vision a future trading landscapewith no physical exchanges and a reduced role for market intermediaries. Ofcourse, the NYSEs of the world don’t see eye-to-eye with this vision of thefuture. And, while it’s possible to automate the matching of customer orders,there is always a need for specialists and dealers to furnish capital when thereis no liquidity in the marketplace. However, employing capital to trade withsophisticated investors is a riskier business than just trading order flow, andit is possible that the risk-adjusted return of trading desks will decline.Several constituencies that are exploiting technology to lower the cost oftrading for buyers (at the expense of the established Wall Street dealercommunity) are worth keeping an eye on. Here’s a look at some of them.
Bloomberg tradingBloomberg terminals, which deliver financial news information and data,have become ubiquitous fixtures on trading desks around the world.Bloomberg’s trade book is an electronic crossing network (ECN) that seeksto leverage the installed base of terminals to generate trading revenues in theequity markets. Bloomberg’s trade book is one of numerous competitors inthe ECN that allow users to post bids and offers and to trade at a fraction ofthe cost charged by more established broker dealers.
Cantor Fitzgerald/eSpeedCantor Fitzgerald created the world’s first electronic marketplace (“screenbrokerage”) for U.S. government securities in 1972. eSpeed was introduced
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in 1996 as a fully electronic trading system that allows simultaneouselectronic trading access to U.S. Treasury cash and futures markets.
Broker-dealersBroker-dealers are always banding together to respond to the latest threatposed by technology. There is very little innovation that actually goes on atbroker-dealers (at least as it relates to new technology platforms), and theannounced initiatives, for the most part, seem to be ineffective, since theseinitiatives are purely defensive in nature. For example, when Bloomberg firstbegan to gain popularity, every major broker-dealer banded together to formthe Electronic Joint Venture (EJV). This project failed miserably andBloomberg has become the industry gold standard.
NASDAQHaving an information monopoly on NASDAQ pricing data isn’t enough.NASDAQ is now getting into the stock trading game. The latest iteration ofNASDAQ is called Supermontage and SuperSOES. According to NASDAQ,both initiatives attempt to improve transparency throughout the NASDAQmarketplace. Critics charge that these changes do nothing more than create arevenue stream for NASDAQ at the expense of the dealer community. Youcan read more about this or access NASDAQ market data onNasdaqtrader.com.
Reuters/Instinet/Island SecuritiesInstinet is an anonymous electronic trading platform for equities owned byReuters. Since ECNs have proliferated, Instinet’s profitability has been onthe decline. The firm recently acquired the largest ECN, Island Securities.Instinet has typically been favored by dealers and institutions, while Islandwas the execution platform of choice for day traders. These two pools ofliquidity are considerable, and are often taking the other side of each other’stransactions. Now, Instinet controls both.
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Business TrendsThere was a time when Wall Street was very focused on proprietary trading(trading with the firm’s own capital with the goal of making a profit on veryshort-term incidents, as opposed to taking a cut for trading for a client) as asource of profit. John Merriwether’s bond arbitrage group chronicled inMichael Lewis’ Liar’s Poker at Salomon Brothers was the perfect example.The problem is that proprietary trading profits are by their very nature nonrecurring sources of revenue. A trader may make or lose a killing in Q1, butthere’s no guarantee that this profit opportunity will happen again in thefuture. Wall Street has increasingly backed off making big capitalcommitments to the proprietary trading effort, since they’ve discovered thatinvestors don’t pay a premium for a company with a volatile earnings stream.However, sales and trading for clients in return for commissions, while not asprofitable as investment banking, can contribute significantly to the firm’searnings. The tradeoff that has been made is that Wall Street has becomeincreasingly customer-focused. The strategy here is that Wall Street firmsalready provide equity and fixed income research, as well as merger advisoryand investment banking services to clients, so why not focus the firm’strading effort as a complement to the full range of services that the investmentbank already provides? Customer-driven trading is very different fromproprietary-driven trading, and its relative importance as a contributor toearnings has increased.The bottom line here is that students who think that they’re going to walkonto a trading desk and start buying shares of IBM for the firm’s proprietaryaccount will be disappointed. Traders don’t care about where IBM sharestrade – their sole function is to provide liquidity in the marketplace. This isa very challenging task, but it’s a different game that’s being played, andprospective job candidates need to be mindful of this shift.
Education TrendsIt used to be that the mail guy could get promoted all the way up to trader orhead sales position. This is a story that a lot of current Wall Street veteransshare, but it is increasingly becoming the exception rather than the rule. WallStreet’s frenzy to hire from the best schools has extended to its sales andVisit the Vault Finance Career Channel at http://finance.vault.com — withinsider firm profiles, message boards, the Vault Finance Job Board and more.
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trading desks, and new analyst and associate classes are filled with recruitsfrom Ivy League schools. Educational pedigree, even though it may havelittle bearing on whether or not the candidate will ultimately becomesuccessful, is becoming more important as a first screen into the business.Consequently, it’s becoming increasingly common for desks to recruitdirectly from the best Ivy League schools and a few other top schools. Thisis great news if you’re at one of these schools, but otherwise it is not such agood thing. Each firm’s commitment to hiring from this core group ofschools is significant, but there are always ways around the system. Tryingto develop contacts through your school’s alumni network is probably themost effective way of landing a job on a desk if your’re not at a targetedschool.But educational background doesn’t just matter for getting a position – it alsois important for ensuring a good “fit” in your position. For example, if you’rethe only MBA on the desk, you may end up getting a not-so-attractivenickname. If you have an MBA or an advanced degree, it may be easier foryou to fit in by finding a department that has a number of advanced degreeholders. Typically, since MBAs are always attracted to the latest and greatestin the industry, you’ll find more MBAs populating sales and trading desks inhot product areas. You’re more likely to find MBAs trading mortgagesecurities or fixed income derivatives rather than equities. Although it’scertainly not a hard and fast rule, you’re more likely to find an MBA-friendlywork environment where there have been several MBAs that have paved theway ahead of you. If these former MBAs also happen to be alums from yourschool, then even better.
A Note on Course SelectionIf you’re an MBA student, the electives you take can go a long way tohelping you prepare for a career in sales and trading. The mostimportant subject is economics. Macroeconomics gives you a broadexposure to the overall economy, and being familiar with what drivesGDP and the trade deficit is very important, especially if you’reconsidering a career in fixed income securities. Microeconomics istypically a prerequisite for MBA programs, and although it’s interestingto learn, it’s somewhat less useful than macroeconomics. Monetaryeconomics is also extremely useful in helping to understand what leversthe Federal Reserve has to stimulate or moderate economic growth.
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Within the finance major, classes that teach you how to value financialinstruments are highly recommended, especially if you’re considering acareer in options, derivatives and fixed income securities. Corporatefinance gives you the basics of how to value a stock according to itsfree cash flows, but the reality is that equity salespeople and tradersdon’t use discounted cash flows to value a prospective trade. On theother hand, options, derivatives and fixed income traders rely on theirmodels to price securities – it is a more quantitatively challenging task,and taking classes like speculative markets and fixed income securitieswill definitely give you an advantage out of the gate. If your schooloffers a trading seminar, then definitely do everything you can to takethe class. While not perfectly accurate, it gives you an opportunity tomatch wits with your classmates, and to make trading decisions in afast-paced simulation exercise.For undergrads, these higher-level finance courses are generally notavailable, but you can do your best to prepare by taking as manyeconomics electives as possible. Engineering programs often havemodeling courses that, while not directly applicable to finance, do teacha rigorous analytical framework which can be applied to the pricing offinancial securities.
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SALESTRADICAREON THE JOBChapter 7: Career Paths and Employers
Chapter 8: Lifestyle and Workplace Diversity
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Career Paths andEmployersCHAPTER 7
Undergraduate Career PathWall Street recruits aggressively at the undergraduate level. Typically, mostbulge bracket investment firms hire a significant portion of their summerinterns for their full-time programs. The summer internship is typically acoveted position, but in reality there’s not much a summer intern can dowithout being licensed (we’ll discuss the Series 7 and 63 licensing exams indetail in the “Getting Hired” section). The glossy recruiting materials willtout a rotation through various product areas, classroom training andnumerous social and professional schmoozing events. While theseundoubtedly occur, the most significant tasks of the summer intern willinclude fetching coffee and ordering lunch. To the extent that trading can belearned by osmosis, the lucky intern has ample opportunity to monitor thestock market, watch the traders and maybe even listen in on sales calls toclients. All the phones on a trading desk have mute buttons, so interns andtrainees can listen in on conversations with clients without being noticed.This last part is perhaps the most valuable aspect of the summer internship.In the end, however, the most important part of being a summer intern ininstitutional sales and trading is to be well liked, or at least not piss anyoneoff. It’s very easy to make a bad first impression, and the trading desk canquickly become an extremely inhospitable environment for interns that don’tfit in.Full-time undergraduates are recruited into Wall Street analyst two-yearprograms. These programs are fairly standardized across the street. Mostfirms have a start date towards the end of July or early August. The entireclass of S&T analysts first spends two to three months in New York City in atraining program that serves as an introduction to the firm. Various managingdirectors and other officials within the firm will talk about their specificproduct areas (credit derivatives, corporate bonds, listed stocks, and so on).The training program will also include bond math and basic accounting –remedial for anyone that has a business background, but critically importantfor liberal arts and science majors for understanding the basics of thebusiness.Visit the Vault Finance Career Channel at http://finance.vault.com — withinsider firm profiles, message boards, the Vault Finance Job Board and more.
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At the end of the training program, the newly minted analyst will have tocomplete the Series 7 and Series 63 examinations with the NASD.Candidates interested in trading NASDAQ stocks will also have to completethe Series 55 examination. Typically, these exams are not very difficult topass, but one should still take care not to fail the exam. Although not quiteas embarrassing as failing the bar exam, new analysts should be wary ofdistinguishing themselves through failure. Concurrently or shortly afterpassing the industry licensing examinations, analysts will be placed into thevarious departments of the firm. The placement procedure varies by firm.Some firms hire directly for specific programs, and analysts know from thestart which trading desk they will call home. Most firms, however, have acompetitive placement process once analysts have been hired. Analysts willcompete with other analysts for coveted positions on the desks with the mostaction. Whatever product area is hot is typically where most analysts andassociates will want to be placed. This elaborate mating ritual is somewhatmore forgiving than interviews, since in theory the analyst is supposed to rankhis or her top three choices, and these choices are supposed to be consideredwhen placement decisions are made. Miraculously, at the end of the day,most analysts are able to say that they ended up working for one of their toptwo choices.
Analyst payAs an analyst at a bulge bracket firm, you can expect starting salary between$45,000 and $55,000 and a year-end bonus of $20,000 to $30,000. Althoughthis sounds like a lot of cash, remember that most sales and tradingopportunities are in New York City, where $45,000 doesn’t always get youvery far.On the plus side, you’ll be making more than most of your classmates.Compared to your college roommate who’s now an investment bankinganalyst, your per-hour compensation will work out to be substantially higher,although you’re getting paid roughly the same dollar amount. In addition,there’s a much better chance that an outstanding S&T analyst will receive anoffer for continued employment at the firm at the end of the program.Investment banking analyst programs, by contrast, may offer the superstaranalyst a third year, but after that, the analyst usually has to go to businessschool in order to move up.
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Lastly, as an analyst, you won’t see much variability in your bonus, especiallyif you’re working in a large shop that has an entire analyst class. This can bea good thing if you’re minimally incompetent, but not a very good thing ifyou’re the next George Soros.
The MBA in S&TDo I need an MBA to be promoted on a sales and trading desk?Generally, sales and trading is a much less hierarchical workenvironment than investment banking. For this reason, it is widelybelieved that you don’t need an MBA to get promoted on sales andtrading desks. This view is often perpetuated be people who work ontrading desks, but just because you hear this once or twice, don’taccept it as truth. Whether you need an MBA or not is really a functionof the firm you work for and the desk you’re on. If the firm you’reconsidering hires both associates and analysts, but you notice thatassociates are offered twice as much pay as analysts, then this iscertainly an indication that MBAs are more highly valued. This doesn’tmean that you can’t be promoted without an MBA; you’ll just have towork much harder to get recognized. When it’s time for a promotion,you may also be somewhat behind in the pecking order. Some firms,on the other hand, don’t want MBAs. This may be because they don’twant to pay more for employees with business degrees, or because theyhave an implicit firm policy regarding MBA – some firms hold the viewthat it’s hard to teach an old dog new tricks, so they will hire exclusivelyout of undergraduate programs.Not only is the MBA valued differently from firm to firm, but it is alsovalued differently from desk to desk. A lot about being on a tradingdesk is about fitting in, and if everyone else, including the boss, doesn’thave an MBA, then chances are that having an MBA won’t add toomuch value in this environment. In fact, an MBA degree may even hurtyour career prospects if there’s a downright disdain for MBA types.Alternatively, if the desk you’re on is populated with MBAs, then nothaving an MBA will probably limit your career advancement.Alternatively, you can be in a situation where you’re the only MBA andeveryone thinks that you’re the brain, which can work to youradvantage even if the boss has no personal biases about the value ofthe degree.
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The bottom line is that there are no hard and fast rules. Depending onthe particular firm and desk, an MBA may not advance your career. Beaware of the aforementioned issues, and ask some good questions toget a better feel for whether an extra degree is a benefit.What are some of the tangible benefits of an MBA?The pay is better and you will generally have a faster track for promotionto salesperson or trader. The MBA associate will typically have to dothe same demeaning things that an undergraduate analyst does, butmercifully for a shorter period of time. In some cases, MBAs are alsomore likely to be assigned the desk that they’d like to work for.Undergraduate sales and trading recruiting programs, on the other hand,may hire you as part of a generalist pool and place you on a desk thatisn’t your top choice. Another benefit for the MBA candidate is theavailability of more exit options out of sales and trading.
MBA Career PathFirst-year MBA students and recent MBA graduates are eligible for summerassociate and full-time associate positions respectively. Associates start withsimilar responsibilities as analysts, but add more responsibility quickly andare typically on a faster track for promotion.MBAs are also more likely than analysts to have the opportunity to get staffedabroad. For example, Goldman Sachs, Morgan Stanley and Lehman Brothershave recently hired MBAs from American business schools directly into theirEuropean trading desks. MBAs interested in pursuing sales and tradingopportunities abroad must be able to demonstrate local language proficiency,and a strong desire to make a long-term commitment to the region. Each ofthese firms has recently also offered summer internship opportunities, butthese programs are less established than the New York-based opportunities,and therefore shouldn’t be counted on as a stable source of MBA hiringdemand.
Associate pay: To infinity and beyondSales and trading associates will start at about the same base pay as theirinvestment banking counterparts. As of 2004, the going rate at bulge bracketfirms has held up around $80,000 to $85,000 per year plus a year-end bonusof $20,000 to $30,000. While signing bonuses were the norm during the bull92
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market of the late 1990s, they are now rare. Salaries increase primarilythrough performance bonuses, especially if you’ve become a position traderfor the firm. Bonuses are normally computed as a percentage of the tradingrevenues you generate (or commission dollars that you generate if you’re asalesperson), so depending on how cheap or generous your firm is, thisnumber can be normally expected to fluctuate between 0 percent and 10percent in any given year.If you make $10 million for the firm, however, don’t expect to receive a coolmillion for your efforts. Wall Street firms are highly conscious of expensecontrol, and the largest expense item is compensation. To keep compensationexpense at or below 50 percent of revenues, investment banks hand outcompensation packages that include among other things, cash, stock optionsand restricted stock (stock grants that vest over a period of several years).Generous stock option grants are a non-cash form of compensation thatdoesn’t hit the income statement, but aren’t quite as motivating as cash.Another game in the compensation is the granting of restricted stock. This isa major component of pay as you move up the ladder, and you can onlyconvert this compensation into cash according to a vesting schedule thatstretches out for years.Finally, keep in mind that investment banks operating across all markets andproducts sectors. Full-service investment banks operate both a bond desk andan equity desk. The bond traders make more money and the salespeople sellmore bonds when the economy is in recession. On the other hand, the stocktraders make more money and the sales-traders sell more stock when theeconomy is robust. What happens at the end of the year when thecompensation committee is determining how big the bond bonus pool and theequity bonus pool should be? Most firms tend to cross-subsidize the equitydesk with the bond desk’s revenues when the stock market falls on hard times,and to return the favor to the bond desk when the bond market falls on hardtimes. This makes sense at the corporate level (preventing mass defections,for example), but the immediate consequence to the stock trader whogenerated $10 million in revenues and is expecting a $1 million check is thathe’ll see a lot less than $1 million. The consolation to the expectant stocktrader is that when he makes substantially less than his budget, maybe thebond desk will stuff his stocking.
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The winding promotion road in S&TThe path to promotion on a sales and trading desk is less standard thanit is in investment banking. Investment banking analysts really don’thave much too look forward to except perhaps a third year beforeshuffling back to business school or some other career. By contrast,undergraduate analysts who have a demonstrated ability to add value toa trading desk have the potential to move up without an MBA.One common scenario is that after several years, the restlessundergraduate analyst decides to apply to business school and getsaccepted. If this analyst is a prized employee, then the boss might offerthe analyst a promotion to associate in order to keep the analyst on thedesk.Title promotions on trading desks are generally not much to celebrate,except that they generally lead to higher pay. Whereas investmentbanking associates promoted from analyst can look forward to movingout of the analyst bullpen and into a real office with a secretary, S&Tassociates settle for better accounts and more trading responsibility.The focus of promotions isn’t to achieve a particular title (vice president,director, managing director, etc.), but rather, to earn real sales andtrading responsibility. Of course if you do your job well, you’ll be dulycompensated and promoted, but after reaching a level of significantresponsibility, you shouldn’t be expecting to getting a title promotionevery couple of years.
Experienced CandidatesThere is no formal hiring process for experienced candidates. If you are inthe position of trying to switch firms, then you better find a good headhunter.You cannot credibly hope to enter into the analyst/associate training programssince you have too much experience and are too expensive. A goodheadhunter can put you in touch with opportunities commensurate with yourskill level and salary requirements.
Switching desksThe good news here is that if you’re a proven revenue generator and good atwhat you do, then chances are pretty good that you’ll be able to find a newhome somewhat more to your liking. Certain firms are more flexible than
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others – Goldman Sachs for example has a reputation for moving talentedemployees through different business units and divisions.One reason firms are able to do this is that essential sales and trading skillscan be applied to any product area. For example, an international equitiestrader going through a mid-life crisis might decide to try his hand at equityderivative sales. Alternatively, a government bond sales professional lookingfor a switch could consider any number of other fixed-income product areas,or maybe even equities. Within departments, it’s especially common toswitch sectors. For example, in the government bond market, you’ll see thatmost traders start out in the Treasury bill market, and over time, if successfuland willing, will move out on the maturity curve, eventually trading the longbond. Salespeople typically have pre-existing relationships with customers,but even while preserving these customer relationships, salespeople oftenwork with different traders in different market conditions, giving thesalesperson an opportunity to learn more about different market sectors.Sometimes salespeople who cover a particular package of accounts mightswitch over to a different product area entirely, while maintainingrelationships with a key group of accounts.
Becoming a managerOne of the ironies of Wall Street is that the best traders and salespeopleeventually are considered for managerial positions – but the skillset that isrequired of managers is very different from what made them successful asproducers. Still, the rationale of meritocracy dictates that successfulmanagers must also have been successful traders or salespeople.Managers are responsible for maintaining the profit and risk profile of theentire department. The best managers recognize their own strengths andweaknesses and trust their traders and salespeople to do what they do best.That said, the manager is almost always involved in large trade decisions.The manager must decide on the appropriate level of risk, the amount ofcapital commitment, and the value of the customer to the firm’s current andfuture business.
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Top 10 Sales and Trading Firms onWall StreetNot all trading desks are created equal. Firms have relative strengths andweaknesses, and what follows is a brief summary of the top 10 Wall Streetbroker-dealers and some of the traditional strengths that they are known for.This list is by no means comprehensive and should be considered only astarting point for investigation. Further information is available on the Vaultweb site and through each firm’s corporate web site.Because of the synergistic relationship between sales and trading (bettertraders induce more order flow and better salespeople generate more orders),each of the firms in the following staffs an A-list roster of traders as well assalespeople. When evaluating the best of the rest, the prospective job hunterneeds to carefully consider firms that present themselves as having a strongsales department but a less capable trading department, and vice versa. It israre for firms to come out and say that their sales department lacks certaincapabilities, but a good tip-off is if a firm says it is “building up” its sales ortrading capabilities. You should ask follow-up questions when a firmmentions this. Why is the sales or trading department less developed? Wasthere a recent mass-departure of salespeople or traders? If so, why did theyleave? Does their departure impact the attractiveness of the opportunitypresented?Here’s a look at the top sales and trading firms on Wall Street:
Bear StearnsBear Stearns has traditionally been a bond powerhouse, especially in fixedincome spread products. The firm has one of the most seasoned corporatebond desks, and regularly transacts over $500 million of bonds per day. BearStearns’ fixed income expertise also includes mortgage-backed and assetbacked securities. Within equities, Bear Stearns is an active trader of OTCequities and has a top three market share ranking in more than half of thesecurities it trades. It also has a leading market share of secondary trading ofstructured convertible securities.
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Citigroup’s Global Corporate and InvestmentBank (formerly Salomon Smith Barney)Citigroup has positioned itself as the “one-stop shop” leveraging research andunderwriting capabilities to provide secondary market liquidity for itsinstitutional investor. Its equity division employs over 900 professionalsthroughout cash trading, convertibles, program trading, equity derivativesand floor brokerage operations. Citigroup’s acquisition of Salomon Brothersgreatly enhanced Salomon Smith Barney’s fixed income capabilities.Although Sandy Weil shut down the fabled Salomon Brothers bond arbitragegroup, Citigroup is one of the world’s leading market-makers of fixed incomesecurities which include bonds, loans and derivatives.
Credit Suisse First BostonLike its competitors, CSFB maintains a broad range of activities in equities,fixed income and derivative products. CSFB maintains a top three marketshare position in U.S. and European equity trading. CSFB’s fixed incomefranchise is organized by product and regional teams. Notable productgroups within fixed income include corporate and credit products, andinterest rate products.
Deutsche BankDeutsche Bank has a strong franchise in Europe and has been expanding itsU.S. operations even as other European competitors have abandoned theirU.S. growth aspirations. Deutsche Bank has supported its expansion throughacquisition by acquiring BT Alex Brown (Deutsche Bank’s OTC equitytrading desk is located in Maryland where Alex Brown was headuartered).Deutsche Bank offers a full range of equity, fixed income and derivativecapabilities, but generally is only recognized for excellence in German andEuropean industry award categories.
Goldman SachsThe Goldman Sachs equities division is ubiquitous throughout global equitymarkets. It has access to the top issuers and institutional clients, and thistranslates into a very profitable equity business in equity market making andblock trading. Not to be outdone, Goldman’s fixed income, currency andcommodities division (FICC) is at the forefront of worldwide markets inVisit the Vault Finance Career Channel at http://finance.vault.com — withinsider firm profiles, message boards, the Vault Finance Job Board and more.
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interest rate securities, foreign exchange, commodities and the evolvingcredit businesses.
J.P. Morgan ChaseJ.P. Morgan has a prestigious name brand that’s recognized throughout theworld, but J.P. Morgan’s strength in sales and trading has traditionally beenlimited to products that are capital intensive. While J.P. Morgan maintainsglobal equity, fixed income and derivative capabilities, its franchise isstrongest in structured finance obligations, interest and credit derivatives,senior debt and loan trading.
Lehman BrothersLehman Brothers is one of the world’s top bond-trading firms and is a leadingglobal market maker in U.S., European and Asian government bonds, moneymarket securities, corporate bonds, mortgage and asset-backed securities,preferred stock, municipal bonds,