“… just got 250,000 shares at 18 1/4 from Janson, think I’ll pull twice that at 18 1/2 outta the California pensions. We got close to half a million shares in the bag.”-Ollie, Wall StreetNo area in finance has been glamorized as much as trading.Right after Wall Street was released in 1987, financiers everywhere aspired to be the next Gordon Gekko – or at least one of his cronies.But is it really that cool to be a trader? What do you do in sales & trading and how is it different from investment banking? What about breaking in?DefinitionsYou already know what investment bankers do: they buy and sell entire companies and make a commission on everything.Traders also buy and sell and earn commissions, but they buy and sell individual securities rather than entire companies.So instead of selling a hot new startup for $1 billion, they might sell 50,000 shares of General Electric.The salespeople pitch these ideas to clients who want to buy and sell, and the traders execute the trades.This is more difficult than it sounds because:
- Getting clients to invest millions or tens of millions of dollars takes a good bit of convincing.
- While you can log onto your E-Trade account and buy 50 shares of Microsoft, buying 1 million shares is a different story. You’d need to convince institutions like Fidelity that have large investments to sell to you.
Traders spend a lot of time dividing large orders into smaller chunks, setting up buying schedules, and making sure that clients get what they want at a reasonable price.You also see trading at hedge funds and small “prop trading” firms that use their own capital to buy and sell securities – the mechanics are similar, but these firms do not have external clients (see below).Agency Trading vs. Prop TradingNow you need to know the 2 basic types of trading: agency trading and prop trading.
- Agency Trading: You execute orders for the client – you’re merely an “agent” doing what he/she wants and do not have (much) freedom.
- Prop Trading: You are the principal and can make whatever trades you want, using your own money – within your trading mandate and risk limits.
These are the 2 extremes – there’s also something called flow trading in between these 2 where you have clients but you also get to make some investment decisions.At banks, you see both agency trading and prop trading – though with recent financial reform, things have been trending away from prop trading because governments perceive it as “too risky.”Prop trading, as the name implies, is what prop trading firms and hedge funds do – and as you might have guessed, you can make a lot more money investing capital rather than simply earning commissions on trades.Other Types of TradingThen there’s the matter of what you’re trading: Equities (companies’ stocks)? Bonds? Foreign currencies? Commodities?Trading is roughly split into equity trading and fixed income trading, but “fixed income” has expanded to include more than bonds that pay fixed interest rates.I could go into all the sub-categories here, but Jerry from our team has already done all the work for me with these articles:
There’s no “best” area – the hot fields rotate depending on banks’ profits and government legislation.Got Flux?Whereas investment banking today is not dramatically different from what it looked like in the 80s, 90s, and 00s, sales & trading has changed significantly.Since trading accounts for more of a bank’s profit than banking, it also comes under more scrutiny and government regulation.Derivatives, credit default swaps, and collateralized debt obligations were huge in the mid-2000s until the financial crisis came along, wiped out those markets, and then prompted financial reform.While M&A advisory work and the buying and selling of companies will always exist in some form, there’s no telling what will happen to sales & trading over the long term.Who Succeeds as a Trader and How Do You Break In?If bankers are more like “farmers,” working over the long-haul on extended projects, traders are more like “hunters” – periods of rapid activity followed by rest.To be a top trader, you need to be good with math and making quick decisions under pressure – and you can never let your emotions get to you.It’s more about “working smart” than “working hard.”Traders come from mathematical and engineering backgrounds more often than bankers – and unlike many investment bankers, they actually enjoy what they do all day.For more on how you break in and the type of people who succeed in each field, check out these podcasts I recorded with Jerry:
- Sales & Trading vs. Investment Banking, Part 1 – Recruiting
- Sales & Trading vs. Investment Banking, Part 2 – Lifestyle, Co-Workers, Pay & Exit Opportunities
And if you want to get a sense of the “trader mindset” and what you do day-to-day, check out these stories and day-in-the-life accounts:
- Trading Psychology: How to Think Like a Trader
- On the Trading Floor
- Credit Derivatives Trading in Tokyo (Interview With Jerry)
- 48 Hours in the Life of a Sales & Trading Intern
Those should give you a flavor of who succeeds in trading, what you do day-to-day, and how recruiting is different from investment banking.Pay, Exit Opportunities & MoreAt the junior levels, pay is not that much different from what you’d make in investment banking: a base salary somewhere in the $70-$100K range and then a highly variable bonus that can be $0 or 100%+ of your salary depending on the economy.At hedge funds and prop trading firms, the pay varies more than in investment banking or private equity because firms’ returns are heavily linked to the market.In general, you’ll start out in the low six-figure range and move closer to $1MM and beyond as you move toward the Partner-level.At hedge funds you may get there even faster, but the fund could also collapse at any moment – especially when the economy tanks.Another difference is that you may get a very low base salary – or perhaps nothing at all – at prop trading firms, with 100% of your pay being performance-dependent.That may not be a big deal if you’re more senior, but if you’ve just graduated university it’s probably not ideal.Exit opportunities in trading are more limited than in investment banking: you keep trading or you move to a different industry.It’s difficult to move into private equity or corporate development coming from trading because the skill sets don’t have much overlap.The longer you stay in the field, the harder it is to move elsewhere – so you should decide within your first year or 2 where you want to be.On the sales side, you could move to a normal company and work in sales there more easily – selling products and stocks are different, of course, but overall sales is sales and it’s more transferable to other industries.For more on pay & exit opps, check out the sales & trading podcast I recorded with Jerry.Should You Become a Trader?Trading (or sales) is not “better” or “worse” than investment banking – it’s just different.A lot of it comes down to your personality – Are you a hunter or a farmer? Do you like long-term projects or quick thinking on your feet?Especially when you’re just starting out, there’s no right or wrong choice – so shop around and explore everything you can.-BrianMergers & InquisitionsBreaking Into Wall StreetP.S. Get here from an email forward, a friend’s link, or a random Google search?This lesson is part of The Banker Blueprint newsletter – which gives you all the tips and insider information you need to break into investment banking. Learn more about it and sign up here.