Traders revel in the lifestyle afforded by their jobs. They love the fact that they’re done when the market closes. And it only gets better: generally speaking, the more senior a trader is, the sooner he or she gets out after the market closes.
The one negative to working market hours is that you’ve got to get up very early to get to work. Typical fixed-income and equity desks are fully staffed by 7:30 a.m. For most people, this means getting up at least one hour before that. International equity traders who are trading London hours are in even earlier. Investment bankers, by contrast, begin rolling in the door after 9:00 a.m.
In contrast to most investment bankers, S&T professionals actually get to take their vacations. When senior traders are out, junior traders have an opportunity to step up. Normally there’s a pecking order among the junior trading staff. The worst way to lose your position on this list is to trade the pad and lose a ton of money. While this is not a regular occurrence, it is very unpleasant and junior traders who step into this responsibility when a senior trader is on vacation need to strike the right balance between being aggressive and being cautious with someone else’s P&L. Junior salespeople have a tougher time earning this type of backup role. Most of the time, if a salesperson is on vacation, it’s easy enough to re-assign that person’s accounts to the remaining sales staff. This minimizes any disruptions to the level of service to the client, but it also doesn’t provide a learning opportunity for junior salespeople. When a junior salesperson earns the confidence of management, that salesperson will be given an opportunity to develop his or her own book of business, typically starting with accounts that have not done very much business with the firm in the past.
Lunch is also worth talking about. There is a rather unpleasant hierarchy whereby summer interns and first-year analysts and associates are expected to fetch coffee and take lunch orders. Junior staff on trading desks have been known to trek to Hoboken for special-ordered sandwiches, or to Brooklyn for artisan tacos. But just because taking lunch or coffee orders doesn’t seem important, doesn’t meant that it isn’t. If Joe orders a medium coffee with cream, don’t give him a Frapuccino. The more you screw up, the more often you’ll be sent on coffee runs. The logic here is, if the kid can’t even take a coffee order, what reason do we have to think that he can take a stock order? This is a rite of passage—almost everyone has experienced it, and there’s no way around it.Diversity
An important aspect of sales and trading to note is that it is predominately white and male. Although no one on the inside will admit it (especially to anyone on the outside), there is still a great deal of gender and ethnic-bias built into the sales and trading culture. This is most apparent in the types of jokes that are circulated from one desk to another. There have also been serious incidents of sexual and racial abuse and/or discrimination. This has changed to some degree in the age of #MeToo and the renewed fight for racial equality and representation. Companies such as Goldman Sachs, Morgan Stanley, and Barclays have instituted programs that help women and underrepresented minorities enter the field and prosper, and these companies and others have strengthened rules against discrimination in any form. Yet, the news is still filled with stories about toxic workplaces at investment banks and hedge funds, as well as in other financial sectors.
If this is not an environment that you are comfortable with, then take this as fair warning. If you’re passionate about sales or trading, but are uncomfortable with this type of environment, then it makes sense for you to try and visit the desk before making any decision on an offer. You should also use every method at your disposal—news stories, social media, your network, etc.—to learn what companies are industry leaders in hiring and supporting women and members of underrepresented ethnic groups, and which are not. Some companies and media organizations publish lists of best companies for diversity. Reading these will also help you to identify good employers. Here are a few lists:
- Vault.com Best Banking Firms for Diversity: http://www.vault.com/company-rankings/banking/best-banking-companies-for-diversity/?sRankID=174&pg=2
- Five of the World’s Most Female-Friendly Banks: https://www.worldfinance.com/banking/five-of-the-worlds-most-female-friendly-banks
NASDAQ agency traders execute orders in stocks that the firm does not maintain a market in “on an agency basis.” Customer trades executed by the firm’s position traders are executed on a principal basis.
A trading strategy in which computers and advanced mathematical models are used to process vast amounts of data and make rapid purchases and sales of securities (sometimes with a holding time of less than a second). Also known as high-frequency and quantitative trading.
Trading stocks, bonds, commodities, or other assets in two different markets to take advantage of pricing differences to make a profit.
Provides support functions for the processing of transactions made by traders and fund managers.
A bond trading strategy in which the trader holds long-term and short-term bonds. In this case, the trader is anticipating a profit based on the view that long- and short-term bonds will outperform intermediate-term bonds.
Any market in which prices exhibit a declining trend for a prolonged period.
Black-Scholes option pricing model
An options pricing model that prices options according to the current stock price, the time until option expiration, the option strike price, the risk-free interest rate, the standard deviation of stock returns, and the cumulative standard normal distribution. The Black-Scholes model makes several key assumptions:
- The stock pays no dividends during the life of the option
- European exercise terms (option exercise at expiry only) are used
- Efficient markets
- No commissions
- Constant and known interest rates
- Returns are lognormally distributed.
A distributed ledger database that uses advanced cryptography to maintain a continuously-growing list of financial records that cannot be altered.
A computer terminal connected to a proprietary news feed most commonly found on the desks of sales people and traders, providing current and historical market information, as well as e-mail and instant messaging services. It is the most popular terminal in the financial industry.
A long-term debt instrument with the promise to pay a specified interest and return of the original investment on a stated maturity date.
bond equivalent yield
Doubling the semiannual yield.
bond rating agencies
The main bond rating agencies are Standard & Poor’s, Moody’s, and Fitch’s. The role of the rating agencies is to provide an unbiased opinion of the issuer’s credit-worthiness. Arguably, this analysis is more objective than equity analysis, since the sole criteria that is applied is the ability of the issuer to repay its debts.
Bonds are classified into two groups: “investment grade” bonds and “junk” bonds. Investment grade bonds include those assigned to the top four quality categories by either Standard & Poor’s (AAA, AA, A, BBB) or Moody’s (Aaa, Aa, A, Baa). Investment grade bonds are generally legal for purchase by banks; junk bonds are not. Bonds that cross the threshold from investment grade to junk bonds must be purged from most institutional accounts, creating potential profit opportunities for the discerning distressed debt investor. The term “junk” is reserved for all bonds with Standard & Poor’s ratings below BBB and/or Moody’s ratings below Baa. Junk bond ratings include BB, B, CCC, CC, C and D. BB-rated bonds have the lowest degree of speculation (among junk bonds) while a D rating is assigned to an issuer in default of payment. As the investor reaches for higher yield by stepping down the credit rating spectrum, he is accepting less quality and protective characteristics (i.e., interest coverage) and assuming greater financial risk.
The difference between the yield of a corporate bond and a U.S. Treasury security of similar time to maturity.
The largest and most prestigious Wall Street banks; these firms typically take the largest positions in a new offering of securities.
A regular coupon-paying bond with a single repayment of principal (the bullet) on the maturity date.
A time in which the prices of stock in the market are rising or are expected to rise.
Asset management firms that work for individual and institutional investors, making buy or sell decisions and acting as agents for their clients.
The separation between public and private sections of an investment bank, including sales, trading, and research from corporate finance. Many banks even have physical barriers and/or e-mail restrictions to support this effort.
A tangible good or item that can be bought or sold, such as grain, gold, or frozen concentrated orange juice.
A convertible bond can be exchanged for a pre-specified amount of common stock in the issuing firm. The conversion ratio indicates the number of shares of common stock that the holder of the convertible has a claim. The conversion price is derived by dividing the par value divided by the conversion ratio.
A digital cash system that is increasingly being used as a substitute or complement to traditional currency. Cryptocurrency payments are not processed through a central banking system or trusted third party, but are sent from payer to payee. Bitcoin is the most-popular cryptocurrency.
The system of money that is used by a particular company or group of countries (such as the European Union).
Current yield = Annual dollar coupon interest/Price
A platform that allows trades of large blocks of securities (most commonly equities) away from the public exchanges; prices are disclosed only after the trades have been completed.
A strategy designed to reduce the risk associated with price movements in the underlying security, achieved through offsetting long and short positions of calls and puts. Delta-hedging strategies can be either dynamic or static. A dynamic-hedging strategy involves the portfolio being rebalanced periodically to maintain a targeted delta. A hedging strategy that is never rebalanced after the initial hedge is initiated is called static-hedging.
A financial contract that derives its value from an existing bond, share, currency, or commodity. Derivatives will move in direct relationship to the price of the underlying investment.
Duration describes the sensitivity of a bond’s price to a change in yield.
Effective duration is a duration measure that quantifies the price sensitivity of the bond while also allowing for changes in the bond’s expected cash flows. The methodology for computing effective duration requires the use of a binomial interest-rate tree.
A share of a corporation representing a claim over a proportion of its assets and profit.
A settlement system for domestic and international securities transactions, covering stocks, bonds, and a variety of investment funds. In addition, Euroclear also acts as the central securities depository for several European markets. See https://www.euroclear.com.
An American dollar held by a foreign institution outside the U.S., usually a bank in Europe.
exchange-traded funds (ETFs)
ETFs are a basket of securities designed to track an index and trade like a single stock.
The day a stock trades without the dividend. Technically, on the ex-dividend date, the price of the stock should adjust downward by the amount of the dividend that will be paid out on the payment date.
A private, unregistered investment pool encompassing all types of investment funds, companies and private partnerships that can use a variety of investment techniques such as borrowing money through leverage, selling short, derivatives for directional investing, and options.
The application of mathematical methods and tools (such as applied mathematics, statistics, computer science, and economic theory) to solve problems in finance. Also known as computational finance, financial mathematics, and mathematical finance.
Stands for financial technology. Any instance in which technology is used to help companies manage the financial aspects of their business.
fixed income product
Interest‐bearing bonds, bills, and notes that pay a specified percentage of interest over the lifetime of the loan. They are typically issued by governments, corporations, and municipalities.
The term "front office" is used at a hedge fund and at investment banks to refer to the departments, such as sales and trading, that directly produce revenues for the firm.
Contracts for the sale/purchase of a specified quantity of a currency, commodity, or financial instrument at an agreed-upon price on a given future date. Futures are available for stocks, stock indexes, U.S. Treasury debt, foreign currencies, Eurodollar deposits, and other financial instruments.
To balance a position in the market in order to reduce risk. Hedges work like insurance: a small position pays off large amounts with a slight move in the market.
An indication is an estimated price, not a firm quote. When the New York Stock Exchange has a buy or sell order imbalance, it publishes an indication, which is an estimated range for the stock’s opening price. This indication often attracts buy or sell interest, and the indication is updated to reflect this new interest, and eventually the stock is opened. On the NASDAQ, every preopening quote is deemed to be an indication. Throughout the trading day, traders may be asked for a quote on a bond or a stock. The typical quoting convention is that these prices are “indications only,” and that before a salesperson is able to transact, he or she must double-check with the trader to get a “firm quote” which is a price and quantity that the trader will honor.
interest rate product
A financial instrument (an asset that can be traded) with a value that increases and decreases based on movements in interest rates.
A financial intermediary that specializes in large and complex financial transactions such as helping companies access capital markets (stock market and bond market, for instance) to raise money for expansion or other needs and facilitating mergers and other corporate reorganizations.
A risky bond offering a higher rate of return and higher default risk than a bond issued by a financially stable company; also known as high yield bonds.
A ranking of companies based on a set of criteria such as revenue, earnings, deals, or any other relevant criteria. League tables are used for comparing companies within a group for investment research or for marketing purposes.
The London Inter-bank Offer Rate is the rate that is the interest rate that the largest international banks charge each other for loans; usually denominated in Eurodollars.
A trader’s profit and loss (P&L) statement is marked-to-market. This refers to the daily valuation of the trader’s account to reflect current market prices. The goal of every trader is to make his P&L statement as large and positive as possible. Sometimes, traders will make money trading, but will lose money because a large position goes down. The trader’s explanation to the boss will go something like this: “I traded pretty well, but this piece of junk position was marked down $100,000.”
A medium-term note (MTN) is a program of bond issues for a specified total amount of bonds over a specified period of time. MTNs are usually unsecured, fixed or floating rate, non-callable debt securities. MTNs save issuers time and money by allowing them to register a program of issuance rather than a series of separate bond issues.
A functional area that supports front office sales and trading in financial and legal matters, such as corporate treasury and risk management.
Momentum traders seek to exploit the very short-term momentum in the market. In its simplest form, momentum traders believe that “the trend is your friend” and will buy stocks that are exploding on the upside and shorting stocks that are breaking down. This type of trading can potentially do well in trending markets, but will tend to do poorly in rangebound markets.
money market securities
This term is generally used to represent the market for securities maturing within one year. These include short-term certificates of deposit, repurchase agreements, and commercial paper (low-risk corporate issues), among others. These are low-risk, short-term securities that have yields similar to treasuries.
Bonds collateralized by a pool of mortgages. Interest and principal payments are based on the individual homeowners making their mortgage payments. The more diverse the pool of mortgages backing the bond, the less risky they are.
Bonds issued by local and state governments, a.k.a. municipalities. They are also known as munis. Municipal bonds are structured as tax-free for the investor, which means investors in munis earn interest payments without having to pay federal taxes. Sometimes investors are exempt from state and local taxes, too. Consequently, municipalities can pay lower interest rates on muni bonds than other bonds of similar risk.
A professionally managed investment pool sold to the public through the sale of shares representing an ownership interest. These funds have a board of directors or trustees to make sure it is managed for the benefit of investors.
A computerized system established by the Financial Industry Regulatory Authority to facilitate trading by providing broker/dealers with current bid and ask price quotes on over-the-counter stocks and some listed stocks. The NASDAQ does not have a physical trading floor that brings together buyers and sellers. Instead, all trading on the NASDAQ exchange is done over a network of computers.
New York Stock Exchange
The New York Stock Exchange (NYSE) is the second-oldest and largest stock exchange in the U.S.; it is located on Wall Street in New York City. The NYSE is responsible for setting policy, supervising member activities, listing securities, overseeing the transfer of member seats, and evaluating applicants. The NYSE traces its origins to 1792, when a group of brokers met under a tree at the tip of Manhattan and signed an agreement to trade securities.
On-the-runs issues are those bonds most recently issued in each maturity. Off-the-runs refer to everything else. All else being equal an on-the-run bond will trade at a slightly lower yield than the comparable off-the-run bond. This difference in yield reflects the liquidity premium offered by trading the most current bond.
A fixed income security’s implied risk premium above the risk-less rate. The option-adjusted spread (OAS) is the spread above the risk-free rate that makes the average present value of the security’s cash flows equal to the market price of the security. The OAS of a risk-free security is zero.
These diagrams indicate the expected profit of an option strategy at expiry. Options allow investors to hedge risk in long and short positions. Combining options can create the desired risk-reward profile for the options trader. Options strategies that are worth knowing are the butterfly spread, condor spread, bull and bear spreads, calendar spread, straddle, strangles, and portfolio insurance.
The P/E ratio measures the current price of the security divided by a full year of earnings. Price is pretty obvious, but there are several things you need to consider with earnings. Forward EPS is the expectation for the next 12 months of earnings. LTM (last 12 months) is trailing earnings. Since most firms are growing their earnings, forward P/E ratios will normally be lower than trailing P/E ratios.
Preferred stock shares characteristics of both common stock and debt. Preferred stockholders are entitled to dividends as a specified percentage of par. If these dividends can accrue until they are paid, the preferred stock issue is called a cumulative preferred stock. If the dividend payment can be missed, then the preferred stock is called a non-cumulative preferred stock. Dividend payments on preferred stock are not tax deductible to the issuing corporation.
price value of a basis point
This is a measure of price volatility for a bond. It measures the change in yield for a one basis point change in price.
A designation awarded by the Federal Reserve to commercial banks or broker/dealers who meet specific criteria, most notably capital requirements and participation in Treasury auctions.
An investment bank that provides financing and other services to institutional clients, typically to hedge funds. Services can include securities lending, leveraged trade executions, and cash management.
Profit-oriented trading in the financial markets using a bank’s own capital, as distinct from trading with funds contributed by investors.
The put/call ratio is the number of put options contracts traded in a given day divided by the number of call options contracts traded that same day. The put volume divided by the call volume yields the put/call ratio. The put/call ratio is used as a contrarian indicator: the greater the number of puts that are traded, the more bearish is the market and the more bullish the informed speculator is supposed to become. On the other hand, the greater the number of calls that are traded, the more bullish the market has become and this should correspond to a more bearish stance for the informed speculator.
Most bonds are bullets, but sometimes bonds have embedded options that alter the structure of a bond such that the principal may be repaid prior to maturity. A callable bond gives the issuer the right but not the obligation to redeem a bond at strike prices and dates before the bond is scheduled to mature. Putable bonds give the investor the right, but not the obligation, to put the bond back to the issuer. A sinking fund bond retires a portion of the principal according to an agreed schedule. A sinking fund can be thought of as a series of call options that the investor writes to the issuer, except that a sinking fund provision is obligatory rather than just a right. Perpetual bonds pay a coupon to the investor forever. Call options are often embedded within perpetual bonds to give the issuer an opportunity to return this perpetual obligation.
Financial instruments that represent some type of financial value.
Securities and Exchange Commission
The primary federal regulatory agency for the securities industry, whose responsibility is to promote full disclosure and to protect investors against fraudulent and manipulative practices in the securities markets. The Securities and Exchange Commission (SEC) enforces, among others, the Securities Act of 1933, the Securities Exchange Act of 1934, the Trust Indenture Act of 1939, the Investment Company Act of 1940, and the Investment Advisers Act. The supervision of dealers is delegated to the self-regulatory bodies of the exchanges. The SEC is an independent, quasi-judiciary agency. It has five commissioners, each appointed for a five-year term that is staggered so that one new commissioner is being replaced every year. See http://www.sec.gov.
A term for brokers who sell bonds and shares to customers and the research departments of investment banks that make recommendations to their clients.
Short interest refers to how many shares are sold short in a given stock. Short interest is normally interpreted as a contrarian indicator. Large short-interest represents future demand (i.e., at some point these bearish bets need to be covered), and shares that everyone hates and that everyone has sold short can experience volatile moves to the upside. The days-to-cover ratio is the number of shares short divided by the average daily trading volume. The larger this ratio, the more likely the stock is setting up for a short-squeeze.
The difference between the price at which a financial institution will buy a bond or share and the price at which it will sell.
The discipline of studying past price movements to predict future price performance. Traders frequently rely on charts to identify areas of support and resistance, and certain chart formations, such as the double bottom or the head and shoulders top or bottom reversal.
Refers to the investment approach or the techniques used by the investment manager to have positive returns on the investments.
Securities issued by the U.S. government. These are divided into Treasury Bills (maturity of up to two years), Treasury Notes (from two years to 10 years maturity), and Treasury Bonds (10 years to 30 years). Because they are government guaranteed, treasuries are often considered risk-free. In fact, while U.S. Treasuries have no default risk, they do have interest rate risk; if rates increase, then the price of U.S. Treasuries will decrease.
triple witching (hour)
An event that occurs four times a year: the 3rd Friday of March, June, September, and December. On these days, contracts for stock index futures, stock index options, and stock options all expire on the same day. Triple witching produces a great deal of volatility, especially in underlying securities that are at or near at-the-money levels. Investors that are long at-the-money options have a financial interest in pushing the price of the underlying security above the strike price, whereas dealers (who are typically option sellers) have an interest in keeping the price of the underlying security below the strike price.
A warrant is a derivative security that grants the holder the right (but not the obligation) to purchase stock from the issuer at a specific price within a certain period of time. There are two main differences between a warrant and a call. First, warrants are much longer-dated securities. Warrants are also issued and guaranteed by the issuer, whereas call options are exchange-traded securities. Warrants are normally issued in conjunction with a debt offering, to make the deal more attractive to prospective bond buyers. This extra privilege granted to bond investors hurts the common shareholder because it dilutes the existing shareholder’s interest in the ownership structure of the firm.
The annual return on investment. A high-yield bond, for example, pays a high rate of interest.
The yield curve graphically represents the relationship between the yield on bonds of the same credit quality but different maturities. The most commonly quoted yield curve is the Treasury yield curve, which is assumed to be free of default risk. Other yield curves are quoted as a spread over the Treasury yield curve.
The yield-to-maturity (YTM) is the interest rate that will make the present value of the cash flows of the bond equal to the price of the bond. The major shortfall of YTM is that this measure assumes that there is no reinvestment risk, i.e. that coupons can be reinvested at a rate that is equal to the YTM. Another way of stating this is that the yield curve is flat. This is rarely ever the case and YTM is almost always never realized.
The path to promotion on a sales and trading desk is less standard than it is in investment banking. Investment banking analysts really don’t have much to look forward to except perhaps a third year before shuffling back to business school or some other career. By contrast, undergraduate analysts who have a demonstrated ability to add value to a trading desk have the potential to move up without an MBA or advanced programming degree.
One common scenario is that after several years, the restless undergraduate analyst decides to apply to business school and gets accepted. If this analyst is a prized employee, then the boss might offer the analyst a promotion to associate in order to keep the analyst on the desk.
Title promotions on trading desks are generally not much to celebrate, except that they generally lead to higher pay. Whereas investment banking associates promoted from analyst can look forward to moving out of the analyst bullpen and into a real office with a secretary, S&T associates 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 and trading responsibility. Of course if you do your job well, you’ll be duly compensated and promoted, but after reaching a level of significant responsibility, you shouldn’t expect to get a title promotion every couple of years.