Credit Derivatives Trading in Tokyo: Interview

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Continuing our series of interviews with bankers / financiers in different parts of the world, today we’re speaking with a friend of mine from Stanford who worked in credit derivatives trading in Japan and then founded his own trading firm… after only 1 year of work.

A lot of readers are interested in going to Asia, and an equal number are interested in starting their own investment firms one day – so I figured this would be a good read.

1. Tell us about yourself.

I’m Taiwanese American, born in the states and raised in Silicon Valley. During my studies at Stanford, I had the opportunity to study abroad and intern in Japan.

It was so cool that I decided Tokyo was the place I wanted to be after graduation. While in Tokyo, I gained experience on the equities trading desk of a major U.S. investment bank and the fixed income trading desk of a major European investment bank.

Now I run my own trading firm out of Beijing, but I trade U.S. and Japanese equities.

Note: For the actual “walk me through your resume” question you want to give more detail / discuss your motivations more. Oh, and say something more interesting too…

The Recruiting Process

2. What was the recruiting process like for trading?

I applied for full-time jobs by going to the Boston Career Forum, which is the largest Japanese-English bilingual career fair in the world.

Many Japanese and non-Japanese find their jobs at top investment banks in Tokyo this way. Before attending the career forum, make sure to submit your resume in advance and fill out any online forms/questionnaires of firms you are interested in.

The interview process at the career fair can be grueling – possibly more than 15 interviews jam-packed in one day.

Most top-tier firms will interview you at least a half dozen times before giving you an offer, which might be given out on the spot or a few weeks later.

For finance professionals already working in Tokyo, much of the hiring goes through acquaintances, former colleagues, and headhunters.

Trading interviews are naturally different from investment banking interviews – for students, there will be some basic fit questions and math / brain teaser questions to test quantitative aptitude. For experienced professionals, the questions will focus on previous trading experience and your understanding of financial markets.

3. Was the process any different because you were applying to Japan?

For US or European investment banks in Tokyo, the process is pretty much the same as everywhere else, except you sometimes go through different channels – such as the Boston Career Forum – rather than sticking to on-campus recruiting or networking.

At Japanese securities firms, recruiting happens much earlier (over a year before the job starts). I’m not sure offhand how much the actual process differs because I didn’t really apply to any Japanese companies.

In terms of getting offers, commitment to living in Japan and ability to speak Japanese come into play, but language ability is not as crucial to trading as it is to other finance jobs like investment banking or private equity.

4. How much networking did you do when getting your job? How essential was that?

My internship at the equity trading desk was due to networking with an alumnus.

I found the fixed income job via the career forum I went to, so no networking was required there.

I got in without a huge networking effort for 2 reasons:

  1. I went to a “target” school and had a finance background.
  2. The market was much better when I was recruiting.

These days networking would be pretty much required to get in, unless you get lucky or have some crazy connection(s).

The Job Itself

5. What did you think the job would be like before you started?  How did that change once you got there?

I expected the fixed income trading job to be exciting and extremely quantitative, but I later realized there was a lot of repetition and that most of the real quantitative work was being done by the quants, not the traders.

The traders simply use the tools developed by the quants.

Trading volume and the outstanding notional amount of non-government fixed income securities in Japan is pretty small. Trading volume of Japanese equities is high but tick-sizes are controlled so that stocks seem to move much more slowly than U.S. equities.

Traders used to fast-paced U.S. markets might be somewhat turned off by this. That said, each market has its quirks and some people enjoy trading the Japanese capital markets.

Also, I expected to spend most of my time trading – but a lot of my time was actually spent resolving IT issues and organizing data.

6. Is there any activity in credit derivatives (where you worked) these days? Or is it completely dead?

Yes, there is. The activity of credit default swaps actually increased after the credit crisis started, since previously Japanese companies didn’t default much and the market didn’t move much.

The Itraxx Japan CDS index, for example, moved about 3 basis points in the half year before July 2007, and then exploded by over 200 bps in a few months.

On the other hand, try selling a synthetic CDO stuffed full of subprime mortgages to a conservative regional Japanese bank… yeah, good luck. It was already really hard before the credit crisis, and now it’s even harder.

Some investors are still willing to take risk given that corporate credit has pretty juicy yields now – but overall, the already small group of credit trading professionals in Tokyo has gotten even smaller since the credit crisis.

7. What other options were you considering? Were you glad you chose what you did in terms of geography/industry?

I only considered jobs in Japan since I liked the country so much.

I was also thinking about consulting or equity research – but those are also more difficult to get into and require native speaker level proficiency.

In retrospect I might have chosen a derivatives structuring job over credit trading, since I am analytical and disliked the repetition involved with flow trading.

Culture / Pay / Models & Bottles

8. Do bankers still lust after models and bottles in Japan? Or is it just sake bottles?

Haha. Oh man. Some guys come to Japan just for this.

If you want to indulge in in Tokyo, it’s pretty easy to do so – until your boss wants you to work overtime.

I won’t get into all the details here since this is PG-rated, but just use your imagination.

One common practice is “goukon,” or blind date parties, where 5 guys and 5 girls might go out for drinks together. I organized one myself before. Even non-finance people in Japan work long hours and it’s hard to meet people otherwise, so these have always been popular.

The selection of bars, pubs, and nightlife in Tokyo is also awesome (not just sake bottles; it’s very international). It’s not like Hong Kong where there is basically only one area (Lam Kwai Fung) to go drinking.

That said, you should come to Japan because you really like the country, not for the models / bottles aspect.

9. What was the culture of your firm like? Was it more because of the firm itself or because you were in Japan?

Foreign investment banks in Tokyo have a mix of the parent bank’s culture and Japanese culture. That means:

  1. Longer working hours than Western counterparts, but maybe not as long as Japanese securities firms.
  2. It’s a meritocracy, and young people can get paid a lot – unlike in Japanese firms, where you typically get paid a fraction of US salaries.
  3. Women are valued and respected more than at Japanese companies, but maybe not as much as they are in the West.
  4. Diversity is more important than at Japanese firms.

In my view, most people would be crazy to work for a Japanese securities firm over a foreign investment bank.

10. What were the hours / pay like in Tokyo?

My starting salary out of college was about 7 million yen base plus a 2.5 million yen bonus, so about $100K USD total. If you start out at a Japanese securities firm your salary could be as low as 1/4 of this (yet another reason why lots of Japanese youth still live with their parents – try getting by in Tokyo on $25K per year!).

Hours were around 13 hours a day plus an occasional Saturday. I know traders in Tokyo who work from 10 hours a day to 17 hours a day, but most are in the 11-14 hours per day range.

Just like at any other trading firm, your salary can quickly escalate into millions of USD depending on your performance – but that rarely happens and given the financial crisis, most firms probably won’t let you take that sort of risk anymore.

11. These days many readers are concerned about how they’ll pay for their apartments in Manhattan given lower pay – what was that like in Tokyo, where real estate is even more expensive than New York?

Keep in mind, everything in Japan – even the most expensive apartment you can find – is much smaller than what you’d find in the US or other parts of the world.

I paid about $1,000 USD per month for a 25 square meter (270 sq ft) place but the location was excellent.

If you are willing to take a short 30 minute commute then your rent can be a lot cheaper. The public transportation system in Tokyo is second-to-none, and Japanese products can help save space in the apartment (like really small but effective vacuum cleaners). Some companies also use an accounting trick to pay for an employee’s housing before taxes, then subtract it from the employee’s pre-tax income.

Next Moves / Starting a Trading Firm

12. You didn’t stick around too long before starting your own firm – why did you leave the industry when you did?

I left my fixed income trading job in Japan because I wanted to start my own company, and because I felt my job was overly repetitive.

I’d like to say that I foresaw the credit crisis and all, but it was just good timing that I got out before things turned really bad.

13. Many readers are thinking of starting their own investment firms one day – what was it like going through that experience after having worked in trading for only a year or so?

Staring my own trading firm was a pretty tough experience, but I learned a lot. My advice: do not do it for the money.

You need to think carefully first about your desired work-life balance and your passion, and only then should you think about the money.

Although my firm is doing OK, I think I started it a bit too early on in life – I would have benefited from a bit more experience at a big company.

Starting the firm in China, of all places, was also “interesting” to say the least. Founding a company in any location is really tough, but all sorts of factors made it even more difficult and grueling here.

14. Where do you want to be 10 years from now?

I hope I can be back in Tokyo, and I’m open to career options outside of finance. I haven’t done too much long-term planning because things change too quickly – if you had found me 2 years ago, I never would have expected to be running my own trading firm today!

15. Many readers are thinking about going to Asia to find opportunities in finance/business these days – any advice or recommendations on that?

I think it is an excellent time to be coming to Asia, especially Hong Kong, Singapore, Beijing, and Shanghai.

If you choose Tokyo, your career prospects might not be as bright but the lifestyle is great. Beijing and Shanghai have lifestyle issues (like pollution, etc.) and the financial system is not as advanced, but they are improving and growing rapidly.

Singapore and Hong Kong are the most advanced financially, they have excellent corporate-friendly legal systems, they are more diverse, and everyone speaks English.

16. Any words of advice for anyone interested in going into trading today?

Be confident but don’t be overly confident. Don’t think that you are always smarter than the market. Do your own due diligence when entering into a trade. Make sure you can handle the pressure of losing money before you take the job.

Trade because you really like doing it – not just for the money.

About the Author

graduated from Stanford, worked in equity research and trading in Japan, and then started and sold his own prop trading firm in China. He then attended both Yonsei University in Korea and The Lauder Institute at Wharton, graduating with an MBA. He currently works as a Financial Analyst at Google in Tokyo, Japan. You can read an interview with him here.

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