S&T-vs-IBD-Part-2-On-the-Job

Mergers & InquisitionsSales & Trading vs. Investment Banking – Part 2 – On the JobIntroductionBrian: Welcome back to our second podcast in this series on sales and trading versus investment banking. This is Brian from Mergersand Inquisitions. I’m here with Jerry, who has been contributingto the site and helping me with some projects behind thescenes.He has worked in sales and trading at two bulge bracketinvestment banks before and then started his own prop tradingfirm, so he has quite a lot of experience in the realm of salesand trading.In the previous podcast, we spoke about the recruiting processfor both investment banking and sales and trading, and how itdiffers depending on what you’re going for, what type of firmyou’re going after, how you network, how you write yourresume, and how interviews are different for these two differentfields.This time around, we’re going to be going into what it’s actuallylike on the job, what it’s actually like to work in both investmentbanking and sales and trading, how you get assigned to groups,how you interact with your co-workers, how working in Asia ordifferent parts of the world is a bit different, and finally, careerpaths, exit opportunities, and what’s available for you in thefuture if you decide to go into one of these industries.To kick off this discussion and to get started here, people knowa lot about the training programs in investment banking. Onceyou actually get a full time offer, there’s a lot of knowledge aboutwhat you learn in training. It’s a lot of accounting, financialmodeling, valuation – those types of skills.What is the training program like in sales and trading? Let’s sayyou’ve gotten an offer and you’re about to start working. Howwould your firm actually go about training you?Sales & Trading Training Programs & Group Assignments/Jerry: Let me talk first about how investment banks would train their traders. Since a trader, like an investment banker, is consideredfront office staff of an investment bank, if this investment bankhas a global training program – usually American investmentbanks will have a two month training program for all their newhires all over the world. They all go to New York and get twomonths 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 whereverthey’re based. Then they’ll get training directly from theirmanager. This is where you can get some variation on how thisworks.Some traders – they’re able to start trading real money on thevery first day, although, on a smaller budget, they’re only able totrade a small amount of money.Some traders – they have to trade with either fake money or nottrade at all for a long time. It may be for three to six months oreven longer.Basically, the way that trading is different from investmentbanking is you really can’t learn trading just by studying itwhereas in investment banking, you can learn modeling bybuilding models in class or on your own.In trading, the psychology of trading fake money and thepsychology of trading of real money is totally different becauseyou might get really excited or nervous when trading actualmoney. The only real way to learn trading well is to actually dothe trading.Basically, your manager will try to ease you into the position byfirst letting you trade with mock money and then letting youtrade with a small amount of real money, and then increasingthe amount of money that you trade. Basically, you learn bydoing.Brian: That’s really interesting because I know that the process is alittle different but I didn’t realize that with trading, there’s muchmore of that element of training once you get back to your realdesk, your real group, and once you start working./I know for banking, they don’t really do that too much. They kindof just throw you into the fire and say, “We have to do a pitchbook, we have to do a deal. Figure out what to do and do it,” butthey don’t really give you any training wheels. It’s a little differentin that respect.You brought up an interesting point, which is that in trading, youstart off with smaller amounts of money, or perhaps in thebeginning with nothing at all while you’re learning the ropes, andthen move up to trading larger amounts.How does that process work exactly? I’ve heard before thatthere are junior traders and then actual real traders. How arethey different? How do you move from a junior trader role up tosomeone who’s making more significant trades, let’s say? Jerry: This varies widely among different investment banks, andobviously among the different types of financial institutions thatconduct trading. Some investment banks will have a differencebetween junior traders and senior traders.Some banks will not use titles like this at all. Basically, you’llhave the same title for a couple of years but the amount ofmoney that you’ll be trading will gradually increase as time goeson.If you’re at an investment bank, you prove that you’re able tocontrol risk well and that you don’t panic when the market goescrazy. If you’re able to steadily make money, then the bank willincrease the amount of risk you’re able to take and the amountof 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 firmsmight have more simplistic rules for increasing the amount ofmoney 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 anumber 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 theamount you’re able to trade is evaluated differs by organization./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 tradingfor example, how does this process actually work?I’m assuming that if you do an internship, and you work on aparticular desk, then you’ll probably go back to it but let’s saythat you haven’t worked at that bank before, let’s say you’re newto it. How would they actually assign you to a particular group orto a particular desk in trading?Jerry: Most financial institutions will actually hire you directly to work ina specific area in trading. For example, before you even enterthe firm, it will be decided that, okay, you will be doing credittrading or you will be doing rates trading.There might be some firms that just hire somebody as a traderand then let them do a rotation in each of the different tradingdesks, and finally let them settle down at one desk, but that ispretty rare nowadays. You might get a chance to rotate aroundthe 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 TraderBrian: Okay, I see. We’ve covered the training program, how thatworks, and how you actually get assigned to groups. One reallycommon question I get is: What do you actually do once you’vestarted working? You’re past the training phase, to kind of gothrough 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 lifeof an investment banker. I guess the way I’d summarize it, incase you haven’t read it already, is that the days are veryrandom. Generally, you’re going to start off working maybe eightor nine, 9:30 in the morning.Usually, mornings are not too active. Afternoons are actually nottoo active in investment banking. You might have meetings, youmight have calls with companies, you might be doing randomtasks and such, but actually what typically happens is that at theend of the day, or at least, the end of the day for the seniorbankers, 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/morning.” They just expect that you’re going to stay there andwork on it until it gets done. Actually most of the time, you’redoing the bulk of your work at night.This is mostly true in the U.S. I know that in other regions it’s abit different. The lifestyle and hours can be a bit different, thework style can be different but this is what I would say iscommon at large investment banks, in the U.S. anyway.For trading, we’ve discussed before, in the first podcast, how it’sa little different in that the trader is very, very busy during markethours but to go into more detail on that, what would you say theaverage 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 doingregular stock trading? The trader would probably get up in themorning, about two or three hours before the market opens, andget to the firm maybe one to one and a half hours before themarket opens.There would be usually a morning meeting where all the tradersget together. It might be in a separate room or it might just be onthe trading floor itself where everyone pulls their chairs together.The traders from the different markets will talk to each otherabout what they think the movements will be today andsummarize the movements from the previous day so that wayeveryone 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 themovements in the credit market. Then, during market hours – inNew York, at 9:30 a.m. – the stock market would open and thetrader would have to be monitoring the market at all times.This actually makes it a little difficult to go to the bathroomsometimes. It might be difficult to take a lunch break if themarket is especially busy on a certain day. There is alwayspressure to be constantly monitoring the market while themarket is open.A trader will monitor the market and, if a good opportunitycomes up, will make a couple of trades, and will also talk with/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./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’treally worked there at all. You mentioned the middle of the daythat it can be hard to take a bathroom break for example.This may sound like a stupid question, but sometimes thingscome up during the middle of the day – personal errands, or youhave to visit the doctor, or something like that.With banking, it’s usually fine to step out for an hour in themiddle of the day if nothing important is going on becausechances are, you can just give work to someone else or itdoesn’t need to be done right this moment but obviously it’sdifferent in trading.Just logistically, let’s say that you have some kind of personalerrand in the middle of the day. For something like that, howwould 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’regone. It would be very dangerous in most situations if you justleft your portfolio there and the market is still moving, andnobody is looking at it.Let’s say one of the companies that you invested in or that youhold stock in suddenly goes bankrupt or announces somethingcrazy, and you’re not there at the desk to take care of thatsituation, then that could result in huge losses for the firm in avery short amount of time, so you need to get somebody to lookat your positions for you.Brian: I see. You mentioned that if you step away, somethingdisastrous could happen because of the volume of money thatyou’re trading here. I know this varies a lot by groups andbanks, and different trading strategies, but on average, whatsize trades are we usually talking about here?People who are day trading might be trading hundreds orthousands of dollars for example, but I’m assuming that it’s waybigger than that at banks. Are we talking about tens ofthousands, hundreds of thousands, millions of dollars in singletrades?/Jerry: It depends a lot in the market that you’re working in. Forexample, I worked mostly in credit trading – the size of mosttrades ranged from about five million dollars notional to about$20 million notional.If you were trading stocks, as a junior trader you might betrading notional amounts of trades in the millions in your firstyear of trading. Something like hundreds of millions of dollars instock? Well, that’s not going to happen in your first year oftrading. 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 Iwas running my own proprietary trading firm, a lot of traders inthe very beginning got about $50,000 worth of buying power.That increased more to $500,000 and a million after a couplemonths 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 dailybasis. You went over the day in the life of a trader, what youmight expect. The bottom line is it sounds like you’re workingmaybe 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 hoursare a couple hours less than that, you only need a few hoursbefore the market opens and a few hours after the marketcloses to wrap up your trades.Then you can leave – unlike investment banking where rightbefore you try to leave the firm, you might get a ton of workdumped on your desk at that moment. The work hours everyday are usually pretty constant.Sometimes you might have to stay late if there’s a specific typeof analysis that you want to do, and you want to get somethingready for a big announcement that’s coming out the next day.Or if you’re the type of trader that has to work with thesalespeople to make trades directly with clients, you might haveto 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./Brian: It sounds like the bottom line is you would expect maybe a 60 hour work week for sales and trading whereas investmentbanking is really all over the map, but I would say expect maybe80 to 100 hours on average with a lot of unpredictability.It’s completely unlike trading. You might have a day where yougo home at 7:00 p.m. and the next day you might have to pullan all-nighter for no apparent reason.You brought up an interesting point there with the possibility ofhaving to work with the salespeople. When you went throughthe average day in the life of a trader, you talked about howyou’re monitoring the market, you’re looking at newsbeforehand, 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 youhave 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 moneyand then you use that money to trade purely for speculativeprofit, then you don’t really deal with salespeople.If you’re, let’s say, a flow trader or an agency trader – a flowtrader means that you need to trade with clients. There is a flowof clients that comes to the bank.For example, a client might want to buy a credit default swap onMicrosoft, or maybe the client is trying to hedge risk onMicrosoft so you would need to sell a Microsoft credit defaultswap to that client. If you don’t like the risk of that, maybe youwould take an opposite trade in the market to hedge out thatrisk.Depending on what type of trader you are, you might have zerointeraction with the sales force, or you might be interacting withthem 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 Zsecurities.” Then they would come to you and say, “Can youhelp me make the trade for this, and can you actually get this forthe client?”/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 theclient,” then the client might be upset so the investment bankwill try to make the client happy by trying to execute mosttrades.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 notworth it for us to do this.Brian: During the day, we went through a sample day in the life of atrader but for the sales force, for anyone working in sales – andI know you’re not an expert because you were on the tradingside.But for sales, what I would imagine is that most of the day isprobably just spent calling clients, talking to them on the phone,trying to find new clients if that’s what your role involves. Is thatpretty accurate that basically they’re spending most of the dayon the phone?Jerry: Right. A large amount of time everyday is spent just callingclients and trying to give them information about the markets,and also, making recommendations for what they should buy orsell.If they’re really good at convincing, just like selling any otherproduct, they might convince the client to purchase, let’s say100 million shares of Microsoft.Then the client would execute that trade through the investmentbank. It’s generally accepted procedure for the client to placethe trade through the bank whose salesperson convinced themof the trade.Let’s say if a client listened to advice from Bank A and thenplaced the trade through Bank B. That would be really messedup and nobody would want to work with that client again – sothat’s the way it works.Salespeople also need to spend a lot of time making theirclients happy. This might mean sending Christmas cards andNew Year’s cards, taking them out to dinner and showing thema really good time, sending them birthday presents, stuff like this/to make sure that that client keeps on doing business with theinvestment bank.Brian: It’s like any sales job really. It sounds like it’s completelyrelationship-driven. If you’re more of a people person than ananalytical person, then maybe that’s a better fit for you.One other point I wanted to touch on here is just your interactionwith co-workers. For investment banking, I think at least if youwork 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 witheach other, and associates to some extent – they are higher upthan you but you’re still at entry level.Beyond that, once you get up to the mid-level – VPs, seniorVPs, directors, and then finally MDs – generally as an analyst,you’re not going to have too much interaction with thembecause they’re busy trying to wine and dine clients and tryingto actually bring in business for the bank.You’re just crunching numbers and making presentations mostof the time so I would say really most of the co-workerinteraction on the investment banking side happens with yourother analysts.You’ll go to Starbucks, you’ll go out to eat, they’ll hang out afterwork, and you form a pretty close bond because they’re all inthe same position. It’s sort of like if you join a fraternity and youhave to go through hazing. That’s sort of what being in ananalyst program at an investment bank doing investmentbanking 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 themarket?Sales & Trading Co-Worker InteractionsJerry: That’s a great question, Brian. It often depends on how focused you are on the market during the day. Some traders will becompletely absorbed in the market, especially if the market isvery volatile that day, and they won’t really be able to talk tomany people during market hours./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./Brian: Picturing the trading floor here, is it kind of like Boiler Roomwhere it’s very loud, people are always screaming at each otherand there’s always a lot of action going on? Are we talkingabout what is described in Liar’s Poker for example?Jerry: I would say both the movie Boiler Room and the book Liar’sPoker would slightly exaggerate what happens on most tradingfloors. That’s also because that book and that movie are slightlydated. Hopefully traders are a bit more civilized now and don’tthrow phones at the heads of interns like they did in Liar’sPoker.It’s true that things that can get quite hectic sometimes andpeople will be excited about the market. Everything is very time-sensitive. One trade placed one second earlier might make areally big difference before a rival firm makes a similar trade andpushes the market in one direction or the other.Definitely, there’s that aspect of attention and sometimes peopleyelling when necessary, but usually it’s not that crazy. It’s noteveryone screaming at each other all day long, everyday. It’snot 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 havepeople screaming at you all day.Another question on lifestyle here – and I’m partially responsiblefor this phrase getting popular – but we have to go to themodels and bottles question.For investment banking, some people are kind of obsessed withgoing 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 iskind of stupid.I did it a couple of times but I was not really that into it. Most ofthe going out with co-workers was more just going to bars,going to events, that kind of stuff. Not quite as much going toexpensive, high-end clubs, at least where I was on the WestCoast of the U.S.For trading though, how would you describe it? I know obviouslyyou were working in Japan so maybe it’s a little different, but/how would you describe the going out scene? Do you do muchwith 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 witheach other, just having a good time. The really interesting partcomes in when the brokers have to take the traders out for agood time.When the traders go out for a good time, they’re all paying outof their own pockets to have fun. When the broker takes thetrader out for a good time, the broker’s firm is paying for thegood time, so basically, the broker has the right – or you couldeven say the mandate – to spend a lot of money to make thistrader happy, to make sure that the trader spends a lot ofmoney 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 canchoose to execute their trades through a selection of differentbrokerage firms.From one trade, a brokerage firm might make a brokerage feeof thousands of dollars. Obviously it makes sense for brokers tospend tons of money on taking traders out to have a good time.As an example, one of my friends from Stanford – who shallremain unnamed – and worked at a bulge bracket investmentbank in New York, once went out with a broker and three othertraders. They just had dinner and a couple nice wines and itturned out to be $15,000 for one night.A salesperson at the Tokyo branch of an American bulgebracket investment bank said he spent – usually when takingone client out to dinner at hostess clubs – they spent about$1,000 per night. That’s the salespeople taking the clients out todinner, 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 shadythan hostess bars, this is a huge amount of expenditure beingspent at investment banks. I would say that’s probably thebiggest aspect of mottles and bottles for traders and forsalespeople./。