, you talked about how
you’re monitoring the market, you’re looking at news
beforehand, you’re planning the day after the market closes,
and then you’re making trades during the day.
How much interaction is there with the sales force? What do you
have to work on together with them?
Jerry: This depends on what kind of trader you are. If you’re a purely proprietary trader, which means that you take the firm’s money
and then you use that money to trade purely for speculative
profit, then you don’t really deal with salespeople.
If you’re, let’s say, a flow trader or an agency trader – a flow
trader means that you need to trade with clients. There is a flow
of clients that comes to the bank.
For example, a client might want to buy a credit default swap on
Microsoft, or maybe the client is trying to hedge risk on
Microsoft so you would need to sell a Microsoft credit default
swap to that client. If you don’t like the risk of that, maybe you
would take an opposite trade in the market to hedge out that
risk.
Depending on what type of trader you are, you might have zero
interaction with the sales force, or you might be interacting with
them all day long. It really depends on the type of trading. Brian: Essentially what happens is that the client would come to the salesperson, and they would say, “I want to buy X, Y, and Z
securities.” Then they would come to you and say, “Can you
help me make the trade for this, and can you actually get this for
the client?”
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Jerry: Exactly. If the trader says, “No, there’s no way we can take that sort of position. We don’t want to make that trade with the
client,” then the client might be upset so the investment bank
will try to make the client happy by trying to execute most
trades.
If the risk is way too big and the trader doesn’t want to do it,
then yes, the trader might analyze the trade and say it’s not
worth it for us to do this.
Brian: During the day, we went through a sample day in the life of a
trader but for the sales force, for anyone working in sales – and
I know you’re not an expert because you were on the trading
side.
But for sales, what I would imagine is that most of the day is
probably just spent calling clients, talking to them on the phone,
trying to find new clients if that’s what your role involves. Is that
pretty accurate that basically they’re spending most of the day
on the phone?
Jerry: Right. A large amount of time everyday is spent just calling
clients and trying to give them information about the markets,
and also, making recommendations for what they should buy or
sell.
If they’re really good at convincing, just like selling any other
product, they might convince the client to purchase, let’s say
100 million shares of Microsoft.
Then the client would execute that trade through the investment
bank. It’s generally accepted procedure for the client to place
the trade through the bank whose salesperson convinced them
of the trade.
Let’s say if a client listened to advice from Bank A and then
placed the trade through Bank B. That would be really messed
up and nobody would want to work with that client again – so
that’s the way it works.
Salespeople also need to spend a lot of time making their
clients happy. This might mean sending Christmas cards and
New Year’s cards, taking them out to dinner and showing them
a really good time, sending them birthday presents, stuff like this
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to make sure that that client keeps on doing business with the
investment bank.
Brian: It’s like any sales job really. It sounds like it’s completely
relationship-driven. If you’re more of a people person than an
analytical person, then maybe that’s a better fit for you.
One other point I wanted to touch on here is just your interaction
with co-workers. For investment banking, I think at least if you
work at a large bank in, say, New York or London for example,
it’s generally pretty hierarchical.
What I mean by that is that other analysts will hang out with
each other, and associates to some extent – they are higher up
than you but you’re still at entry level.
Beyond that, once you get up to the mid-level – VPs, senior
VPs, directors, and then finally MDs – generally as an analyst,
you’re not going to have too much interaction with them
because they’re busy trying to wine and dine clients and trying
to actually bring in business for the bank.
You’re just crunching numbers and making presentations most
of the time so I would say really most of the co-worker
interaction on the investment banking side happens with your
other analysts.
You’ll go to Starbucks, you’ll go out to eat, they’ll hang out after
work, and you form a pretty close bond because they’re all in
the same position. It’s sort of like if you join a fraternity and you
have to go through hazing. That’s sort of what being in an
analyst program at an investment bank doing investment
banking is like.
What is it like on the trading side? Do you talk to your co-
workers much during the day or are you just too focused on the
market?
Sales & Trading Co-Worker Interactions
Jerry: That’s a great question, Brian. It often depends on how focused you are on the market during the day. Some traders will be
completely absorbed in the market, especially if the market is
very volatile that day, and they won’t really be able to talk to
many people during market hours.
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However, trading well usually does require significant interaction mainly with other traders and to a lesser extent, with people the middle office and sales.
The reason for the need for this interaction is because you need to understand how other markets are functioning since other markets might affect your market.
If you’re working as an equity trader, you might talk with the options traders to figure out if a huge order in the options market is affecting the price of the stock for the option that is being traded.
Another interaction you might have is with the risk department. If you want to make a really big trade or you want to buy a stock in a very risky company, then you might need to get approval first from the risk department. That might be a big argument or discussion as to whether or not you’re allowed to make that trade.
In terms of hierarchy, trading is a lot more flat. One reason is because a junior trader might easily make more money than a senior trader just because they’re having a better month or year or because they’re actually more skilled.
Unlike investment banking, some people are just born to do trading well and they can do it very well very quickly whereas other people might not do well even if they trade for years.
If, let’s say, there’s the head of a trading department, they’re not going to be sitting in a corner office separated from everyone else because that would just make it very hard to trade trading ideas.
When the market is moving very quickly, you don’t have time to walk over to a corner office, have a meeting, and then come back to the market and make a decision. You need to – bam, one, two, three – you need to make decisions right at that moment. Sometimes people yell if necessary. Everyone needs to be able to communicate with everyone else instantly. Sometimes the need for formality, to have slow meetings, that just doesn’t work for trading.
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Brian: Picturing the trading floor here, is it kind of like Boiler Room
where it’s very loud, people are always screaming at each other
and there’s always a lot of action going on? Are we talking
about what is described in Liar’s Poker for example?
Jerry: I would say both the movie Boiler Room and the book Liar’s
Poker would slightly exaggerate what happens on most trading
floors. That’s also because that book and that movie are slightly
dated. Hopefully traders are a bit more civilized now and don’t
throw phones at the heads of interns like they did in Liar’s
Poker.
It’s true that things that can get quite hectic sometimes and
people will be excited about the market. Everything is very time-
sensitive. One trade placed one second earlier might make a
really big difference before a rival firm makes a similar trade and
pushes the market in one direction or the other.
Definitely, there’s that aspect of attention and sometimes people
yelling when necessary, but usually it’s not that crazy. It’s not
everyone screaming at each other all day long, everyday. It’s
not like that.
Brian: I guess that’s good to hear from the perspective of your health, although it does make it a little less interesting to not have
people screaming at you all day.
Another question on lifestyle here – and I’m partially responsible
for this phrase getting popular – but we have to go to the
models and bottles question.
For investment banking, some people are kind of obsessed with
going out to clubs with their co-workers and getting a table.
They’re paying $400 USD to get a table, get expensive alcohol,
and sitting there and acting important at a club, which I think is
kind of stupid.
I did it a couple of times but I was not really that into it. Most of
the going out with co-workers was more just going to bars,
going to events, that kind of stuff. Not quite as much going to
expensive, high-end clubs, at least where I was on the West
Coast of the U.S.
For trading though, how would you describe it? I know obviously
you were working in Japan so maybe it’s a little different, but
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how would you describe the going out scene? Do you do much
with your co-workers outside of work?
Jerry: Going out with co-workers can be interesting, but most of it just involves going to bars or going to restaurants and chatting with
each other, just having a good time. The really interesting part
comes in when the brokers have to take the traders out for a
good time.
When the traders go out for a good time, they’re all paying out
of their own pockets to have fun. When the broker takes the
trader out for a good time, the broker’s firm is paying for the
good time, so basically, the broker has the right – or you could
even say the mandate – to spend a lot of money to make this
trader happy, to make sure that the trader spends a lot of
money on trades with the broker firm.
The reason for this is because in markets that require a broker,
which would be most over-the-counter markets, a trader can
choose to execute their trades through a selection of different
brokerage firms.
From one trade, a brokerage firm might make a brokerage fee
of thousands of dollars. Obviously it makes sense for brokers to
spend tons of money on taking traders out to have a good time.
As an example, one of my friends from Stanford – who shall
remain unnamed – and worked at a bulge bracket investment
bank in New York, once went out with a broker and three other
traders. They just had dinner and a couple nice wines and it
turned out to be $15,000 for one night.
A salesperson at the Tokyo branch of an American bulge
bracket investment bank said he spent – usually when taking
one client out to dinner at hostess clubs – they spent about
$1,000 per night. That’s the salespeople taking the clients out to
dinner, not the brokers taking the traders out to dinner.
Basically this culture of people taking their clients out to dinner,
to hostess bars, and maybe to establishments even more shady
than hostess bars, this is a huge amount of expenditure being
spent at investment banks. I would say that’s probably the
biggest aspect of mottles and bottles for traders and for
salespeople.
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Brian: One other thing I’m curious about here is that you mentioned that the average day might be, say, 12 hours. It sounds like you
might have some time after work to do something, assuming
that you’re sleeping for eight hours.
Do traders have interests outside of work and going out? What
do you typically do when you get home after a day of trading
and you have a couple of hours? What do people usually do? Jerry: I think this isn’t really that specific to trading. I think it just
depends on the person. Some people really enjoy golf, so they
go golfing on weekends. If you’re a salesperson, you might
actually have to take a client golfing.
In people’s personal time, a lot of traders enjoy sports. This is
especially important because trading requires very healthy
bodies since you’re very stressed all day and you need to focus
all day long on the market.
If you’re even slightly unhealthy, that might affect your actual
trading performance, so working out in the gym or playing
basketball or other physical activities are often the hobbies of
traders.
Otherwise I think it just depends on the specific person. Brian: One thing you brought up that I thought was interesting that we haven’t addressed so far is you mentioned how trading – and I
would argue finance in general – do tend to be male-dominated
fields, and even more so in Asia.
There are definitely quite a few female readers on the site who
are interested in finance and perhaps even trading. Would you
tell them to be wary of entering the field because of how male -
dominated it is or would you say, “Just go ahead anyway and if
you make money, and then you make money. Then the firm and
your co-workers will like you.”
How tough would it be for a female to actually get into trading
and actually perform well and succeed there?
Jerry: I definitely think that anyone who is passionate about trading
and is sure that they really want to do it, I’m sure definitely I
would give trading a shot.
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When I was running my own proprietary trading firm, I
interviewed both men and women. I also hired both men and
women.
In the end, the performance of the women in my firm was just as
good as the men. I think that that shows that it’s possible for a
woman to really excel in trading as well.
Exit Opportunities & Pay
Brian: Interesting. I guess the last topic I wanted to go into was career paths and exit opportunities. I think this might be something
that’s a little unique to maybe the U.S. and Asia.
I’ve noticed that in Europe and the Middle East, and other
regions, people are not quite as obsessed with exit opportunities
– but I get a lot of questions from people who just come to me
and say, “If I do investment banking, can you give me an exact
blueprint of what the next 20 years of my life will look like?”
Of course it doesn’t work like that. Things are unpredictable;
things change very quickly so you can’t predict that far in
advance but generally speaking, if you do investment banking,
you have a couple different options.
You can go to private equity, go to a hedge fund, you can go to
corporate development at a normal company and work on
acquisitions or finance there, you can go to a venture capital
firm, you can stay in banking, or you could even do something
completely different.
It’s not unheard of. You could start your own company.
Basically, you have quite a few exit opportunities. Some people
would argue that investment banking gives you the broadest
range of exit opportunities among pretty much any job that you
could get at the entry level.
That’s how it works on the investment banking side. The career
path, it’s kind of hard to say because it really depends on your
performance. If you perform well, then you can move up – not
as quickly as you could move up in, I suspect, in trading, though
we’ll find out from Jerry in a bit.
You will move up if you’re a top performer. If you make money
for a PE firm or for a hedge fund, you will move up and they will
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compensate you because if you’re making money, they’re
making money, and everyone is happy.
In general, your career path is very performance-dependant,
especially as you move up. It’s difficult to say. When I get emails
saying, “I want to be a Managing Director in ten years,” I can’t
really tell you whether that’s possible because if you make
money, if you bring in tons of clients, then, okay, sure.
If you don’t, if maybe you don’t have the sales and relationship
skills, then it’s going to be harder to do that. You do get a broad
range of exit opportunities, but I would say that the career path
is more uncertain than most people think. That’s how I would
summarize it on the investment banking side.
What is your view on sales and trading? I know you mentioned
in the first podcast that generally you’re either going to be
trading or you have to do something completely different. Any
other possibilities if you start out in sales and trading?
Jerry: Let me talk about trading first. Trading requires some very
specific skills which may not be applicable to most other jobs
out there. This is because, for example, you’re spending all day
in front of a screen looking at numbers going up and down, and
maybe you’re using some technical analysis techniques to
analyze the charts that make you a lot of money.
This has nothing to do with, let’s say, if you want to manage a
large company later on in your life. If you get into trading, you
want to make sure that you want to do it for the long-term.
If you want to do trading for just a couple years for example, two
to three years, and then switch to a different role in finance or
just have a career change, that’s still possible, not as easy as in
investment banking, but still possible.
If you’ve been a trader for longer, let’s say more than five or six
years and you want to make a career change then, it’s just
going to get harder and harder. I would just keep that in mind if
you’re already currently in trading.
It is possible to become an MD or even get into one of the top
positions in an investment bank as a trader, just because the
trading department is a huge part of any investment bank. It’s
what brings in a lot of the dough.
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You could be the Vice President of global capital markets or
something like that, but again, that’s a trading-related job and
you’re basically managing other traders. If you wanted to move
into a high-level executive role in any other non-trading-related
company, it would be very difficult.
In a sales role on the other hand, since you are gaining sales
skills, skill relating to clients and selling them products, and also
showing them a good time and developing relationships, those
people skills can be very useful for a variety of other sales
positions and other people-related positions within finance.
I would say the exit opportunities for sales would be greater, but
in the end, people who stay long-term in trading and are able to
stay without getting fired make the most money, so it’s your call. Brian: I don’t expect to get exact numbers here, but you brought up the issue of who makes the most money. What I would say for
investment banking, and again, hard to give specific exact
numbers here – but I would say at the entry level as an analyst,
generally you’ll be making around $60,000 or $70,000 USD
base salary at most large banks. It moves up by about $10,000
USD each year.
At the associate level, usually you start closer to around
$100,000 base salary, and it moves up or actually sometimes
stays in relatively the same range.
Bonuses obviously can be widely variable, but generally if the
market is really good, then you might get your entire base salary
as a bonus or even more than that if the market is really, really
good.
Associates can start earning much higher than that. When you
get to the mid-levels in investment banking – VPs will probably
see somewhere in the mid-six figures range, all-in, all the way
up to possibly a million or so once you’ve been there for a few
years.
At the Managing Director level, you’ll usually go beyond that. It
is tricky because Managing Director-compensation is based
heavily on how many deals they bring in and how much
business they win.
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If they have a really bad year, they don’t close any deals, then
they are not going to see that much in the way of compensation.
They’ll get a base salary but their bonus will not be spectacular
if it’s there at all.
They have the potential to earn millions or even maybe above
$10 million if they’re the head of a group or something like that,
or if they’re head of investment banking it will go up maybe even
over and beyond that.
These figures, by the way, are all at large banks. At smaller
banks, it’s going to scale down proportionately, especially at the
higher levels. That’s how I’d summarize it.
On the hedge fund and private equity side in terms of exit
opportunities, the pay structure is similar before you get to the
highest levels but once you get to the Partner-level, they
actually have the potential to make a lot more than investment
banking MDs.
The most well-paid hedge fund managers, for example, might
make over a billion dollars in cash each year. It doesn’t always
happen. It happens more often when the economy is good,
when hedge funds aren’t failing left and right, but there is the
potential to make a serious amount of money if you’re managing
tens of billions of dollars and you have a really good year.
That’s how I view compensation on the banking and corporate
finance side. For sales and trading – and we can start with
trading – how would describe the pay structure? I would guess
that it’s probably more variable than what I just described. Jerry: Let me start with trading. I’ll first talk about the compensation at investment banks, and then at proprietary trading firms. At
investment banks, you’ll usually get a base salary.
Coming out of college, this base salary might be somewhere in
the range of $50,000 to $80,000 USD per year. Your bonus in
your first year of trading would be maybe around 20% to 50% of
this base amount.
From there, your bonus depends on how much money you
make for the bank. If you don’t make any money for the bank or
you lose money, then you’re going to get a very small,
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insignificant bonus. If you make a lot of money for the bank, the
sky’s the limit.
I’m sure you’ve all heard of the trader at Citigroup that was
going to get a $100 million dollar bonus. If you bring in $200
million for the bank, does that mean you’re going to get a $100
million bonus? No, it doesn’t work that way.
Brian: How much did the Citigroup trader bring in then?
Jerry: I’m not sure. I heard it was over a billion. It was a lot of money.
In general, investment banks pay about 5% to 15% of what the
trader makes as a bonus to the trader.
The reason for this is because there’s a big risk to the bank. The
trader might also lose money for the bank and that’s a risk. The
bank has to account for both traders that make money and lose
money.
They can’t afford to pay out a huge percentage of what the
trader makes for the bank. Of course the numbers are adjusted
for the amount of risk the trader took.
At an investment bank, they might be able to keep a trader on
for even one or two years of losing money but anything longer
than that, they would probably let go of the trader and just fire
them since they’re not able to make money.
At a proprietary trading firm, this varies widely by firm, but the
general trend is you get a much higher percentage of trading
profits as a bonus paid out to yourself, but you have a much
smaller base salary, and you’re also fired much more quickly if
you don’t make any money.
Depending on the firm, you might have a percentage of the
trades being funded by your own money or it might be 100%
funded by the firm. For example, SwiftTrade, which is based in
Toronto, is the biggest proprietary trading firm in the world.
To their top traders, they pay about 60% payouts. If their trader
makes $100 million, then that trader will actually be paid $60
million for a bonus. Of course, that’s extremely rare. I don’t think
SwiftTrade has any trader that makes that much money.
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