The Equities Trading Floor: What You Really Do Every Day, and Why You Don’t Even Have to Work in Dallas

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Equities Trading FloorThis is a guest post from “DerivsTrading,” who founded S&T Careers.com to teach you how to win bulge bracket trading interviews and offers and ace your assessment centers. He’s an experienced flow options trader currently working at a bulge bracket bank in London, and he defied the odds to break in coming from a non-target school.

Traders often think of Equities as the ugly friend of the girl/guy you’re trying to hook up with – FICC (Fixed Income, Currency, and Commodities) is, of course, the hot friend.

And ever since Liar’s Poker, the “Equities in Dallas” label has haunted equities traders everywhere they go.

But what equities traders do in real life today has little in common with the stunts you saw in 80’s money novels.

Before we jump into what to expect and what each role on the equities trading floor entails, let’s bust a couple of myths that deserved to die a long time ago – and see which ones might just be true:

Myth #1: Equities Takes Less Intelligence than FICC

Verdict: Not True

FICC does generally require more quantitative ability than equities – but there are desks in equities that require better quant ability than certain desks in FICC.

For example, the exotic equity derivatives desk requires more math than any of the cash desks in FICC, and the products themselves vary all the way from simple to more complex.

Myth #2: You Make Less Money in Equities

Verdict: True, In General

In the words of an MD, “You need to be very smart to make a lot of money in FICC, but you need to be f***ing smart to make a lot of money in equities.”

This doesn’t mean you can’t make the same amount of money in equities – there are quite a few guys there that earn over $1 million USD per year.

In statistical terms, the average might be lower but the ceiling is about the same.

However, FICC also tends to have higher turnover than equities – if you look at an equities floor you’ll find quite a few guys who have been there since their first internship, whereas the FICC floor always has lots of turnover.

This is largely because of myth #3:

Myth #3: Equities Generates Less Money than FICC

Verdict: True, But Irrelevant

If you look at the annual reports of most investment banks, you’ll see that FICC generally brings in more profit than Equities (1.5-2x more). Students often cite this as a reason for choosing FICC, since they take it as a sign that the people there make more money.

But you have to keep in mind that FICC is larger in the scope of products as well as its headcount.

The equities floor consists of cash, flow derivatives, convertibles, and exotics.

But FICC includes FX, credit, interest rates, and commodities, all of which have multitudes of products within them – so there are more employees and the profit per employee may not be much different.

Equities revenue is also much more stable than FICC revenue, which leads to higher job stability.

If you suck at trading, then the job security of the product is irrelevant – but it is nice to know that you’re less likely to get fired in equities just because of a poorly-performing product.

Myth #4: Equities is Full of Old-School Aggressive Traders

Verdict: True

This is the one myth that is closest to being true. Most cash and flow derivatives equity desks have a strong, fratty culture.

Simpler products require quicker thinking and aggressiveness rather than quantitative ability; as you get more complex, people become more reserved and “brainy.”

The FICC trading floor also has desks with fratty cultures, but the ratio is more in favor of the reserved, brainy guys.

In addition, the sales teams across all products are generally more fratty – these people are extremely social and outgoing since they spend all day selling to major institutional clients and then wining and dining them at night.

Divisions within Equities Trading

OK, so now that you know which myths about equities are true, which are false, and which are partially true, let’s jump into the different jobs on the equities trading floor.

Some of the main roles include Cash and Derivatives Sales, Cash Sales-Trading, Cash Trading, Flow Derivatives Trading, and Exotics Trading.

Most people just split this into “Sales” vs. “Trading,” but that’s actually a simplification – as we’ll see below.

Cash and Derivatives Sales – The Job

Cash sales people have one main job: to use the research written by equity research analysts and pitch ideas to clients to get them to trade.

Every morning the research department produces reports, which the sales people then read and pass on to buy-side clients.

Many buy-side portfolio managers have made a career out of simply choosing trade ideas sent to them by sell-side desks instead of coming up with their own strategies.

But most portfolio managers get a huge amount of research every morning – so the pitches you make as a sales person can sometimes sound like background noise to buy-side traders.

Whether or not the buy-side guy trades through you is mostly a result of outside-the-office relationships – and that’s why sales people spend so much time “entertaining” clients.

The other function of sales is to help place IPO issues that the bank is trying to sell to institutional investors.

Cash and Derivatives Sales – The Most Important Skills

You must be able to condense huge amounts of research into a quick 2-minute pitch and deliver it over the phone with enough enthusiasm so that the guy on the other side of the phone thinks you know what you’re talking about – even when you don’t.

Salespeople also need to have great interpersonal skills and must get along with a wide range of people. Much of your success as a sales person comes from getting others to like you.

Cash and Derivatives Sales – How Money is Made

Simple: commissions. Every time a trade is placed through the sales department, the bank earns a commission – which is then split between sales people, sales-traders, and traders in a specific ratio.

Cash and Derivatives Sales – A Day in the Life

6:45 AM – Get into the office and start checking what has happened in overnight markets.

7:00 AM – Read over that day’s research and choose the few items that you feel like pitching that day. You can choose to go against the in-house research, but you are expected to have an extremely good case when doing so and it’s usually frowned upon even if your ideas are great.

7:25 AM – Morning meeting with the other sales people and research analysts.

7:30 AM – Start calling clients to pitch ideas, hopefully generate some trading commissions. The day from here on out is a combination of talking to clients and researching even more ideas to pitch.

2:00 PM – Meeting with the founders of a new company that is going through the IPO process with the bank. This is your main chance to get sound bites from the founders that you can use in pitches later on.

5:30 PM – Get out of the office and go “entertain” some buy-side traders.

Cash and Derivatives Sales – Tips for Interns

Sales people love interns that are enthusiastic and “go-getters.” So try to do things that might not make any impact whatsoever, but which show initiative – for example, send out a desk-wide email summarizing key news every morning.

As an intern, you won’t actually be allowed to pitch ideas to investors so the best thing you can do is support the sales people and make their lives easier.

Cash Sales-Trading – The Job

You might spend a couple days on the Cash Sales-Trading Desk as an intern and still not have a clue what they do.

In essence, they are the execution side of sales. With most products, sales is a combination of research and execution, and in equities it’s split up into two separate roles altogether.

Cash sales-traders do still pitch ideas, but they are geared toward short-term execution instead of the more fundamental pitches the sales people focus on.

For example, if a buy-side PM wants to buy 100,000 shares of VOD, he/she will contact the sales-trader who will in turn try to execute the order.

The difference between sales-traders and normal traders is that sales-traders do not take any risk.

If the client needs to make a risk trade, traders manage that position; the sales-traders have a host of proprietary algorithms that they can use to execute trades.

They don’t actually need to know the technical side of the algorithms, just when to use which one – one example is VWAP, which targets the volume weighted average price for a certain period during which the order is executed.

Cash Sales-Trading – How the Desk is Split Up

The desk is divided into two: the sales-traders that cover institutional investors and the sales-traders that cover hedge funds.

Generally, there are also one or two sales-traders that focus on fund managers in different time zones. For example, the London sales trading desk might have two guys who cover US PMs that want to trade European stocks.

Cash Sales-Trading – The Most Important Skills

It’s very similar to sales, except that the process of turning research into a pitch takes place over a shorter time period since the job is more market-sensitive.

Sales-traders also need to have a more “trading”-esque grasp of the markets, and must be able to quickly decipher news and its potential impact right after it happens.

Cash Sales-Trading – How Money is Made

The same exact way as normal sales: commissions.

Cash Sales-Trading – A Day in the Life

6:30 AM – Arrive and get in touch with colleagues from Asia (if you’re in London) to get a recap of overnight markets. Unlike normal sales people, sales-traders need to be much more in tune with market movements and so this part of the day is more important.

6:45 AM – The research department has sent a 5-page brief with half-page items on market developments. Mostly they are about stocks that have had their status changed (buy, sell, neutral).

You quickly skim the report and highlight the stuff your clients might find interesting. If you know a client has a position in any of the stocks with changed statuses, you need to let them know ASAP. A key part of sales-trading is to know what your client wants to hear; there’s no use in pitching ideas that are destined to fail.

8:00 AM – Sales-traders don’t usually hold morning meetings. As the market opens, execution starts. Throughout the day you are constantly working orders for clients and making sure they get executed.

12:00 PM – A company announces earnings, and you immediately get on the phone to call all relevant clients and let them know even though they’ll be well aware of it if they have a position. You need to develop an opinion on any news that comes out as quickly as possible – is it good for the stock? Bad for the stock? Neutral?

4:30 PM – The markets close, and there’s not much holding you up from logging off and heading out. Sales-traders usually entertain clients 2-3 nights a week, so even though the office hours may be shorter than other roles in finance, the total work hours add up to a higher number.

Cash Sales-Trading – Tips for Interns

Stay on top of the markets at all times. Know what announcements are being made, what companies are announcing earnings, and the estimates for each one (EPS is the most important metric).

Sales-trading interns generally have to give daily phone pitches, where you call the rest of the desk (whoever is free listens in, and there are usually 2-3 people on the line for each call) and you give a summary of the key research topics you think are important. Then, you go through the key developments expected during the day.

As an intern you should stay away from injecting your opinion too much, but as you get more comfortable you can let your own style come through; the key point is breadth.

The full-time traders listening often interrupt you to say, “I’m not interested in that” and you’ll be forced to start talking about something else.

Cash Trading – The Job

Cash Traders trade the shares of companies. They manage the risk that the firm takes on and they execute large trades that cannot be filled quickly.

A buy-side investor can trade in 2 different ways: he can go for an agency trade where the bank simply works the order in the market, not taking any risk – or he can do a risk trade, where the trader makes the client a price at which he is able to buy/sell all of the shares that the client wants to sell/buy.

So if a client needs to urgently dump a large block of shares – let’s say 2x the daily volume of the stock – the trader makes him a two-way price: a bid price at which he’ll buy, and an ask price at which he’s willing to sell (with the ask price higher than the bid).

Example: If the market price of the stock is currently $100, the trader might make a price of $98-$102; if the client sells at $98, the trader has a mark-to-market profit of 2 points on each share.

But that isn’t real profit because the trader needs to unwind the position – and since it’s huge, it will take a long time to do so.

If the stock drops before he gets rid of it, the trader has effectively lost money – so he needs to judge how wide of a market to make based on how big a position he is taking relative to how quickly he can unload it.

If the spread he gives is too wide, the client might not trade and might simply get a more competitive quote from someone else; on the other hand, if the spread is too narrow, there isn’t enough room for error when unwinding the position.

Most cash equity traders also have a side prop book where they can trade their own ideas within certain limits that desks impose on them.

Cash traders are renowned for being “old school,” and the desks are dominated by former athletes and frat guys.

Cash Trading – The Most Important Skills

Being a cash equities trader is all about market instinct. The job requires little quantitative ability because you don’t do much math – but you must react quickly to anything that happens.

Mental arithmetic is huge on this desk since you must track your P&L in real-time.

Cash Trading – How Money is Made

Most trading desks depend on making money through bid-ask spreads. However, cash equities traders often find that they lose money on risk trades. That’s because when a client wants to unload 2x the daily normal volume, it drives the stock price down and the market-maker loses out.

But the traders are willing to take a loss on these trades if the commission and prime brokerage fees generated by those clients are high enough to offset the losses. Therefore, each client has a balance with the desk, which keeps track of how much the bank has lost on risk trades with the client.

Cash Trading – Typical Day

The typical day is filled with making prices, taking prop positions, and managing the risk on the book.

Prices find their level very quickly in cash equities following a news announcement, so a trader always has to think about potential scenarios and the prices stocks would trade at under different outcomes.

Cash Trading – Tips for Interns

Do not mess up the lunch/coffee orders. A lot of desks don’t use interns as errand boys, but the cash equities desk consistently uses lunch orders to test an intern’s ability to execute orders quickly and accurately.

Tip: memorize the order and write it down when they aren’t looking and it will make you look like you have a good memory.

Flow Derivatives Trading – The Job

Flow Derivatives Trading encompasses the vanilla products that have more liquid markets than exotics and structured products.

It’s made up of index volatility (options and variance swaps), single stock volatility and convertible bonds.

Some banks have convertibles as a separate unit, but convertibles themselves have many shared characteristics and so it’s natural to keep them close to the options traders.

This desk is often regarded as the best mix between technical complexity and a fairly liquid product.

As an options trader, you’re in charge of managing a book of options – at any given time that book features thousands of positions that you monitor through your overall risk measures (delta, gamma, vega, theta).

Think of the guy at the circus who tries to get eight plates spinning all at once: he starts spinning all the plates, but by #4 or #5 he has to go back to the first one to adjust it.

That’s the job of an options market maker – you sit on all these positions and they’re constantly changing because the parameters are always changing.

Pure stock trading is simpler because only the price changes – with options you have the price, passage of time, implied volatility, realized volatility, dividends, interest rates, and so on.

Even if the stock doesn’t move, you’re either making money or losing money through your gamma/theta. You might be completely right about one aspect and then end up losing money because one of the other parameters changed dramatically.

Flow Derivatives Trading – The Most Important Skills

Even though all trading positions require a great amount of focus, you could argue that options traders need to be the most-focused traders.

There are ton of variables to keep track of, but you don’t get the luxury of time that an exotics trader might get since the options market is so liquid.

Flow Derivatives Trading – How Money is Made

It’s hard to pinpoint how options trading desks make money because there are so many different profit sources. Generally, you make money from the bid-ask spread – not in the sense of being able to buy and then sell the same option for a profit, but rather by getting a statistical edge if the option is held to maturity.

For example, if the fair value of an option is 20% volatility and the bid-ask is 19.5-20.5, and the trader buys it for 19.5 and then hedges it for the rest of the option’s life, a profit will be made if the option realizes 20%.

However, since an options trader is managing so many different positions, there is a large proprietary aspect to it and the line between client trades and prop trades becomes very blurry.

Flow Derivatives Trading – Typical Day

6:30 AM – Get in and start checking overnight markets.

7:00 AM – Morning meeting with other derivatives traders and sales people. Talk about key issues from yesterday and what is expected today. The sales people present a few trade ideas they’ll be pitching.

7:30 AM – Look over a printout of your risk report; you always have an idea of where you’re at but it’s good to look over and see exact figures. The sheet is broken down by portfolio as a whole as well as by all the individual components that you are trading.

Each risk (delta, gamma, theta, vega, rho) is shown for a range of spot levels as well as a range of implied volatilities, which is how you assess your exposure as those two variables change.

8:00 AM – The market opens and several customer pricing requests come in – they’re all small trades so you complete them and hedge the delta immediately. If they were larger trades you might consider hedging the delta throughout the day to avoid moving the market.

10:15 AM – A stock in which you have a long back month calendar spread has sharply broken upward, and since you are short gamma in the front month this causes a bit of a loss – you have a choice of either stomaching the loss and re-hedging at these levels, or waiting for the stock to come back down to erase the loss. However, if the stock continues to move upward, the gamma loss would increase exponentially.

1:30 PM – Another pricing request, this time for a variance swap, so you run it through the pricer and send back a quote. It’s not a position you want to take on so you try to make a quote that is respectable – the client won’t feel insulted, but at the same time he won’t want to trade with you.

6:00 PM – End of the day; you hedge all the deltas and head home.

Flow Derivatives Trading – Tips for Interns

It’s all about option theory. To impress, you need to show that you can pick up concepts quickly and that you only need to be taught something once.

Once you learn something once, make sure to go over it as much as possible until the concept becomes second-nature – that way when you’re examined under pressure (which you will be), you’ll be able to impress.

Exotics Trading – The Job

You do two things in exotics: 1) Come up with structures and price those structures for clients; and 2) Manage the hedges after a deal is done.

Unlike what you see with more liquid products, with exotics the trader holds the trade on his book until the deal expires – so rather than the bid-ask style of trading, you focus more on hedging the risks of the transaction with more plain vanilla structures.

You price exotics by pricing the cost of using a hedge with more liquid instruments – so your job is to avoid losing more on subsequent hedges than what was made on the exotics transaction.

This desk favors very mathematical people – you don’t necessarily need a Math / Physics / CS degree, but unless you have a serious quantitative background you wouldn’t be suited for the role.

A high percentage of the traders on exotics desks are French and come from The Grandes Écoles; in some banks the main language on the exotics desk is French – well, in Europe, anyway…

Exotics Trading – The Most Important Skills

You must understand the pricing behind the products. You don’t necessarily need to be able to do all the math behind the pricing, but you do need to understand the concepts – because exotics is all about nuances and small details that can make or lose a lot of money.

Do that well, and you just might become a legendary BSD even if you’re in Equities – without having to suffer through Dallas first.

This is a guest post from “DerivsTrading,” who founded S&T Careers.com to teach you how to win bulge bracket trading interviews and offers and ace your assessment centers. He’s an experienced flow options trader currently working at a bulge bracket bank in London, and he defied the odds to break in coming from a non-target school.

He offers a comprehensive S&T interview guide that includes 100+ technical (equities, credit, FX, interest rates, and options theory) and behavioral questions, a guide to generating trade ideas, secrets on how to beat the intern “trading game,” and full support and access to a forum where you can ask all your questions and receive answers from professional traders.

Click here to check out the S&T interview guide and sign up.

NOTE FROM BRIAN:

Yes, this is a guest post (did you really think I suddenly became a trading guru?), but I’m chiming in because our author is selling a sales & trading interview guide, which you’re probably wondering about.

As with everything else I’ve promoted on this site, I read the whole guide in detail and reviewed all the questions and answers within.

It’s great if you’re looking for a more technically-oriented guide to S&T interviews.

It’s ideal if you’ve had experience in trading and the interviewers will expect you to know more than the relatively simple technical and market-related questions we’ve covered in previous articles.

It could still be useful if you’re going for entry-level roles, but this guide definitely skews to the more “advanced” side of the S&T world.

And, of course, it’s a great intro to the concepts if you’re about to start working and need to make sense of different areas like credit derivatives, volatility swaps, bonds, and so on.

There isn’t quite as much coverage on the qualitative / “fit” side, but previous authors here have already addressed a fair number of those questions.

So that’s my honest opinion: it’s a great guide, but it all comes down to what you’re looking for.

And before you ask: no, I am never going to release a sales & trading interview guide because it would be spreading our resources too thin and I do not know enough about the area personally to create any type of course about it.

So if you’ve been looking for that elusive S&T interview guide, this is your chance. Good luck!

About the Author

is the Founder of Mergers & Inquisitions and Breaking Into Wall Street. In his spare time, he enjoys learning obscure Excel functions, editing resumes, obsessing over TV shows, and traveling so much that he's forced to add additional pages to his passport on a regular basis.

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29 Comments to “The Equities Trading Floor: What You Really Do Every Day, and Why You Don’t Even Have to Work in Dallas”

Comments

  1. Àlex says

    Great insight into the unknown world of S&T! Fascinating. Info well-presented (The Job, the most important skills, How money is made, tipical day and tips for interns)! Congrats and thanks!

      • hbk says

        Thanks Brian. I had 3 specific Qs about buy-side trading:-

        1. Is the role of a trader different in Asset Managements Firms (Fidelity, Vanguard, Blackrock etc) v/s Hedge Funds v/s Prop Trading Firms ??

        2. Is there a difference between “Emerging Markets Long/Short Equity Fund” at an Asset Management Firm as compared to a hedge fund that follows an “Emerging Markets Long/Short Equity” strategy ?

        3. Is it common to be an equity / equity-derivatives trader at a hedge fund ? (or are those jobs replaced by computers ?)

        Thanks again !!

        • says

          Not an expert on these, but:

          1. Yes, because the trading strategies are different. Large AM firms are often long-only whereas HFs can do almost anything and prop trading firms are generally market-makers and do not use directional trading as much.

          2. Yes, because generally the HFs will use a great variety of trading strategies and many (though not all, I believe) AM firms are more limited to long-only investments.

          3. Maybe not “common” but human traders definitely still exist at hedge funds in those roles. There will always be a role for great human traders, because there are somethings a machine can’t do as well.

          • hbk says

            Thanks Brian!

            But for Q2: How is a “Emerging Markets Long/Short Equity Fund” (Note: LONG/SHORT) at an AM different from a Hedge fund using a “Emerging Markets Long/Short Equity” strategy ?

            For Q3: Can you give some examples of what kind of things human traders do when trading is mainly algorithmic ?

            Thanks. This is a great site. Highly recommended :)

          • says

            The difference is that HFs will just use more aggressive strategies I believe… they will make bets that many AM firms just won’t make. But L/S equity is the same strategy really.

            What human traders can do: sometimes they have a better intuitive reading of the market or can better predict in advance how market news will play out in “creative ways” that a computer wouldn’t necessarily predict… so if Event X happens, maybe they could think of how it would have an impact on unrelated Industry Z, where a computer would miss that.

        • says

          Hi,

          I work on the sellside, but in terms of buyside trading the job varies quite a bit. Being a trader at a lon only asset manager or fund is often just being an execution trader. The portfolio manager is the one that does the analysis, allocates capital, makes decisions, the trader is really there just for execution and management of positions. And there are tons of hedge funds that are set up like this as well, oftne times ones that are fundamental equity funds. The portfolio manager doesnt want to be bothered with calling the sellside desk to execute orders. On the other hand there are buyside firms that are more trading oriented and less investing oriented, in these cases the trader runs an actual book, so you allocate capital and make decisions.

          • Adam says

            @hbk,

            Q2, how is a L/S fund at an AM shop different from a L/S HF? You’re right that they can be quite similar, but it depends on the mandate for each fund/sub-fund. HFs generally have more liberal mandates, e.g. the have wider discretion on the types of cos, sectors, markets, and concentrations in the portfolio. But again it’s case by case.

            Q3 Trading mainly algo?? Algos work for routine trading in deep markets. If you’re dealing in anything illiquid, be at small caps, emerging markets without deep trading, big orders sizes, etc. then people do the trades, either without algos or in combination with algos in some cases. For derivs, some delta-one issues can be traded on algos, but the above liquid issue certainly applies and put anything with convexity in algos and you’ll either be gamma-ed or flit away your P&L on over hedging.

  2. MI says

    The timing of this article couldn’t be better! Starting work soon :)
    And looking forward to more articles from the author & M&I, especially on FICC. Thanks alot!

  3. RJ says

    Thanks for the article!
    I definitely recommend the S&T interview guide, it helped me get an internship in structured product sales at a BB. The section on option theory and greeks was especially useful! Some parts will be more/less relevant depending on the job you interview for.

  4. Arthur says

    Great article! It helped me a lot.
    I would like to have some details about careers in S&T. Do you think it’s easy to begin in Sales and then work in equity research or be a trader?
    Generally speaking, when you apply for an internship in S&T, do you work with all the teams (sales, sale-traders, research, traders)?
    Thank you very much!

    • M&I - Nicole says

      I think it is tougher to move from Sales to ER/Trading versus the other way round. ER builds up your technical skills and many move from ER to sales after building a solid foundation on stock analysis. It is not common from people to move from sales to trading because the two skill sets are different.

      Yes you do.

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