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Institutional Sales and Trading Section Three: Trading – The Players

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Each desk on a trading floor carries its own sub-culture. Some are tougher than others, some work late, and some socialize outside of work on a regular basis. While some new associates in trading maintain ambitions of working on a particular desk because of the product (say, equity or high-yield debt), most find themselves in an environment where they most enjoy the people. After all, salespeople and traders sit side-by-side for 10 hours a day. Liking the guy in the next chair takes precedence when placing an associate full-time on a desk, especially considering the levels of stress, noise and pressure on a trading floor.

The Desk

Different areas on the trading floor at an I-bank typically are divided into "desks." Common desks include OTC equity trading, big board (NYSE) equity trading, convertibles (called "converts"), municipal bonds, high yield, and Treasuries. This list is far from complete - some of the bigger firms have 50 or more distinct trading desks on the floor (depending how they are defined).



Investment banks usually separate the equity trading floor from the fixed income trading floor. In fact, equity traders and debt traders rarely interact. Conversely, sales and trading within one of these departments are combined and integrated as much as possible. For example, treasury salespeople and treasury traders work next to one another on the same desk. Sales will be covered in following sections.

The Players

The players in the trading game depend on the firm. There are no hard and fast rules regarding whether or not one needs an MBA. The degree itself, though less applicable directly to the trading position, tends to matter beyond the trader level. Managers - heads of desks - and higher-ups are often selected from the MBA ranks.

Generally, regional I-banks hire clerks and/or trading assistants (non-MBAs) who are sometimes able to advance to a full-fledged trading job within a few years. Other banks, like Merrill Lynch and others on Wall Street, hire analysts and associates just as they do in investment banking. Thus an analyst job on Wall Street in trading includes a two- to three-year stint before the expectation of going back to business school, and the associate position begins after one earns his or her MBA. The ultimate job in trading is to become a full-fledged trader or a manager over a trading desk. Here we break out the early positions into those more common at regional I-banks and those more common on Wall Street.

Entry-Level Positions

Regional Frameworks - Traditional Programs

Clerks: The bottom rung of the ladder in trading in regional firms, clerks generally "balance the books," tracking a desk or a particular trader's buy and sell transactions throughout the day.  A starting point for an undergrad aiming to move up to an assistant trader role, clerks gain exposure to the trading floor environment, the traders themselves and the markets. However, clerks take messages, make copies, go get coffee, and are hardly respected by traders. And at bigger firms, this position can be a dead-end job: clerks may remain in these roles indefinitely, while new MBAs move into full-time trading positions or top undergrads move into "real" analyst jobs. Clerks begin making annual salaries in the mid to upper-20's.

Trading Assistants: Typically filled by recent graduates of undergraduate universities, the trading assistant position is more involved in trades than the clerk position. Trading assistants move beyond staring at the computer and balancing the books to become more involved with the actual traders. Backing up accounts, relaying messages and reports to and from the floor of the NYSE, and actually speaking with some accounts occasionally - these responsibilities bring trading assistants much closer to understanding how the whole biz works. Depending on the firm, some undergrads immediately move into a trading assistant position with the hope of moving into a full-time trading job. Trading assistants begin with salaries in the high 30's to low 40's per year, usually with a small annual bonus tacked on at the end of the year.

Note: Clerks and trading assistants at some firms are hired with the possibility of upward advancement, a though promoting non-MBAs to full-time trading jobs is becoming more and more uncommon, even at region; 1 firms.

Wall Street Analyst and Associate Programs

Analysts: Similar to corporate finance analysts, trading analysts at Wall Street firms typically are smart undergraduates with the desire to either become a trader or learn about the trading environment. Quantitative skills are a must for analysts, as much of their time is spent dealing with books of trades and numbers. The ability to cruch numbers in a short time is especially important on the fixed income side. Traders often demand bond price or yield calculations with only a moment's notice, and analysts must be able to produce. After a two to three-year stint, analysts move on to business school or go to another firm, although promotion to the associate level is much more common in trading than it is in corporate finance. (Salaries mirror those paid to corporate finance analysts, that is, starting in the low 40's)

Associates: Trading associates, typically recent business school graduates, begin in either rotational programs or are hired directly to a desk. Rotations can last anywhere from a month to a year, and are designed to both educate new MBAs on various desks and to ensure a good fit prior to placement. As in other areas of investment banks, new MBAs begin at about $75,000 salary with an about $25,000 bonus at major Wall Street banks. Second-year associate compensation tracks closely to that of the second-year corporate finance associate (upwards of $200,000 in total comp). Associates move to full-fledged trading positions generally in about two to three years, but can move more quickly if they perform well and there are openings (turnover) on the desk.

Full-Fledged Trading Positions

The Block Trader: These are the guys you see sitting on a desk with dozens of phone lines ringing simultaneously and four or more computer monitors blinking, with orders coming in like machine-gun fire. Typically, traders deal in active, mature markets, such as government securities, stocks, currencies and corporate bonds. Sometimes hailing from top MBA schools, and sometimes tough guys named Vinny from the mailroom, traders historically are hired based on work ethic, attitude and "streetsmarts."

The Sales-trader: A hybrid between sales and trading, sales-traders essentially operate in a dual role as both salesperson and block trader. While block traders deal with huge trades and often massive inventories of stocks or bonds, sales-traders act somewhat as a go-between for salespeople and block traders and trade somewhat smaller blocks of securities. Different from the pure block trader, the sales-trader actually initiates calls to clients, pitches investment ideas and gives market commentary. The sales-trader keeps abreast of market conditions and research commentaries, but, unlike the salesperson, does not need to know the ins and outs of every company when pitching products to clients. Salespeople must be thoroughly versed in the companies they are pitching to clients, whereas sales-traders typically cover the highlights and the big picture. When specific questions arise, a sales-trader will often refer a client to the research analyst.

The Structured Product Trader: At some of the biggest Wall Street firms, "structured product" traders deal with derivatives, a.k.a. "structured products." (Derivatives are complex securities that derive their value out of, or have their value contingent on the values of other assets like stocks, bonds, commodity prices, or market index values.) Because of their complexity, derivatives typically require substantial time to price and structure, so foster an entirely different environment than that of a block trader who deals with heavy trading flows and intense on-the-spot pressure. Note, however, that common stock options (calls and puts) and even Treasury options trade much like any other liquid security. The pricing is fairly transparent, the securities standardized and the volume high. Low-volume, complex derivatives such as interest rate swaps, structured repurchase agreements, and credit derivatives require pricing and typically more legwork prior to trading.

Note that in Trading, job titles can range from Associate to VP to Managing Director. But, the roles as a trader change little. The difference is that MDs typically manage the desks, spending their time dealing with desk issues, risk management issues, personnel issues, etc.

In trading, most firms pay a fixed salary plus a bonus based on the profits the trader brings to the group. Once associates have moved into full-fledged trading roles after two or three years, they begin to be judged by their profit contributions. How much can a trader make? Typically, each desk on the trading floor has a P&L statement for the group. As the group does well, so do the primary contributors. In a down year, everyone suffers. In up years, everyone is happy. Exactly how the bonuses are determined can be a mystery. Office politics, profits brought into the firm, and tenure all contribute to the final distribution. Often, the MDs on the desk or the top two or three traders on the desk get together and hash out how the bonus pool will be allocated to each person. Then, each trader is told what his or her bonus is. If he or she is unhappy, it is not uncommon for traders (as well as any other employee at an I-bank) to jump ship and leave the firm the second that his or her bonus check clears the bank. Top traders can pull in well over $ 1 million per year.
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