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Sales & Trading: Analyst Day In The Life
A day in the life of a rates trading analyst
Follow along for a typical day of a first year Rates Trading Analyst on the Interest Rate Swaps Desk in New York. Rates Trading sits within Fixed Income and would include products such as treasuries, agencies, interest rate swaps, interest rate options and repo/financing.
What is an Interest Rate Swap?
Let me take a step back and tell you about what I trade. An Interest Rate Swap is an agreement to exchange Fixed Rate and Floating Rate Cashflows. It's a contract created based on borrowers and investors having different Interest Rate preferences.
Bonds pay a Fixed Rate Coupon, for example 3% every year for the life of the bond, as borrowers generally like a Fixed Interest rate and some investors (Life Insurers in particular) want a Fixed Rate. Loans have interest based on a Floating Rate (typically LIBOR) because the banks that lend money on a loan want a Floating Rate. Companies that borrow money on a traditional loan pay a higher interest rate when LIBOR is higher and a lower interest rate when rates LIBOR is lower. Banks like this as the rate of interest they receive correspond to the interest rate they pay out on deposits.
Loan borrowers wanted a tool to hedge their interest rate risk. Instead of paying a floating rate, they wanted to pay a fixed interest rate to better plan out their cash needs. Banks wanted to buy Fixed Rate Bonds and change the Fixed rate they received on the bond into a floating rate.
What surprised me when I joined was how huge the swap market is. The USD Swap Market has over 100 trillion in notional outstanding, compared to 41 trillion for all Fixed Income Securities.
This created a natural two way market, Banks paid a Fixed rate and received a Floating rate. Loan borrowers paid a floating rate and received a fixed rate. The market has grown from just a risk management tool to an asset class and where investors use Interest Rate Swaps to express a view on rates (rates going up or down). What surprised me when I joined was how huge the swap market is. The USD Swap Market has over 100 trillion in notional outstanding, compared to 41 trillion in notional for all Fixed Income Securities (bonds). There are 2.5 times the number of swaps than bonds to hedge.
As a result in my job there are two sides to the trade: Me ( The Trading Desk ) and the Client. As the trading desk we either:
- Pay Fixed: Trader pays the fixed rate and receives the floating rate. The client on the other side who pays the floating rate thinks rates are going down.
- Receive Fixed: Trader receives the fixed rate and pays the floating rate. The client on the other side who receives the floating rate thinks rates are going up.
Things we have to agree on to make the swap work:
- Tenor: How long are we going to exchange cash flows for (e.g. 5 years, or 10 years)?
- Size: What notional are we going to exchange rates for? If the Fixed Rate is 1.85%, it's 1.85% times what notional.
My job as a trader is to quote fixed rates that we would pay fixed and receive LIBOR, or vice versa, rates where we would receive a fixed rate and pay LIBOR. The client decides whether they want to trade or not, and if so, they say "done" and we've agreed to a trade.
My Typical Day
6:30am - Arrive at the office. As I walk in, I see my friend from college who works in M&A is just leaving after an all-nighter he just pulled in the office. As traders, our hours are far better and well defined.
6:35am - Start-up my computers and load up the swap pricer I need for the day. A pricer is software that each bank develops internally that calculates product prices (in this case, a swap) that traders need in order to figure out what prices we should be quoting. While that loads up, I grab a coffee and a bagel from the mini cafeteria they have on the trading floor. The elevators take forever and it takes too long to go to the main cafeteria.
6:40am - Start-up Bloomberg. Hit WEIF <GO> to get an idea of where equity futures are. Although I sit on the Fixed Income side, we look at Equity futures as one measure of market sentiment. The equity future prices on the screen are all green, meaning equity futures are up and stock markets are expected to go higher. Next, I Hit TOP <GO>, and scroll through the top news headlines. After that, I hit Hit ECO <GO> and refresh myself on the economic data coming up. It's the first Friday of the month and that means it's payrolls. Non-Farm Payrolls, NFP for short, is one of the biggest pieces of economic data that we watch, no just in rates, but across all of Fixed Income and Equities.
6:45am - After that, I hit BBAL <GO> On Bloomberg and note this morning's LIBOR setting. LIBOR serves as the basis of the floating rate side of Interest Rate Swaps, the product I trade. I copy down today's 3 month LIBOR into a blank spreadsheet that i use for notes and quick calculations.
6:50am - Next, I check the swaps curves in my swap pricer versus what I see in Bloomberg. I do this to make sure my data feeds are coming in properly. The swap pricer is a tool and takes market rates of where Eurodollar Futures, Treasury Futures and Swap Rates and solves for a price. Since my pricer is just a tool, and if the market data that is in my pricer is not updated (we'd say "my curves are stale"), I’m going to be quoting prices that are off. In addition to checking Eurodollars and Swap Rates, I double check my LIBOR value that I copied down earlier to make sure swap pricer is calculating off today's number. Below is an example of a screen I would check versus my bank's own tools and pricer.
7:00am - Check-in with my colleagues in London and Tokyo. Although I have traders in London and Tokyo that trade swaps in their home currencies (Sterling, Euros and Yen Swaps), I'm talking about my colleagues that trade US Dollar Swaps in London and Tokyo. Unlike Equities which have fixed trading hours on an exchange, in Fixed Income, the markets are open in my overnight, which is the Tokyo and London day. We essentially trade the same market, and the Tokyo trader is leaving for the day and the London trader will hand off their trading books at lunchtime. But we all trade the same product which is why we need to be coordinated.
I wanted to see what they traded, and what orders they are working on. Working an order means that we have a client that is looking for a certain rate. If 5 year swaps are at 1.84% and they want to trade when I can pay 1.85%, we are working the order. Their order to me is firm and I can pay the 1.85% when the market gets there, but only if the market gets there. If it doesn't get there, the order isn't filled and we don't have a trade.
As the most junior trader on my desk, I don't actually get to sit in the conference room for the morning meeting. I listen on the phone just in case someone wants to trade during the meeting.
7:15am - Morning Meeting Time. The morning meeting is where Sales, Trading and Research get together and go through a quick recap of the markets. Sales talks about what their clients are doing. Each trading desk, swaps for me, treasuries for someone else, options for another trader, talk through the dynamics in their markets. Sometimes, traders highlight trading opportunities that they want the salespeople to discuss with their clients. Research provides an overview of reports they have written.
My job is to arrive 5 minutes early into the conference room and dial-in the branch offices. We have salespeople in regional offices dial-in. As the most junior trader on my desk, I don't actually get to sit in the conference room. I come back to my desk and listen on the phone. I want to be there just in case someone wants to trade during the meeting.
7:40am - Everyone is back at the desk after the morning meeting and the trading day has begun. As a fairly new hire analyst, it's the VP and MD sitting to the left of me that are executing most of the trades. My job is to manage the hedges we need and to keep track to the trade blotter. The trade blotter keeps track of all the trades we have done for the day including client trades and trades with other trading desks at my firm.
8:10am - Pretty quiet morning with everyone waiting for the payrolls number. Payrolls is one of the big economic data points that will likely move markets. Macro Hedge Funds will generally take a view on the number, but my job doesn’t involve taking a view, rather to make markets at a flow trading desk. Our desk's risk position is pretty flat, meaning we are hedged such that if rates go up or down we don't gain or lose a lot of money. I run back to the mini cafeteria they have on the floor and get coffees for the desk.
8:30am - Our economist (who sits within research) goes over the hoot (speakerbox) as we see the payroll number being released by the Bureau of Labor Statistics. The number of jobs added flash on our Bloomberg screens in red. The number beat market expectations. The market is in a ”Risk On" mode meaning investors are feeling good about the markets and willing to take risk. Investors want to buy stocks and not bonds. Treasury bond future prices are dropping, meaning yields are rising. Swap markets are correlated, meaning they move in line, so my fixed rates that I am quoting to pay or receive just went up.
8:31am - My ears are focused on the hum of the trading floor. Salespeople are asking for firm quotes on the trading phone (turret). Below is a picture of what a turret looks like. Each person on the trading floor has a button and you can directly speak to them over their speaker box without waiting for them to pick up the phone. "Where will you pay $100mm 5s" "Where would you receive $50mm 10s". Clients asking for price quotes, specifying size and tenor. So far, these as just quotes. I'm watching the phones, listening to the quotes, waiting for the magic word done.
8:35am - After a bit of waiting, the first trade is done. Meaning we've gone from quoting to agreeing to a trade. We're facing a Macro Hedge Fund on an Interest Rate Swap. The Hedge Fund wants to pay fixed on the good market news, expecting rates to go up further. I would be receiving fixed, taking the other side. The salesperson said done to my VP, and my VP looked over at me and told me to blotter the trade and hedge the trade risk (called the delta). The VP went off to the next trade quote, while I recorded the details in to my trade blotter and began to hedge the trade risk.
8:36am - Hedging the trade. My swaps pricer calculates the Futures equivalents of the trade, how many futures are equivalent to my trade and then I electronically trade the equivalent treasury "TY" futures I need to match the duration on the swap. TY futures are the futures ticket. They are supposed to be a 10 year future but currently have a much shorter duration, so we just call them TYs.
8:45am - The salesperson sends the trade recap to the VP and me. E-mail with the key details and serves as a written receipt of the trade we did over the phone. It also has the sales credits the salesperson receives for bringing that trade in. I take a quick look, recalculate the sales credits in the excel scratchpad. The numbers don't add up. The salesperson got the DV01 wrong (DV01 stands for Dollar Value of 1 basis point). I ask him to fix it, and he sends another trade recap over.
10:30am - Busy day and busy time of the morning. Notifications for Rates Options (Swaptions) are between 9:00am and 11:00am New York. On a day like today where the markets are moving, the options traders are waiting until the last minute to decide whether they are going to exercise the options that are close. My desk provides the delta hedges for the options desk (meaning their hedging product is what I trade), and I'm trying to work with them on all the hedges they need to do.
11:15am - After I sort out all trades with the options desk, it's time for lunch. My MD operates on a principal of "you fly, I buy" - meaning if you're going to make the trip, he'll pay for your lunch at the location he chooses. I collect orders in a Bloomberg chat with only our desk on it.
11:20am - I pop the order online in the app and start making my way to the sandwich shop. The MD starts telling a story of when he was an analyst he had to call the store and there were no "apps" and getting the order right was a rite of passage.
11:30am - I get to the Deli, double check my MD's sandwich is there. And race back to the desk
11:40am - I scarf down my sandwich pretty quickly while scrolling through emails and double checking trade recaps.
2:00pm - Things slow down a bit. Someone challenges me to knuckle pushups on the trading floor.
3:00pm - Start drafting the closing commentary for the week. Payrolls. Notable trades. Draft the Bloomberg message for my MD to edit and send out.
3:30pm - Check-in with the middle office to see if that trade booking issue earlier on in the day is solved
3:45pm - Run a report on where my positions are. I've hedged my positions for the day using treasury futures, but I do have some basis risk between LIBOR and Treasuries that I need to check.
4:00pm - Report is done. I bought some Eurodollar bundles to hedge my LIBOR basis risk. Eurodollar Bundles are a series of Futures that lock in LIBOR rates for me for days in the future.
5:00pm - We are done for the day. Time for after-work drinks with some of the rates salespeople and traders. It's a good way to unwind but also ask questions you typically don't get to during the day.
5:30pm - Quick call from the middle office about one of my trades missing a sales booking. The salesperson hasn't booked it yet and was running late. I sent the salesperson a Bloomberg chat from my cell phone. The salesperson trade booking came in a few moments later.
6:00pm - We're still at the bar, and the middle office finishes up the P&L calculation for the day. Today's P&L numbers are good. The MD orders one more round of drinks to celebrate, and we all head home.
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