Table of Contents
- What is a trading floor really like?
- Roles in Sales & Trading
- Products in Sales & Trading
- Fixed Income
- Types of Trades
- Flow Trading
- Agency Trading
- Electronic Trading
- Prop Trading
- Sales & trading recruiting
- Sales & trading compensation
- Career path and exit opportunities in sales & trading
Sales and trading refers to the division of an investment bank responsible for making markets in stocks, bonds, and derivatives. Salespeople work with asset managers, hedge funds, insurance companies, and other buy-side investors to pitch ideas and to buy or sell securities or derivatives. Sales & Trading is also referred to as the Markets or Securities Division, depending on the bank.
As you can see from the image below, Sales & Trading, along with equity research, are on the sell side (the investment banking side) and facilitates trades between various participants on the buy side. Within the investment bank, it sits on the public side of the “Chinese Wall,” meaning it is not privy to non-public information that professionals on the M&A and Capital Markets side are working on (i.e. advising companies on potential acquisitions and capital raises, IPOs, etc.).
What is a trading floor really like?
Salespeople and traders sit on a trading floor. Trading floors today are quieter than in the past, and not at all like what you see on movies. Less and less trading is done over the phone or yelling at a trader; increasingly you’ll hear more keyboard clacking as more is done via IB Instant Bloomberg Chat or on an electronic platform.
The trading floor is split out by asset class. At most large banks, each major asset class gets a floor.
For example, you’ll have a floor for rates, a floor for equities, and a floor for credit (corporate bonds). Within each floor you’ll have traders making markets in one niche area of the asset class. For example, you could be joining a trading desk focused on short expiry interest rate options, and there are many separate trading desks that come together to form the rates trading floor.
A typical day for a trader is filled with calls, price quotes and meetings. Below is a picture of what your desk would look like. A number of screens. A name plate at the top. The big box below the screens your phone (called a trading turret).
Roles in Sales & Trading
As an intern or analyst, you’ll be typically placed into a generalist program where you rotate across various asset classes and roles. Once you are on the desk, however, your role and product focus becomes more defined. The broad categories of roles in sales & trading are as follows:
Sales “owns” the relationship with clients on behalf of the investment bank. Most request to quote a price to buy or sell something comes through a salesperson, who serves as the main contact for the investment banks investor clients. Salespeople are split up by product (i.e. equities, fixed income, etc). In addition to the product, salespeople are split up by client type, meaning they only cover Hedge Funds, only cover Corporates or only cover “Real Money” Investors (which are long only investors such as Asset Managers, Pension Funds and Insurers).
Traders make a market and execute trades on behalf of investors. Like sales, traders focus on specific products. Unlike the other roles here, a trader has a trading book where she can take positions and generate P&L. Additionally, traders need to be able to be quick with mental math, have the quantitative skills to understand complex products, and have an intuitive understanding of markets and be able to spot mispricings.
For some very complex products, salespeople lack the expertise to effectively guide clients. That’s where structurers come in. Structurers develop expertise in complex products and are brought in to pitch their area of expertise to clients by the salespeople, who cover the broader day to day relationships. They work directly with the traders when it comes time to execute the trades.
Research exists to provide salespeople, traders as well as investors directly with insights and potential investment and trade ideas. Equity research is focused on – you guessed it – equities, while credit research is focused on the fixed income side.
Certain trades that used to be handled by traders are increasingly being done electronically (see “electronic trading” below). Quants (also called “strats”) maintain these electronic trading or algorithmic trading platforms. This part of the business is growing, particularly in lower margin and high-volume business such as cash equities and FX.
Products in Sales & Trading
Traders don’t trade every type of product – they specialize. Specifically, most banks will split up Equities from FICC (Fixed Income Currencies and Commodities).
Refers to trading stock. More specifically, equities are split up between:
- Cash equities: Trading ordinary shares of stock
- Equity derivatives: Trading derivatives of equities (stock options) and equity indices
Refers to bonds, and are often further split up in the following way:
- Rates: Government bonds and Interest Rate Derivatives
- Credit: Corporate Bonds (High Grade, High Yield, Loans), Credit Derivatives
- Securitized Products: Mortgage Backed Securities, Asset Backed Securities
- Municipals: Tax-exempt bonds (State, Municipality, Non-Profit)
Currencies – Also referred to as FX – and Commodities rounds out FICC.
Types of Trades
Not all trades are the same. There are four main types of trading:
Flow trading is where the bank acts as principal (thus often called principal transactions), making markets directly and not through an exchange. The client decides if they want to buy or sell, and the trader sets the price and takes the other side, charging a bid-offer spread on the transaction. Today, most traders on Wall Street are Flow Traders, with Prop Trading (see below) being regulated out and many Agency Trading roles being replaced by Electronic Trading
Most common flow trades: Fixed Income and most equity derivatives.
For heavily traded, liquid securities traded on an exchange (NASDAQ, NYSE, CME), you don’t really need market markets (flow traders). In these cases, buyers and sellers just need the trader to send the order on their behalf to the exchange, which is a natural and efficient market maker. As you might have guessed, because the investment bank takes on no risk in agency trades, traders earn only a small commission when they act as agent.
Most common agency trades: Stocks (cash equities), futures and certain derivatives.
Electronic trading (also called platform or algorithmic trading) is all about removing human touch points from the trading process. As the name suggests, with electronic trading investors trade without calling or “Bloomberg chatting” with a salesperson. There aren’t really “traders” in the traditional sense here. Instead, you need coders to build the platform. Depending on the system, you can have a traditional flow trader managing the risk position, or have hedging strategies built into the algorithm. The sales and support function is certainly necessary but the least glamorous part of it.
Prop stands for proprietary and refers to trading that you’re doing for the bank, as opposed to for clients. Rather than making a market, you are taking long and short positions in various securities. Think of it as working at the bank’s internal hedge fund. Due to regulatory changes, prop trading is now mostly gone from investment banking and firms have largely spun out their prop trading desks and turned them to independent Hedge Funds.
Sales & trading recruiting
Recruiting has changed in recent years. I used to recruit at Cornell because my younger sister studied there. I would leave mid-afternoon with about twenty or so colleagues, fly in on a small 37 seat turboprop jet, have an early evening meet and greet where I hand out a hundred or so business cards, and then meet my sister for dinner afterward. We’d fly back the next morning on a 6 am flight and arrive back onto the trading desk halfway into the trading day. Traders don’t like being away from their desk and it just wasn’t a great use of time.
Those were different times and firms are scaling back their on campus recruiting efforts in lieu with online (HireVue) interviews and online games and simulations. The online interview is conducted the same way as live interviews and is split into three main categories: technical, brainteasers, and fit.
Sales & trading compensation
An average starting base salary at a major bank for a sales and trading analyst role is $85,000, with a $50,000-$80,000 bonus.
Career path and exit opportunities in sales & trading
The titles in sales & trading are similar to investment banking (from the top down):
- Managing Director
- Executive Director
- Vice President
Unlike investment banking which is very hierarchical, sales and trading has a very flat organizational structure. In sales and trading, you sit within your asset class and role. I sat beside my MDs and they knew what I ate for lunch, what I was working on, and which friends I was chatting to.
Investment banking generally has two separate streams with analysts being pre-MBA students and associates being post-MBA. In sales and trading, an MBA is generally not required and progressing from analyst to associate and then onto VP is quite common.