you’ll do the same on the desk – you’re deemed to be anundesirable candidate.Students attending non-targeted schools should forward resumes directly tothe human resources departments of banks. Know that to be considered withthe associate/analyst candidate pool, you may have to be willing to wait untilthe next incoming analyst class is fully assembled unless you start extremelyearly in the school year. It is very rare that banks will hire you even inDecember for the class whose training program begins in July.The back door into the business is through connections. Some firms, notablyBear Stearns, have a very strict “no nepotism” policy, but this shouldn’tdiscourage you from picking up the phone and calling a friend or friend of afriend on a desk. You may be able to meet someone and get an interview.Generally, though, this avenue only works for lateral hires moving fromanother firm, not entry-level hires graduating from school. Whether you’rean entry-level or lateral candidate, if you’re networking for a sales and tradingjob, be mindful of the fact that you are asking for a favor. For example, don’tcall your contact at 9:29 a.m. or 3:45 p.m. if you’re thinking of an equityposition – calling when the market is opening or closing is sure to create anextremely poor first impression. E-mail is a better, less-intrusive way of
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getting someone’s attention – if the contact is interested in having aconversation, an appointment can be set up in over e-mail.
Resumes and cover lettersCover letters and resumes should be sent directly to the sales and tradingrecruiter of the bank. Resumes should be limited to one page, and coverletters should also be brief. The standard advice for resumes applies: addressthe letter to a specific person rather than the “Human Resources Department.”For candidates with no prior industry experience, highlight any stock marketexperience that you have had. If you’ve managed a personal portfolio, besure to mention this on your resume. In your prior work experience, be sureto highlight significant team responsibilities that you have had.
InternshipsAs with any industry, an internship is the best way to determine whether ornot this profession best matches your skills, abilities and interests. It alsogives employers a relatively low-cost way to try potential employees out,after which they can hire interns they feel will fit well in their organizations.The best place to start an internship search is your school’s career placementoffice. Every school does it a little differently, but usually, there is a treasuretrove of information available at the office. You can use this information tosupplement information that you can get from your target firms corporateweb sites. Be sure to seek out other students who have worked at your targetfirm to get their perspective on the firm’s culture and what type of summer orfull-time experience they had.On-campus first-round interviews for internships are generally held inJanuary and February. The hiring process for summer internships is the sameas that for full-time analyst/associate positions (one round on-campus thananother at the firm’s office).Generally speaking, the pay you can expect for the summer will be the typicalanalyst or associate salary prorated over the 10-week summer period. Do notexpect any performance bonus or sign-on bonus as part of your summercompensation package.
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Should I cold call the desk to get a job?Breaking into the institutional sales and trading industry is very difficult.Cold-calling, generally, is difficult, and while you certainly can get a jobthis way, be prepared for rejection. The industry has built up substantialhuman resource infrastructures that are tremendously valuable in theformalized job search either out of undergraduate or graduate school.It’s a lot more difficult to be moving into the industry if you’re notcurrently in it.Once you’re in the industry, however, you’ll notice that sales andtrading professionals often depart one firm only to immediately set upshop at another firm. This traveling act, so to speak, is very commonon the street.It’s amazing how many times even a mediocresalesperson can switch firms in a five-year period. Often, thesemovements are orchestrated by headhunters who get the first threenumbers of a firm’s telephone number and make random calls to see ifthere’s anyone on the other side of the phone that’s willing to make amove. These moves ultimately are determined by the individual, but areseriously influenced by market conditions.
Licenses and TrainingBefore you can even talk to a customer or trade a single share of stock, youneed to pass the NASD Series 7 and 63 examinations. The Series 7 is thegeneral securities license that every aspiring Wall Streeter needs to havebefore getting started. It is not an easy exam, so don’t blow it off. Failing isembarrassing and a solid study schedule will ensure that you’re spared thescorn of your entering class, and more importantly, the disapproval of yourpotential hiring department.The Series 63 exam, by comparison is a lot easier. It’s basically the exam thatevery registered representative needs to pass in order to sell securities in otherstates. Typically, people refer to passing the Series 63 as being “Blue Skied.”This means that you can sell securities in any state under the big blue sky.Recently, the NASDAQ changed its regulations to require that professionalswho work on its exchange take the Series 55 exam. This was a result of the$1 billion odd-eighths settlement case in the mid-1990s. It’s really a sort ofcontinuing education requirement to make sure the NASDAQ professionals
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know their execution responsibilities under a constantly changing technologyplatform. It also tests ethics and professional conduct.Because you’re basically a cost center for your firm until you pass this exam,everything you do for the first few months in an analyst/associate trainingprogram is geared towards passing this exam. You will typically come towork, sit in a big classroom with other members of your class and havepeople talk to you about accounting and bond math. There may even beexams. In between these classroom sessions, you can expect to hearpresentations from just about every single major sales and trading departmentat the firm. This is probably the only time you’ll ever get to have such a broadexposure to so many different departments and managing directors, so if youdon’t pay attention for the bond math or accounting, at least take note of thenames of the MDs, VPs and associates who are making the presentations. Ifyou were hired into a generalist pool, the same hustle that got you in the dooris going to be absolutely essential for you to get placed in the department thatyou desire.Once you’ve gone through the departmental presentations and the basic bondmath and accounting boot camp, you can expect to be placed in a Series 7training session. The best way to think of this is to think back on yourexperience taking the Kaplan or Princeton Review classes for theSAT/GMAT. These classes are taught by Series 7 ringers, and they tend tospend a proportional part of their time covering proportionately importantparts of the examination. Some of the material on the exam you can actuallyreason through without memorizing information (e.g., option payoffdiagrams), but unfortunately most of it is very fact- and regulation-oriented.Knowing the implications of the Securities Act of 1933 and the SecuritiesExchange Act of 1934 are more important for the Series 7 than figuringpayoff diagrams for various options strategies. And unfortunately, it’s notenough just to know that the 1933 Exchange Act deals with offering reportingrequirements whereas the 1934 Securities Exchange Act addresses thecontinuous reporting requirements of corporate issuers. You need to knowthe differences between Rule 503 and Rule 504 small offering exemptions.You need to know what Regulation A and Regulation D are, and so on, andso on. In short, pay attention in this class and do the assigned readings beforeyour exam.The Series 7 is a very long exam. It consists of 250 questions and you needto get 70 percent of the questions correct. While it may be your goal is to118
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learn everything inside out to become a knowledgeable securities industryprofessionally there is no difference between getting a 99 percent and gettinga 71 percent on the exam. There is no ranking of analysts/associates based onhigh grade achievements on an industry exam. After having attended theclasses and reviewed the material, it’s important to go through the practiceexams. The priorities of the NASD are constantly changing, so if you’re 24hours before the exam and have a limited amount of time to study, start withthe most current exams, and work backwards if you have time.The exam is a computer-based exam and is administered by Sylvan LearningCenters, the same friendly folks that you’ve seen at your otherlicensing/scholastic standardized tests.
The Back Office: Backdoor to the FrontOfficeThe Secret of My Success chronicles Michael J. Fox’s ascent from mailclerk to top corporate gun. A similar story goes on every day on WallStreet’s trading desks. The back office is staffed with an army ofemployees who are responsible for clearing the mountain of tradesgenerated by the front office. The front office speaks with customersto execute trades and revenues. The back office doesn’t generaterevenues, but its role is vital. If trades are not picked up (DK’ed) or iftrade details are different from what the customer knows, this can costthe firm millions of dollars, so it’s important to have a back office tokeep the business running smoothly. By the very nature of their work(interacting with salespeople and traders on a daily basis to solveproblems before they become errors), back office employees have anopportunity to showcase their abilities to the boss. When there’s asales or trading assistant opening in the front office, it often makessense to fill this position from the back office, since this person isfamiliar with the trading system, the people and the customers. If youcan’t immediately get a job in the front office and are desperate to getinto trading, consider putting in your dues in the back office for a shotat that dream job. If you do go this route, make sure you have someevidence that the desk you’re interested in has a history of hiring fromthe back office. It’s not enough to know that a particular firm may ormay not hire from the back office – you need to make inquiries into thespecific desk that you’re interested in.
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Interview QuestionsCHAPTER 11The key to nailing your interviews is preparation – and beginning yourpreparation as son as possible It’s a lot easier to begin learning financeconcepts early and gradually than it is to become a fixed income derivativesexpert in two weeks. We strongly suggest that you begin reading The WallStreet Journal and business periodicals such as the Economist orBusinessWeek. Sales and trading interviewers, while not overly technical,tend to want to talk about the stock market. A typical question that you maybe asked is, “What do you think about the stock market.” This is a very openended question, but the more you are able to tie your market view withcurrent events, the better.Beyond the news, it’s also helpful to try and keep up with the latest marketbuzz. You can visit Morgan Stanley’s web site to hear the latest from thefirm’s internal dueling investment strategists, Barton Biggs and Byron Wien.Another great resource is Bill Gross’s market commentary, which is availableon PIMCO’s web site and is particularly useful for those interested inapplying for fixed income positions. Finally, regardless of the product areayou are targeting, it’s very useful to know how the economy will impact themarkets. For this, we recommend Professor Jeremy Siegel of the WhartonSchool. His class is perennially over-subscribed, and his market commentaryis available for free on his web site, JeremySiegel.com.
Fit QuestionsFit questions are normally the first screen to moving on to the next round ofinterviews. These questions are pretty typical investment banking fare, butyou should be prepared to talk about why you want to trade or sell. Makeyour answer as concrete as possible by offering examples in your past thatcause you to believe that you will make a great trader or salesperson.1) Why do you want to become a trader/salesperson?This question is not so relevant for someone with industry experience, butespecially important for career switchers. Consultants that go back to schoolto get an MBA to become traders need to have a reason for the career switch.This story should involve personal reflection and things that you’ve done inthe past that suggest that you might be good at trading in the future. MaybeVisit 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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you’ve traded a personal account and not lost everything. Maybe you’requick with the numbers. For salespeople, the important thing is that you loveto sell. If you have a story of a time when you sold ice to Eskimos, by allmeans, tell it.2) What are your greatest strengths?Here you want to talk about how you’re really quick with numbers, you’reanalytical, you’re motivated and driven and greedy. These strengths need tosomehow be related to the job, and if you have personal anecdotes to bolsteryour claim that you will be God’s gift to the currency trading pit, be sure torelay these experiences during your interview.3) What are your greatest weaknesses?As with any type of interview, you want to make sure that you’re not givingaway your candidacy by listing serious weaknesses. For example, if yourweakness list starts looking like “I’m a poor decision maker under stressfulconditions,” “I’m not so quick with the numbers” or “I prefer a quiet workenvironment,” perhaps you should consider an alternative to sales andtrading.4) What motivates you?Be sure to mention that in your mind, greed is good (said in a more delicateway of course). Some people talk about wanting to learn from the experience– they are not surprisingly not invited for second-round interviews. Learningis great, but you’re paid to earn money. Traders want people that can makemoney.If you’re a business school student, it may be assumed that you’re already toosmart for a trading desk, so beware of making yourself look too much like anacademic. An acceptable compromise is that you look forward to the steeplearning curve (this implies that you’ll learn fast) and the opportunity to excelin a true meritocracy. It is debatable whether S&T is actually a truemeritocracy, but everyone within the industry tends to view the profession assuch.5) How smart are you?Tricky question. You want to balance off being smart with being someonethat people will want to work with. If you end up coming across as a brainattached to a body, then chances are good that you’re not going to get acallback. Being smart is a good thing. Being too smart is not.
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6) What skills have you acquired that will make you appropriate for thejob?This is a really important question for career switchers. A lot of consultantsenjoy using a functional resume (a resume organized around skills rather thanwork history). If you are one of these consultants, then pick the achievementsthat you feel are most relevant to sales and trading. If you haven’t givenmuch thought to this question, think about situations where you have beencalled on to make decisions under uncertainty, situations that have required alot of teamwork or a decision that you made that had a material impact on thebottom line.7) How important is money to you?Remember: greed is good.8) Tell me a good joke.This is an elaboration on the airport test, which is basically a personality testthat asks the interviewer to imagine being stuck at an airport for six hoursnext to the candidate and to assess whether he or she would be able to toleratethe layover. Make sure you have some jokes handy for your interviews, andwith this question, you need to do your best to tailor the joke to youraudience.9) Why are you interested in sales and trading rather than investmentbanking?This question deserves some thought. You can’t really say customer focus,since investment banking and trading are both highly customer-drivenactivities. You need to think carefully about what in your personality and pastwork experience makes you more suited to sales and trading versusinvestment banking. There is some disdain among traders for investmentbankers and vice versa, although you’ll never get either to admit it. You couldpotentially use this information to your advantage during the interview, but becareful, since there are always exceptions to the rule.10) How will you motivate yourself to make the calls you hate to makeevery day?No one likes making cold calls, but enthusiasm and drive are probably theway to go on this one.11) What is the greatest risk you have ever taken? How risky are you?There is a common misperception that traders enjoy taking wild amounts ofrisk. This is simply not true. Traders are paid to take appropriate risks. BeVisit 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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sure that your example demonstrates that you performed due diligence thatconvinced you that the risk was worth taking, regardless of the eventualoutcome.12) What would you add to our firm?Know the firm you’re interviewing with. Know the firm’s relative strengthsand weaknesses and how you can contribute to the firm’s sales and tradingcapabilities.13) What other firms are you interviewing with?This is a tough question. You need to consider how much information you’regiving out. For example, if you’re interviewing with a firm on the edge of thebulge bracket, do you really want to mention that you’re interviewing withseven other firms (and are therefore less likely to accept an offer with thefirm)? On the other hand, if you say that you’re not interviewing with anyoneexcept that firm, you run the risk of sounding desperate or undesirable. Youcertainly don’t want to lie on this one, but be sure to strike the right balancebetween being highly interested in the firm and being desperate.Certain firms like to be compared to each other and not to others. While it’scommon knowledge that Goldman Sachs and Morgan Stanley compete toeto-toe in just about every business, there are less apparent rivalries that youshould be trying to discern throughout the recruiting process. If you know theproduct area you’re interested in, the obvious place to start is the marketshare/league table. You generally want to make comparisons that theprofessionals that you’re going to be interviewed by are likely making on adaily basis. This is one of the points of differentiation between an unfocusedcandidate, and one that has done his homework and has sales and tradingtattooed all over.
Market QuestionsTraders and salespeople live and breathe the market. You’ve got to beenthusiastic about your work to be a fierce competitor on the job, andinterviewers will try and gauge how much you know about the market, not somuch for any particular insight that you may have, but as an indication ofyour interest for the market.
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1) Talk to me about the economy.This question can come in a variety of forms: “Where do you see the dollartrading and how will this impact the long term government bond market?” or“What is your outlook on inflation and do you think there is a risk ofdeflation?” or “Why is the Federal Reserve so concerned about inflation?” Ifyou are a paying subscriber to The Wall Street Journal and wake up to CNBCevery morning, you should have no problem with these questions.2) What would you do with $1 million?A more applied version of this general stock market question is, “Assuming Igave you $1 million to invest, how would you go about investing it?” Here,the obvious point is to talk about products that your interviewer cares about.Don’t recommend high yield bonds to an equity salesperson, and don’t tryand pitch a portfolio of foreign equities to a bond trader. A lot of times, yourmodel portfolio will apparently draw the derision of your interviewer. Thisis typically going to be a test of your nerves – don’t back down. Try to justifyyour initial portfolio recommendation succinctly and articulately. On theother hand, don’t be disagreeable – this is a guaranteed ticket to rejection.3) Tell me about a stock in your personal portfolio.Salespeople are looking for your ability to pitch the stock, so practice pitchinga few stocks in your portfolio. If you’re focused on trading, then focus moreon the profitability of your trade, and the factors that drive yourinvesting/trading decisions. If you don’t own stocks, then you should talkabout potential opportunities that exist in the current market environment.While traders are interested in hearing whether or not you are able to make asound investment decision, remember not to confuse trading with long-terminvesting – if you have an example where you were speculating based on ashort-term market condition, this might be more appropriate than a buy-andhold investment that you once made.4) Pitch me a stock that you would buy or sell now.Whatever you do, keep your answer brief. Salespeople and traders have verylimited attention spans, so if you find yourself describing what the companydoes for more than one minute, you’re probably not going to sound veryconvincing. You need to show that you can take the best parts of a stock storyand articulate a convincing case quickly. This is what salespeople do everymorning, and if you can’t do it in in a room with a friendly interviewer, whatmakes you think you can do it with customers who get calls from 20salepeople every morning? The ideal scenario here is that you give yourVisit 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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pitch, the interviewer asks a few follow-up questions which you are able todiscuss intelligently because you are very familiar with the story.5) Tell me about three stocks you would buy.This question tests your depth of knowledge about the stock market.
Product QuestionsIf you say that you love the bond market, then be prepared to answer bondquestions. While this is particularly true in fixed income, the same goes forany other product area.1) What particular product are you interested in?Obviously talk about the bond market if you’re going for fixed income. Themore successful candidate has done his homework and researched the firm’srelative strengths and weaknesses. Generally if you’re applying for bondsand find yourself at Lehman or Bear Stearns, this is a pretty easy sell – you’dsay that they are the best fixed income franchises on the Street and you’vealways seen yourself with the best. It’s a little more difficult to answer thisquestion if you end up interviewing for a firm that has not yet broken into thetop tier of a particular product area. European banks, for example, seem tobe perpetually building out their capabilities. However, do not fear – don’tbe bashful about using the “I’d love to get in on the ground floor and what agreat opportunity this is to be selling credit default swaps to the Europeanclient base of [name your European bank].”2) Why are credit default swaps so popular?This type of question can come in a variety of different flavors, but it’s asimple screen for how much you care about the business, and how closely youfollow the market. If you claim to be a credit default swap enthusiast andcan’t even explain what they are, Houston, you have a problem. Know theproduct, know the reasons with the product area is growing and definitelyknow how the firm you’re interviewing fits into the whole picture.
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Valuation and Technical QuestionsA further elaboration of the product question is the technical question. Ifyou’re a candidate that is targeting a specific product area, then you willlikely be asked basic valuation questions. The following questions arecommon to stocks, bonds and options, but there are a multitude of productareas. Be familiar with how to value the particular product you’re interestedin.1) What are the key points of difference and similarity between a stockand a bond?A bond has a fixed maturity and normally pays a specified rate of interest. Astock, on the other hand, represents an ownership share in the firm’s assetsand profits after senior claimholders (i.e., the bond holders and preferredstock holders) have been satisfied. If there is a dividend, this dividend isvariable. Most stocks have voting rights, whereas bond holders typically donot have the right to vote. Both bonds and stocks are negotiable securities.2) What’s the difference between a primary market and a secondarymarket?The primary market refers to the issuance of new securities. Subsequent tothis initial offering, stocks and bonds trade in the secondary market.3) What’s the difference between a repo and a reverse repo transaction?A repo (repurchase agreement) is an agreement for the sale of a security withthe simultaneous agreement by the seller to repurchase the security at anagreed upon future date and agreed price. A reverse repo (reverse repurchaseagreement) is an agreement for the purchase of a security with thesimultaneous agreement by the seller to resell the security at an agreed futuredate and agreed price. If this sounds like securities lending, that’s because itis. Another name for the repo market is the “securities lending market.”4) The Japanese company NCR issues bonds denominated in Britishpounds which can only trade in the United Kingdom. What kind of abond issue is this?A foreign bond issue.5) What happens to bond prices when yields increase?Remember that there is an inverse relationship between bond prices and bondyields. If the yield decreases, then prices increase, and if prices increase then
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yields decrease. A more confusing version of this question is, “What happensto yields when the price of bonds rallies?” The answer is exactly the same,but it’s somewhat tempting to say that yields increase because prices arerallying. Don’t fall for this trick.6) Why might two bonds issued by the same issuer with the same couponand the same maturity be trading at a different price?A great answer here is to talk about embedded options. You might notice thatone bond has an embedded call option, while the other bond does not. Ofcourse, since you the investor are giving up potential upside in the callablebond if interest rates plummet, you’re less willing to pay up for the callablebond. Alternatively, you might be willing to pay more for a putable bond,since the issuer has sold you a bond and has thrown in an option that you canuse to return the bonds to the issuer if interest rates soar.7) I have two bullet bonds of similar maturity and coupon. One tradesabove the yield curve, the other trades under the yield curve. Which oneis the better buy?This question tests your knowledge of the inverse price/yield relationship.Remember that a high yield means a cheap dollar price and a low yield meansa high dollar price. This means that the better buy is the bond trading overthe yield curve.8) Is there an exchange of principal in a foreign currency swap?You might be tempted to say no, since interest rate swaps do not exchange thenotional amounts. However, because a foreign currency swap involves twodifferent currencies, an exchange of principal at the outset and maturity of theswap is necessitated. Also, since there is no common currency upon whichinterest payments can be netted against, interest payments are paid in full inthe two currencies involved in the swap.9) Ignoring credit risk, what causes swap spreads to narrow or widen?The answer is interest rate expectations. When interest rates are expected torise, more borrowers want to swap into fixed and receive floating, so swapspreads widen. When interest rates are expected to decline, more borrowerswant to swap into floating and receive fixed, causing swap spreads to narrow.10) What is put-call parity?Put-call parity relates the price of European puts and calls. The put-call parityrelationship is expressed by the formula:
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P = C – S + PV(K)Where:C is the price of the call with the strike price K,S is the price of the underlying securityP is the price of the put with strike price K.11) What are the limits of duration?Duration is a useful tool for measuring price volatility, but there are severallimitations to its use which are definitely worth knowing.• Estimates are only valid for small changes in yield. The bigger theassumed change in yield, the more the price/yield convex curvature occursand the less accurate the estimate.• Duration assumes a parallel yield-curve shift, even though yield curvesvery rarely shift in a uniform fashion.• Duration does not account for yield volatility.• Duration cannot value bonds with embedded options. Duration implicitlyassumes that cash flows are completely known and unchangeable. In thereal world, bonds are callable and putable.12) Assume a Treasury bond and a junk bond are issued at the same timeand with the same maturity. Which bond has a greater duration?The answer is the Treasury bond. If you went for the junk bond answer, thenyou have an incomplete understanding of duration which needs to beremedied. Duration is higher because the Treasury bond carries a lowercoupon rate, which raises duration relative to the higher coupon junk bond.Does this mean that the Treasury bond has greater price volatility? To answerthis question, you need to consider yield volatility. The price volatility of thebond is a combination of duration and yield volatility.13) Why do yield curves invert?Typically the cost of borrowing increases as maturity increases. An invertedyield curve is an uncommon situation in which long-term interest rates arelower than short-term interest rates. Yield curves tend to invert followingperiods of tight money and tight credit, and when the curve inverts, themarket is expecting that short-term interest rates will decline.
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14) Assume an inverted yield curve. How do I make money in bonds if Iexpect the yield curve to revert?If the yield curve reverts to its normal shape (upward sloping), then shortterm rates must rise more than long-term rates. This means that you want toput on a curve-steepening trade where you are buy long-term maturities andare short short-term maturities. This is a generic trade in the governmentbond market, and the spreads between two years and 30 years, two years and10 years, two years and five years, and so on, are constantly quoted,especially ahead of Fed action and the release of widely anticipated economicstatistics.Be sure to know how to make money if the yield curve flattens.15) What’s the difference between a stock exchange and a futuresexchange?Remember that a share of stock represents a fractional ownership interest ina company, whereas a futures contract represents the obligation to accept ordeliver a quantity of a commodity on a pre-specified future date. Thedifference between these two exchanges is how a price