by Nicole Lee Comments (38)

Convertible Bond Sales 101: Got Liquidity?

Convertible Bond Sales 101: Got Liquidity?Sales & Trading, Sales & Trading, Sales & Trading…

Only we’ve covered far too much of the “trading” side and not enough on the “sales” side.

Actually, change that to “nothing” on the sales side.

But that changes with the first interview in our series on institutional sales in different parts of the world.

Today, you’ll hear from a reader who works on the convertible bonds sales desk in Hong Kong and you’ll learn all about the group, including:

  • How you make money on convertible bond sales vs. equity sales and how you get compensated.
  • What your average day in the group will be like.
  • How you’ll interact with traders when you work in sales, and whether or not they secretly hate you.
  • Differences in the convertible bond market in the US and Europe vs. Asia.

Let’s get started:

Pre-Conversion to Sales

Q: Let’s start with the usual resume walkthrough. How did you get started in the industry?

A: I am American and was born in the States. I had worked in various capital markets origination roles (debt, equity and converts) in the US, Australia and Asia.

In HK, I focused on convertible bonds in the standard ECM capacity at a bulge bracket bank. An opportunity came up to move over to the convertible bond sales desk, which is where I’ve been ever since.

Q: Not going to say where you went to school or anything?

A: It would make me too easy to identify, sorry. There aren’t a ton of foreigners in HK doing the same thing I am.

Q: OK, I’ll see if I can trick you into answering that one later anyway.

Stepping back for a second, could you explain what exactly convertible bonds are and what you do in convertible bond sales?

A: Sure. A convertible bond is that also has an equity call option embedded in it.

To investors, convertible bonds can be viewed as an investment that offers the best of both worlds – access to the upside potential of equities, but with a level of downside protection given that it is also a bond that (hopefully) is paid back at maturity if the stock doesn’t perform well.

The convertible bond sales desk of an investment bank sells and trades CBs with institutional investors such as hedge funds, mutual funds and asset managers.

Sales is involved with both primary (newly-issued bonds) and secondary activity (typical trading and market making).

The two main investor types involved in CBs are hedge funds (which may or may not engage in CB arbitrage by shorting the underlying stock) and outright CB investors which do not hedge their CBs and thus are taking a fundamental view that the credit/equity of the company will improve.

Q: OK, so it sounds like convertibles might be an interesting area if you want to move to a hedge fund in the future… but we’ll return to that one later.

What about breaking in… in the first place? Who are they looking for, and what are resumes and interviews like?

A: Few people break in straight from college. Most people come from some related background such as risk management for a trading desk, the middle office, or origination; I broke in from capital markets.

In terms of what interviewers care about, I think people are mostly concerned about your personality, intelligence and drive to succeed.

If you already have a related background, it’s low risk for the team to hire you because you have already demonstrated knowledge of and familiarity with the products.

Some questions that interviewers might ask:

  • Why are you interested in working on the convertible bonds desk?
  • What are your previous experiences that are related to convertible bonds?
  • Do you know how convertible bond math works?

For the first question, you want to relate it back to convertibles being a “compromise” between debt and equity and how you’re interested in the field because you like both of those and don’t want to cover only one at the expense of the others.

For the previous experience question, again you need to relate it back to previous experience in equity or debt.

And if you haven’t had either of those, find a way to link some other type of analytical work you’ve done to convertibles and point out how you have the aptitude to do it math-wise.

Q: Another big question with recruiting in Asia is the language requirement. Do you need to speak fluent Mandarin to work on the convertible bond sales desk in Hong Kong?

A: No. I do not speak or write Mandarin or Cantonese at all.

My investors are mostly people from hedge funds who are based in Asia, Europe or the US. Even those clients based in Asia tend to be Western or at least Western-educated so local language skills are not really important.

Money, Sales, and Deals

Q: I see, it sounds like your group is quite different from something like IB where language skills would be required.

Can you walk us through an average day in your life on the convertible bond sales desk?

A: Sure. I get into the office at around 7:30 AM, and we usually start by having a brief meeting with traders that set the objectives for the day.

I will then call my clients and see what they are up to. As Gordon Gekko might say, “Lunch is for wimps,” so we don’t really take extended lunch breaks here.

I usually just step out of my desk to grab a sandwich back in the office and eat. In the afternoon, the European market opens and I’ll be dealing with European clients too. I usually leave the office by 6 PM.

Unlike equity sales, we do not have as much “client entertainment,” so it’s not as if we’re going out and doing the whole models and bottles thing every night. We’re busy during the day, but we have more free time at night.

Q: Wait, what? No models and bottles? How do you guys actually make money then?

A: I’m glad you brought that up, because it’s actually quite a bit different from equity sales.

The convertible bond market is an over-the-counter (OTC) “risk market,” meaning that the convertible bond desk makes money on bid-ask spreads rather than commissions.

In almost every trade the convertible bond desk makes, the desk is taking risk and trying to recycle that risk within the spread.

The size of the spread and how much value you can capture depends on how liquid the bond is and often how the market itself trades in the short term. The Asia CB market is much less liquid than the market in Europe or the US and the average spread is about 1 point.

For example, the CB desk might quote a bond 100 – 101 and if we agree to buy US $1mm of bonds at 100, we are taking on the risk that we can find buyers above 100 so we actually make money (or if we sell bonds at 101, we are taking the risk that we can find sellers below 101 to cover the sale).

On the other hand, equity sales teams generate revenue from brokerage commissions – you get paid a commission on whatever you execute and do not have residual risk from unfilled orders (i.e. if the clients says sell 100 shares of XYZ company at $100 and you only sell 50, you aren’t at risk to buy the other 50 shares).

Q: OK, so then how much is an average trade, and how many trades do you guys make in a day? How liquid is the convertible bond market?

A: An average trade is usually around $1 – 3 million USD. So unlike equities, we make money with a smaller volume of larger dollar-value trades rather than a larger volume of smaller dollar-value trades.

The convertible bond market in Asia is not liquid given the limited number of investors and the limited supply of paper.

There is also a lot of one-way momentum trading, and since a large portion of the investor base (outright CB investors) tends to be long-term holders the effective free-float at any one point in time can be rather limited.

Q: Do you think that’s just because you’re in Asia? Or are convertible bond markets elsewhere similar?

A: It’s largely an Asia thing; Europe and especially the US have much deeper markets. We just don’t have as much paper to trade or investors to call, but over time this lack of liquidity should start to change.

One thing that also holds the Asia liquidity back is the lack of stock borrow and the lack of liquidity in the underlying stocks.

Convertible bonds offer a chance to employ a market-neutral strategy (CB arbitrage) but that only works if you can at least hedge the equity, which requires stock borrow to short-sell the underlying stock.

The more stock borrow becomes available, the more hedge funds you will see attracted to Asian CBs which should result in more trading.

So the convertible bond market here is pretty much a momentum market.

If equities go up, convertible bonds go up, and vice versa. You can’t always make money regardless of market direction like you often can in Europe and the US.

Co-Workers & Pay

Q: You’ve mentioned trading and working with traders a few times.

How does your team work? How do salespeople interact with traders?

A: Each bank works slightly differently depending on how performance is measured and reward.

Some banks reward sales based on the volume of bonds they trade (which has its own obvious moral hazard) and others focus more on the profitability of their trades and the performance of the desk’s own book. Our desk is more of the latter so I will briefly describe that.

Typically, traders are in charge of making risk prices and managing the prop positions of the desk. The objective of sales is to assist the traders in managing their risk and facilitating client orders, often by using our insight into other potential buyers/sellers.

If traders tried to do this on their own, they would be spread too thin because they’re not only coming up with the ideas, but also attempting to execute them.

By letting us focus on knowing who all the clients are and what potential buyers are doing, the work is divided much more effectively.

Q: What about your co-workers on the desk? Who do you work with most closely?

A: I mainly interact with my traders (getting prices, sharing market color etc) and other CB sales guys as we try to match client flow amongst each other.

I also work with the origination team – so when our bank is selling a convertible bond offering, I would coordinate with the ECM team and provide them with pricing and appropriate structure.

On a sales & trading desk you don’t work as closely with your colleagues as you do in IB because everyone has their own clients and accounts and not everything is a group effort.

Q: Speaking of investment banking, how do salaries and bonuses compare? Can you get promoted more quickly on the markets side if you perform well?

A: Base salary is the same as what investment banking and bonuses are also fairly similar to IB at the entry-level.

The difference is that on the markets side, everything is more performance-dependent even at the junior levels. So if you perform well, you can get promoted more quickly and earn more money – but if you don’t bring in revenue, you also get laid off more quickly.

The “ceiling” for salespeople in terms of pay is probably several million USD per year, but keep in mind that post-financial crisis, fewer people in the industry make that much.

Q: And how is that pay determined? Does it depend on how well your desk has done, or is it more about your individual performance?

A: Different banks have different policies. Some banks pay their team based on how much volume the individual executes. Other banks, like ours, pay the team based on the profit & loss statement of the whole desk, which is split between the sales and traders.

I think the latter is a better way to compensate people because everyone’s incentives are aligned.

Some firms set objectives for traders just to get a certain volume done, so traders may execute at a bad price just to increase volume.

That ends up hurting everyone else, so I think it’s better to base compensation on the P&L of the desk as a whole and make sure everyone’s on the same page.

A Future in Convertibles?

Q: So let’s say you’ve worked in convertible sales for a few years and now you’re looking to move on and do something different – what are the exit opportunities?

A: That depends if you are looking to stay in finance or not. People staying in finance often go to a convertible bond fund either on the execution desks or in some analyst or portfolio management type role.

It’s rare to move into something like private equity or corporate development at a normal company because your skill set is very specialized when you work with convertibles, though you do have the benefit of a holistic view of both debt and equity markets.

So you get a trade-off similar to what you see in other specialized fields of finance: you position yourself to move to a fund that invests using your strategy or which invests in your security, but it’s much harder to move to something that requires a broader skill set.

Q: How does your new job compared to your past life in ECM? Any preference for one or the other?

A: Coming from an IB background, I have to say that this role is not as tangible compared to what you do in IB.

You do have a P&L you can point to, but no real work product to produce and take pride in. Most of your time is spent on the phone or building client relationships so it suits a different skill than IB.

But the work-life balance here is much better than my previous life in capital markets – it really is just market hours, and even if there’s a deal launching in the market I don’t stay late pulling all-nighters to get things done.

Q: Yeah, that makes a lot of sense. We’ve heard from previous interviewees how capital markets hours may not be as good as you imagine.

What do you think about trading vs. sales? Any thoughts on both of those as career options?

A: This really comes down to your personality, but I would suggest that you choose trading over sales because you provide more tangible value in trading.

It’s easier to point to your P&L in trading and take credit – whereas in sales, a lot of what we do is indirect and doesn’t result in an immediate sale or commission.

And, of course, if you’re interested in exit opportunities outside of finance you’re better off going to IB/PE in the first place.

One final note: everything I’ve said above applies to convertible bond sales.

Institutional sales in other areas is definitely different, so don’t interpret my thoughts as blanket statements that apply to everything in sales.

Q: Thanks. Yeah, we’re going to cover some of those areas soon so readers can get the full picture.

Thanks for your time – learned a lot about convertible bond sales!

A: No worries – enjoyed the chat.

About the Author

Nicole Lee has been serving as an Executive Career & Networking Coach for senior professionals in investment banking, asset management, private equity, and global Fortune 500 companies since 2012.

She has helped 500+ candidates land finance roles at firms such as Morgan Stanley, Macquarie Capital, and UBS.

You can connect with her here.

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Comments

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  1. Hi,

    The article mentioned that convertible bond funds and other entities that invest in equity-linked products may be exit opportunities. How feasible is this transition if you are a salesperson? I imagine they would prefer traders or people who have investing experience.

    Thanks!

    1. It’s probably less feasible if you’re in sales, but you might still be able to do something like investor relations at one of those firms. They rarely hire execution traders who don’t have trading experience, but you might be able to get in on the IR, fundraising, or even the research side.

  2. This paper tells you how to price convertible bond correctly and why it makes profit.
    http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2400101

    1. M&I - Nicole

      Thanks Allen!

  3. Thanks for the post, Nicole!
    I got some SA offers from BB IBDs but my top priority is S&T. I heard it’s not very hard to internally transfer from IBD to S&T but how does that work out in reality? At which point should I bring this up? I guess it’s not a good idea to ask for it during my internship. So does the transfer usually occur after 1-2 years of work? To whom and how do one bring that up? Thanks a lot!

    1. M&I - Nicole

      I’d make sure you ace your internship first so you can secure a return offer. This is a delicate situation – I’d suggest you to network a lot with sales and traders and sniff around re opportunities and perhaps start informally interviewing with peeps on the trading floor. With the above being said, you may not have enough time in IB to network with people on the trading floor so I’d try your best to get involved with company events which allow you to meet people in S&T. If you were to bring it up during your internship, do it closer to the end. Yes, transfer can occur after 1-2 years of work, rarely do they happen before 1-year. Bring it up to a division head/MD you TRUST and have spoken with a few times on the trading floor.

  4. Hi,

    I really appreciate this post and interview, and all the discussions below. They are really helpful for my case.

    I have an upcoming interview with an investment bank Convert group. They underwrite convertible bonds and convertible preferred stock. Is there any help/useful external materials on the primary market for convertible securities? Thanks a lot!

    1. It might be useful to find out the recent issues for the region you’re interviewing for.

  5. Hi Nicole,

    Not sure when this post was written. Do you think it is a good idea for a fresh grad or experienced people in other EQL products to get into the CB universe, considering that the CB universe has been shrinking over the last 2 years? (i.e. Do you think hiring and career in the space would get better in the future?)

    1. M&I - Nicole

      Probably not, though I may be wrong.

  6. Great article,
    Can you speak to the future of sales at bulge brackets? There is lots of talk that sales is the next function to be cut what with tightening spreads and decreased demand for coverage services. Sales is the path I plan to go down, but I can’t help but be uneasy…
    -e

    1. M&I - Nicole

      Yes there is some truth to the talks. There will still be sales, but the pool will shrink so it can be harder to break in. There spots for sales are actually more limited versus IB analyst roles, at least in my experience. Quite a lot of people like sales cause the lifestyle is good and you get decent pay!

  7. hi i’m an electrical contractor in order for me to bid on public job i should have a bid bond ,but my question is if it is possible other than paying premium for my bond i can buy the goverment bond and use it as an investment and bond for my license ,i mean is it possible?

    thanks

    1. M&I - Nicole

      I think readers may be able answer your question. I am not familiar with this area to help you.

    2. hi readers i have a question what is the different between bid bond(costruction)and goverement bond?for example any contractor how needs bid bond can buy government bond other than bid bond?
      (iam new in us,iappreciate your ideas)

      thanks

  8. I find it a bit hard to believe that the typical background for a CB trader is Risk Management. I spent some time during my internship at a converts desk and while it’s true that they don’t take interns or graduates, everyone came from an equity options trading desk. Converts math is not easy, since it’s a mix of option and bond math, and it’s pretty far off from a risk role. If normally it’s hard to transition from MO to trading, I would think it’s even harder to do it to a Converts desk….

    Do you think the background described in the interview just applies to Asia? Is the desk I worked with the “weird” one? If you could please elaborate it would be great, I’m really interested in this desk.

    1. M&I - Nicole

      I can see where you are coming from. I don’t believe this just applies to Asia. I believe if you can demonstrate your knowledge of CB, you can make the transition from MO. Of course, having a background in equity options trading would also help. I don’t think the desk you worked with is the “weird” one. I think it varies a/c to the firm & desk. I’ll let the interviewee know of your thoughts and let you know his thoughts (if he has any).

      1. “Converts math is not easy, since it’s a mix of option and bond math, and it’s pretty far off from a risk role”

        Vanilla option and vanilla bond; the fact that these two are combined does not make it difficult at all. The paper often will have call features or mandatory conversion (i.e. knockout) ones, but even this is easily handled via simulation. A person from market risk (other risk depts perhaps not) could do this stuff easily.

        The real trick behind making markets in converts is doing your delta hedging properly, both on the equity side and rates (duration/convexity) and tossing in a bit of credit on top. Risk folks can learn this just like anyone else (before you think it, no I’m not a risk guy).

  9. Hi Nicole,

    Nice interview. I look forward to your future articles especially the upcoming one you mentioned focused on Institutional Equity Sales.

    This summer I am considering taking an internship offer in Equity Research at a very well-regarded boutique. I will also be taking an extra semester to complete my degree and will be applying next summer for SA programs in S&T and IB (still not 100% sure which I’d rather pursue).

    How could I leverage this ER internship for S&T? I know it will give me modeling experiencing that will be relevant for IB but is it a good experience to break into S&T as well? Please note that last summer I was an intern at a regional BB for their Institutional Equity Sales team (so I already have a Sales experience that’d be relevant when applying for S&T).

    Thanks!

    1. M&I - Nicole

      This ER experience will be useful for S&T roles. You can talk about what you learned in ER i.e. your knowledge of valuing companies in the sector you are following and how improves your product knowledge when you sell/trade.

      1. Just to add, depending on which sector you cover and the whims of the senior analyst you work with/for, ER is often not modeling-intensive at all. I wouldn’t be surprised if you go the entire summer without building a single DCF. You’ll focus mostly on comps and due diligence on the companies you cover, such as channel checks.

        If you’ve already done research sales and now ER, you should be set to go into S&T in equities. If you want trading specifically or another asset class (do you?) then you’re on the wrong track probably.

        1. Quick further add (Brian get an edit function for your comments section!): in ER you’ll also do lots of marketing, so you’ll make pitch-book-like presentations for your senior analyst for him/her to take on the road, and sit in on lots of conf calls. This bit is quite sellable for landing in IBD as you can see.

  10. Angelus99

    Great interview Nicole! I’m still looking to break into sales trading myself and it has been very hard in this job market.

    1. M&I - Nicole

      Sorry to hear. Yes, you may want to consider other options in finance as a backup, or roles at boutiques/second/third tier firms/brokerage houses such as http://www.gfigroup.com

      1. Angelus99

        Thank you…My search has been mostly in the past two months. Do you know how i can get a list of good small boutique sales and trading desk?
        I will look into GFI right away…again thanks for the quick reply

        1. M&I - Nicole

          Take a look at banks like Cantor http://www.cantor.com/sales_and_trading, Jefferies http://www.jefco.com/, Nomura, RBS …

          1. Angelus99

            Thats awesome..Thank you

    2. Cantor and GFI are inter-dealer brokers, not “banks” or “brokers” as usually discussed on this site. IDBs may be of some interest to readers, in fact Brian you should try to line up a interview, but just wanted to make that distinction.

      1. M&I - Nicole

        Thanks Adam! I suggested these firms to Angelus99 because they offer an alternative way to break into the industry, esp if he finds it difficult to land roles in S&T.

  11. Hey Brain,

    Currently got an offer lined up at a bb re pe fund and was wondering if I should pick it. The other option would to join a MBB. I’m not looking to stay in RE in the long run but would like to go in to something such as hard asset financing, for example commodities pe or commodities trading. any inputs?

    1. Eh, that one is a tough call because real estate really does make you more specialized and I don’t know how transferable the skills are to commodities trading. But MBB is probably worse since it has even less in common. I would go with the RE PE offer if those are your only 2 options.

      1. Thanks. I was actually tending towards MBB because of the fact that there are a vast amount of projects, at least in my country, focused on mining and minerals (though plan is to go into physical trading not paper trading). Furthermore location wise the MBB offer is in a commodities trading hub. Just see it as a hard call.

  12. Nice interview. Appreciate it!

    1. M&I - Nicole

      Thanks Ben!

  13. Do you think you will have time to post an article about MBS/Fixed Income sales/trading?

    1. Yup we hope to cover all sales desks in the future. Really just a matter of who volunteers to be interviewed – that is somewhat random. Fixed income trading: https://www.mergersandinquisitions.com/what-you-do-in-fixed-income-sales-trading/

      1. Thanks! Yeup I’ve read the Fixed Income Trading one but was wondering if there would be something a bit more specific to MBS (trading or sales).

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