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SALESTRADCAREVAULT CAREERGUIDE TOSALES &TRADING
GABRIEL KIMAND THE STAFF OF VAULT
© 2004 Vault Inc.
Copyright © 2004 by Vault Inc. All rights reserved.All information in this book is subject to change without notice. Vault makes no claims as tothe accuracy and reliability of the information contained within and disclaims all warranties.No part of this book may be reproduced or transmitted in any form or by any means,electronic or mechanical, for any purpose, without the express written permission of Vault Inc.Vault, the Vault logo, and “the most trusted name in career informationTM” are trademarks ofVault Inc.For information about permission to reproduce selections from this book, contact Vault Inc.,150 West 22nd St, New York, New York 10011, (212) 366-4212.Library of Congress CIP Data is available.ISBN 1-58131-252-0Printed in the United States of America
ACKNOWLEDGEMENTSGabriel Kim’s acknowledgements:To Irene, my best friend and love for life.Special thanks also to our dear parents in Winnipeg and New York.Vault’s acknowledgements:Vault would like to acknowledge the assistance and support of MattDoull, Ahmad Al-Khaled, Lee Black, Eric Ober, Hollinger Ventures,Tekbanc, New York City Investment Fund, American Lawyer Media,Globix, Hoover’s, Glenn Fischer, Mark Fernandez, Ravi Mhatre, CarterWeiss, Ken Cron, Ed Somekh, Isidore Mayrock, Zahi Khouri, SanaSabbagh and other Vault investors. Many thanks to our loving familiesand friends.
Table of ContentsINTRODUCTION
1
THE SCOOP
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Chapter 1: Sales and Trading Basics
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What is Sales and Trading? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5S&T and Investment Banking . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7Sales and Trading Culture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9Chapter 2: The Traders
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Bid and Ask Prices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13Providing Liquidity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .22The Power of Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .32Chapter 3: The Salespeople
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Brokers No Longer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .37What Makes a Good Salesperson? . . . . . . . . . . . . . . . . . . . . . . . .39Chapter 4: Financial Markets and Economics
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Economic Statistics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .51The Fed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .53Which Indicator? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .54The Stock Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .57Chapter 5: Financial Products
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Equity and Equity-Related Products . . . . . . . . . . . . . . . . . . . . . . .61Fixed Income Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .64Convertible Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .73Derivatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .75Chapter 6: Trends in the Industry
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Technology Trends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .81Business Trends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .83Education Trends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .83Visit 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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Vault Guide to the Top 50 Banking EmployersTable of Contents
ON THE JOB
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Chapter 7: Career Paths and Employers
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Undergraduate Career Path . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .89MBA Career Path . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .92Experienced Candidates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .94Top 10 Sales and Trading Firms on Wall Street . . . . . . . . . . . . . .96Boutiques, Regional Firms, Foreign Firms and Specialists . . . . .99Chapter 8: Lifestyle and Workplace Diversity 105
Lifestyle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .105Desk or Floor? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .106Diversity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .108
GETTING HIREDChapter 9: The Hiring Process
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Hiring Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .115Internships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .116Licenses and Training . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .117Chapter 10: Interview Questions
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Fit Questions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .121Market Questions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .124Product Questions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .126Valuation and Technical Questions . . . . . . . . . . . . . . . . . . . . . . .127Brainteasers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .131Chapter 11: Exit Options
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Business School . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .133Debt or Equity Capital Markets . . . . . . . . . . . . . . . . . . . . . . . . .134The Buy-Side . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .134Hedge Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .135Day Trading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .137
APPENDIX
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© 2004 Vault Inc.
IntroductionIf you believe in the efficient markets hypothesis, then you should not beconsidering a career in sales and trading. An old joke about the hypothesisgoes something like this:A finance professor and a student are walking down a busy sidewalk.Along the way, the professor discusses the efficient marketshypothesis with his student, who is staring down in studious thought.The student catches a glimpse of a $20 bill on the sidewalk, and hestops to pick it up. After pocketing the bill, the student runs to catchup with the professor. The excited student asks the professor if he hadseen the bill. The professor, without skipping a beat, quips, “My dearstudent, have you not been listening to any part of the efficientmarkets that I’ve been talking about? Yes, I saw the $20, but I knewthat my eyes must have been deceiving me. Efficient markets theorydictates that it couldn’t possibly have been there, since someone elsewould have already picked it up.”If you’re considering a career in sales and trading, you probably don’t believein the efficient markets hypothesis, or at least don’t believe that markets areperfectly efficient – and are willing to wager your career on it.Wall Street is an exciting place to be, and sales and trading (the “sell-side” ofthe Street), is one of the most exciting areas. It’s an extremely competitivebusiness – at times it’s downright ruthless. If you’re a market junkie andbought your first stock when you were in third grade, then trading isdefinitely the place for you. If prior to considering a career change to S&T,you made a career selling ice to the Eskimos, then instiutional or privateclient sales on Wall Street might be the right place for you. And even if youwere a security guard or a consultant, or studied arts or sciences in school,sales and trading might still be for you.The pace of sales and trading is fast and furious in the heat of battle, butpassion and initiative can produce extraordinary results. Whether you’re justexploring sales and trading as a potential career option, or you’re someonewho’s wanted to trade stock since the third grade, this Vault guide can helpyou prepare for that job interview, nail it and hit the ground running when youstart. Good luck!
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SALESTRADICARETHE SCOOPChapter 1: Sales and Trading BasicsChapter 2: The Traders
Chapter 3: The Salespeople
Chapter 4: Financial Markets and EconomicsChapter 5: Financial Products
Chapter 6: Trends in the Industry
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Sales and Trading BasicsCHAPTER 1
What is Sales and Trading?If you’ve ever been to an investment banking trading floor, you’ve witnessedthe pandemonium. Before the market opens, the trading desk seems like areasonable place to work. Traders are monitoring flickering screens, andsalesmen are having seemingly pleasant telephone conversations. But oncethe market opens, there’s an eruption of activity – the salesmen and tradersare yelling, swearing and shouting at each other. The exchange floor is evenmore chaotic. Tempers are short, nerves are frayed, and there are bits ofconfetti flying around everywhere. If the market is tanking or diving, thesound and fury of trading activity rises palpably. What’s most impressiveabout all of this is that beneath this buzz of unruly activity on the desk or thefloor, traders are making prices, salesmen are shopping merchandise andmillions of shares of stock are being transacted every time someone says“done.”
I saw the movie “Wall Street.” Is sales andtrading like that?Wall Street is a movie worth watching because it gives you a very good ideaof what it takes to get in the door (unbridled ambition) and what it takes tostay there (the ability to generate profits). In some circles it’s consideredrequired viewing for any professional entering the business. In the movie,Bud Fox is a rookie broker who “bags the elephant” (lands a huge client),Gordon Gekko. Gordon Gekko decides to give Fox a chance, after he agreesto help Gekko trade on inside information and Fox starts to generate big timecommissions trading Gekko’s orders. This much of the story is plausible.Then, the movie takes a somewhat unrealistic turn as Fox’s charactertransforms from a broker into a nascent corporate takeover artist. Fox helpsGekko take over his father’s airline, Blue Star Airlines. In the process, Gekkostabs Bud in the back by trying to breakup the airline. The story iscompelling, but if you get a start in private client services like Fox (nobodyis called a broker anymore), don’t expect to be pitching mergers andacquisition deals to your clients. This is the responsibility of the firm’sinvestment bankers. On the other hand, Bud’s never-ending quest to “bag the
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elephant” is something you can expect to relate to if you get your start as asalesperson on Wall Street.
I saw the movie “Boiler Room.”trading like that?
Is sales and
Hopefully not. Boiler Room describes the exploits of a pump-and-dumpoperation. Pump-and-dump is the practice of buying low-priced shares ofusually illegitimate companies. Salespeople then go out and apply highpressure sales tactics to unload this worthless stock on retired folks in Floridaand farmers in Iowa. As the share price begins to rise, the unscrupulousbroker then dumps the shares that he bought at substantially lower prices onunsuspecting buyers. This activity is completly illegal, even for Ben Affleckand Vin Diesel. If you find yourself working in this type of environment, getout, unless you look good in stripes.There are several aspects of this movie worth noting, however. First, everyself-respecting salesperson and trader has the lines to Boiler Roommemorized. Second, the movie accurately portrays a pervasive culture ofgreed underlying this entire business. People join this business for no otherreason than money, so don’t expect to be able to tell your friends that you’reproviding an invaluable service to society by selling municipal bonds ortrading exotic options. Finally, as depicted in the movie, Wall Street tradingdesks remain a male-dominated macho work environment. We’ll explorediversity issues with respect to women in S&T later on this guide.
So what is sales and trading?At this point, we know that sales and trading isn’t exactly what we see on themovies. So what is sales and trading? Salespeople work with customers onwhat is called “the buy-side,” selling them large amounts of securities likestocks, bonds or currencies. The largest customers on the buy-side aretypically institutions (such as mutual funds or pension funds) that manageassets for others. Salespeople who sell to these institutions are identified bya variety of titles: institutional salesperson, sales-trader or researchsalesperson.Salespeople who sell to smaller institutions or wealthyindividuals are called private client services (PCS) professionals.Traders watch the market and trade orders for customers. The trader nevertalks directly to the customer; it’s the job of the salesperson (institutional or
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PCS) to act as intermediary. The trader uses an array of computer systems totrack the market and to execute orders.
What is the buy-side?The buy-side refers to the investment management firms, pension funds andtrusts that buy stocks, bonds and other securities from the “sell-side.”
What is the sell-side?The sell-side refers to Wall Street investment banks that sell stocks, bonds andother securities to the buy-side. The numerous sales and trading programsthat recruit on-campus are for the sell-side firms.
S&T and Investment BankingHow is sales and trading different frominvestment banking?There are several ways to compare and contrast the differences betweeninvestment banking and sales and trading. The first is the actual work thatthey do and the time in which this work is done. Investment bankersprimarily help to raise money for clients through stock or bond offerings oradvise clients on mergers or acquisitions. The endless flow of pitchbooks(PowerPoint presentations to clients), the detailed financial modeling andaround-the-clock client schmoozing are all focused on achieving one result: adeal that will generate substantial fee income for the investment bank. Thisfee is calculated as a percentage of the deal (for example, a percentage of themoney raised by an initial public offering). Investment bankers work formonths – even years – to generate one deal, schmoozing comany execs untilthe company is ready to raise money or acquire a company. But when thecompany is ready and hires the bank to ehlp them, the reward for the bank issubstantial.Salespeople and traders also work on deals – every trade is a deal – and alsoentertain clients. Compared to investment banking, however, it takes muchless time to consummate a transaction in S&T. Typical trades areconsummated in seconds or minutes, and the average fee per trade is
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measured in cents per share traded rather than as a percentage of the deal’sproceeds.Another big difference between S&T and I-banking is the lifestyle. Sales andtrading professionals are the first-in-and-first-out in the investment bank. Toget a jumpstart on the trading day, salespeople and traders normally take theearliest train into work. But they are the first ones out of the office, leavingshortly after the markets close. Salespeople and traders also never workweekends – trading desks are completely abandoned on the weekends. Incontrast, investment bankers are expected to be their desks during theweekdays and weekends, at all hours and throughout major holidays. If youever want to see a sad sight, go to one of the major investment banks onChristmas Day or Easter. Around lunch time, you’ll see investment bankinganalysts trickle down from their cramped bullpens to pick up their food ordersfrom the delivery guy. Sales and trading is a sprint; investment banking is anendless marathon that rarely ever stops for anything.
Why do investment banks have sales andtrading departments?The most important function of a sales and trading department at aninvestment bank is, of course, to make money. An investment bank collectssignificant fees every time its sales and trading professionals execute a dealfor clients. Traders and salespeople add incrementally to the bottom linethrough daily profit and loss and commissions, and raise the profile of thefirm in the marketplace.But there are ancillary benefits to having a strong S&T department.Investment banks provide capital raising and mergers and acquisitionadvisory services. Salespeople and traders are needed to create and maintainan active secondary market in these new issues. (Investments that are simplybought and held, such as life insurance, do not have secondary markets.Secondary markets exist to allow investors to buy and sell investments suchas stock even after an initial public offering.) Most large investment bankstarget their secondary market activities towards issues that will support theprimary market activities and capital raising efforts of the investment bank(for example, a client company’s IPO). Companies and other entities thatraise money by issuing stock or bonds are primarily concerned with howmuch money they can raise and at what price, but they’re also concerned withthe ability of the investment bank to properly distribute shares of the new8
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issue and the ability of the investment bank and its syndicate (otherinvestment banks partnering in the deal) to actively trade the new issue. Aninvestment bank’s market share of the daily trading volume in the issuer’sstock can often be a decisive factor in deciding which bank gets to bring thenew issue to market. Of course, to do this properly, traders will also tradestocks that are important in the context of the overall marketplace.
Sales and Trading CultureThe sales and trading team environmentSales and trading is a symbiotic relationship. Salespeople need traders andtraders need salespeople. Salespeople wouldn’t be able to provide liquidityto customers without traders, and traders would be twiddling their thumbs allday long without customer orders to trade. This simple reality is sometimeslost during the course of the trading day, when traders routinely rip intosalespeople, and salespeople shake their heads as they pick up the phone togive reports to their customers.Let’s take a closer look at why salespeople and traders often find themselvesat odds. Let’s say a trader just bought 500,000 shares of Precision OrthopedicSupplies (POS) from Fluke Investment Bank and makes a big spectacle aboutthe trade, yelling at a salesperson something like, “That’s not the right price,Dave, but you know that’s what Fluke always does. These guys are trying tosandbag me again.” Here, the trader is concerned that he has bought the stockat too high a price, albeit from an important customer. The salesperson mayshoot back something like, “Come on, you know Joe over at Fluke. You haddinner with him last week! Play nice… you know this order grows.” Here,the salesperson is telling the trader that doing the trade to keep therelationship with Fluke strong will pay off in the long run.The trader is basically trying to protect himself from the wrath of his boss inthe event that POS shares plummet immediately after he buys the shares fromFluke. The salesperson is trying to protect himself from the wrath of the bossby mentioning what a great account Fluke is and how important this accountis to the success of the desk. If only one side says something, and the shareprice of POS goes on to hit the fan, the boss will harass the other side for afull accounting of his reckless actions: “Capital doesn’t grow on trees. What
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kind of a stupid decision happened here?!” However, if both sides yell ateach other, then at least it becomes a little harder for the boss to blame either.More often than not, at the end of a profitable trading day, you’ll observe thesalesperson and the trader have a discreet conversation during which theybasically kiss and make up. The salesperson affirms the trader’s superiorprice-making ability, and the trader affirms the salesperson’s incredibly deepand invaluable customer relationships. It’s a lovefest as long as everyone’smaking money. The main point here is that a trading desk is a lot like a circus.Experienced salespeople and traders recognize that a lot of what goes on isfor show.At the core of why salespeople and traders routinely find themselves at oddsis that traders and salespeople have different measures of performance.Traders make money by buying low and selling high. For an investor in POS,this might mean buying at $20/share and six months later, selling at$26/share. For an institutional trader, whose time horizon is measured inseconds, this means buying at $20 and selling at $20.06/share. If the tradercan make 6 cents on every share traded on a million share trade, he’s making6 million pennies, or $60,000. In contrast, the salesperson is compensated bycommissions (called sales credits) on each transaction. Commissions aregenerated entirely through volume, so the typical salesperson values size ofcustomer trade, rather than profitability of customer trade.Of course, in the ideal situation, traders and salespeople work together totrade the maximum amount of volume for the most profit for the firm. But attimes, salespeople and traders are at odds – the vast majority of argumentsthat erupt throughout the trading day relate to whether you’re motivated byspread or by sales credits. If salespeople and traders are not working welltogether, suspicion and mistrust can poison the symbiotic relationshipbetween trader and salesperson. For example, a trader may find that he iscontinually “getting jammed” by a client, meaning the client (through thesalesperson) has sold or bought stock to the trader at what turns out to be abad price (this may happen, if, for example, the client happens to knowsomething about soon-to-be released news about the company). Or, asalesperson may find that a trader is only offering poor prices or poorvolumes to the client, even though the stock may be moving at large volumesor at better prices through other firms. The salesperson is stuck with giving“pathetic reports” about what the trader is willing to buy or sell to his client,
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even though the client can see that other firms are willing to do better (interms of either price or volume).
The colorful personalitiesLook through any sell-side firm’s recruiting literature and you’ll quickly learnwhat qualities are valued in salespeople and traders. Salespeople prize theability to schmooze with clients, which requires superior communicationskills, outgoing personalities and a sharp wit. Traders tend to be morecerebral, more analytical and they generally consider themselves to besmarter than salespeople. Traders need to be good at handling stressfulsituations and exuding a sense of calm and control even when situations arequickly spiraling out of control. The interesting thing about traders andsalespeople is that there’s a strong stereotype for how they should act andwhat qualities they should demonstrate, so part of the learning curve in anysales and trading environment is developing the right mannerisms and quirksthat reflect the desirable qualities.Effective salespeople and traders are good communicators. This applies notjust with respect to clients, but also with respect to bosses. Experiencedtraders have an intuitive feel for murky situations, but the junior trader that istrading a pad of stocks as a substitute trader sometimes does not realize thelevel of communication that is demanded of them. If you have the goodfortune of trading a pad early on in your career, make sure you continuallycommunicate with your boss. The worst thing that can happen in your tradingdebut is that you buy 25,000 shares of XYZ stock and lose $100,000 on theposition without ever talking with the boss. You’ve got a big fat loss foreveryone to see, and guess what? Next time there’s a trading seat that needsto be filled, you won’t get the call. At the time, you may have thought thatcommunicating too frequently with the boss would lead him to believe thatyou don’t have much confidence or trading ability. Of course with a big fatloss at the end of the day, there’s absolutely no doubt about it now. You canprevent this sad situation by keeping the boss updated on your tradingdecisions. This is difficult to do, because the natural instinct is to clam upwhen you’re losing money. But by involving the boss, you’ll get a feel forhow an experienced professional looks at risk vis-à-vis a particular client, andif you’re lucky, maybe the boss will even get involved in the situation.
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The people in your neighborhoodTrading desks are very impressive sights. There are rows and rows ofcomputer monitors and hundreds of people intermittently pounding the table,yelling or staring intently at their screens. Each trading desk is organized alittle differently, but there are several desk layout themes that are consistent.What you’ll usually see is traders sitting separately from the salespeople.Salespeople may be situated in the middle of the desk or in the front on aslightly elevated platform. Salespeople need to be able to reach out and touchsomeone, so they will tend to occupy center stage. The traders surround thesalespeople, and there’s a little jockeying that goes on among them for whogets the good seats. A lot can be inferred from position with respect to thesalespeople. The closer a trader sits to the salespeople, the more senior thetrader is, or the more important that sector is for the overall desk, or both. Theoutskirts of the trading desk tend to be occupied by more junior traders,