by Brian DeChesare Comments (32)

Prop Trading vs. Bulge Bracket Sales & Trading: Fatty Bonuses vs. Restrictive Regulations That Drain Your Bank Account?

Prop Trading vs. Sales & TradingIf you want to be a professional trader and you’re just starting out, you’ve got 3 options:

  1. Go work in sales & trading at a large bank.
  2. Join a prop trading firm (or hedge fund).
  3. Sit at home in your bathrobe day trading via an online brokerage account.

If you’re reading this, I’ll assume you’re more interested in options 1 or 2 (although not having to go to an office and getting to wear a stylish bathrobe all day have their merits – I do both of them all the time).

The only problem is that it’s hard to figure out what the exact differences are in both these fields – from recruiting, networking, and interviews to the job itself, culture, and pay.

So that’s why I recently spoke with a reader who comes from a family of traders and who’s had experience interviewing at top prop trading firms, as well as for sales & trading at bulge bracket banks – and who has completed internships at both a hedge fund and a bank.

Oh yeah, and not only can he tell you all about the differences, but he can also explain how to break in from a non-target school – since that’s exactly what he did.

Paying attention yet?

The Trading Family

Q: I really want to hear how you grew up in a family of traders and survived the abuse – can we start there?

A: Sure. My father, straight out of undergrad, became a market maker in equity options and many other members of my family were also market makers / independent traders.

For him it was not only about the fact that he enjoyed trading, but also the lifestyle involved with it: he was mostly independent and did not have to rely on the whims of his bosses or co-workers to succeed.

Trading attracts a lot of smart, ambitious, mathematically-inclined people because it’s the closest thing to a merit-based profession in the world of finance.

In the late 90’s, as trading started to become more and more electronically-driven, my father started trading from home and I saw firsthand how to use long/short equity and other strategies as he expanded what he was doing.

Q: I’m sure that made for a great answer to the, “So why do you want to be a trader?” question in interviews…

A: It did! But more importantly, I also learned firsthand what you actually do as a trader and the myths and realities of what it’s like to work in the field.

I was pretty interested in following that path, but then a few years later (early 2000’s), independent trading went downhill – especially within equities trading.

Part of it was because of decimalization and the fact that spreads collapsed and “easy money” stopped existing as a result of that – but the market was also getting more competitive.

Since I attended a “semi-target school,” there weren’t a huge number of opportunities at big banks, but I was becoming convinced that joining a large bank would be more sustainable than trading independently or going to a prop trading firm.

And since I did a relatively technical major (Management Information Systems) along with a minor in finance, I figured that I would be a more attractive candidate on the trading side.

Recruiting and Networking

Q: OK, you have this great background for any type of trading, whether at a bank or a prop trading firm, but you’re not quite sure what direction you’ll go in yet… what did you do next?

A: The first thing I did was find a good mentor (friend of a friend) who could explain the entire process to me and who had had experience in wealth management, prop trading, and related fields.

While my family had a good background in the industry, they had never worked at large banks or large firms of any type, so they couldn’t tell me that much about the recruiting process at those places.

I also landed an internship at a local hedge fund in my sophomore year, which I completed part-time during the school year. I got that one via networking – although my family hadn’t worked at large banks before, they were able to refer me to a few traders and other fund managers they had known.

It still took a lot of persistence, but having these connections definitely helped.

I pretty much sent my resume to every prop trading firm out there, whether legitimate or “chop shop” (think: Boiler Room) because I wanted to spread a very wide net and make sure that I could land a decent-looking internship somewhere.

There were some very legitimate, large, and well-known prop trading firms like Group One, Wolverine, and Jump Trading, but I didn’t distinguish much between those and everything else out there.

And I had an advantage since I had the hedge fund internship, the technical background, and since I was close to Chicago, where a lot of prop trading takes place in the US.

Q: So you actually got a reasonable response just from applying to these prop trading firms online?

A: Yeah. One other factor working in my favor is that undergrads don’t seek out prop trading firms or even know much about them compared to bulge bracket banks.

So applying online resulted in a decent response rate for me, and I got pretty quick answers from most places.

Q: And you focused exclusively on prop trading firms, any particular reason for that?

A: No, not exactly – I did apply to lots of prop trading firms, but I didn’t focus on them exclusively.

At the same time, I was also sending out at least 3 emails per day (and often a lot more than that) to people I had networked with, recruiters, and anyone else who would give me advice.

I was also making 2-3 networking / informational interview phone calls per day – the key was to get to know people personally, which then allowed me to ask about recruiting, interviews, or at least get referrals later on.

I knew that I would have no shot at large banks without a serious amount of networking, and I wanted to keep banks as a back-up option because I wasn’t completely sold on a prop trading internship.

Q: OK, so basically you started far in advance of the official recruiting season, networked heavily with people at banks, and also applied to plenty of prop trading firms at the same time.

What happened next?

A: I started getting prop trading offers fairly early on due to my background, knowledge of trading, and the fact that recruiting in prop trading is much more random and doesn’t follow the same strict timeline that you see at banks.

These offers were tempting because the firms were more flexible about start dates than banks, and there would be no “shadowing” of traders as in sales & trading internships at large banks – they threw you into the action immediately.

But at the same time, many firms wanted me to sign a non-compete even as an intern, which would have effectively locked me into working for them afterward.

I didn’t like that and wasn’t ready to commit to only working for one firm after an internship, so I decided to continue down the “large bank” path and leveraged some of my offers and skill set and resume to move along in the recruiting process there.

And then I ultimately ended up accepting a sales & trading internship offer at a bulge bracket bank – I used many of the same tactics you’ve written about before; coming from a non-target or semi-target school, aggressive networking is the only shot you have.

Got Interview Questions?

Q: Great… I’m glad you finished up that story, because I want to delve into more of what makes sales & trading at a large bank different from prop trading.

How are “fit” questions and telling your story different?

A: The main difference is that prop trading interview questions are much more random.

I got thrown so many curveball questions that I don’t even think an interview guide would help you much with prop trading.

Unlike banks, they don’t care as much about getting “well-rounded” people and will ask strange questions since they’re looking for a very specific fit:

  • Is family important to you?
  • Do you do any volunteer work?
  • If you won the lottery, what would you do with the money?
  • Are you motivated by money?

You need to convince them that you think like a natural trader and can properly evaluate risk and potential rewards, and that you’re driven by trading well on your own and earning a lot in the process.

With banks, the process is much more predictable and the “fit” questions are well-established – if you read some of the previous coverage on this site, you’ll be in good shape for those.

Banks like to think that they’re recruiting “well-rounded” people, even though this is questionable for trading – you just don’t use as wide a skill set as you do in other fields.

Q: You mentioned how random prop trading interviews are and how difficult it is to prepare via guides – what would you recommend doing then?

A: Honestly, you just need to do as many real interviews as possible. Start with firms you don’t care about as much, and keep practicing and moving along, saving places that are higher on your priority list until the end.

It’s definitely possible to prepare for investment banking or private equity interviews, and even for sales & trading interviews at banks (to a lesser extent), but prop trading is a whole different ball game.

Q: Sounds like fun, at least if you enjoy the thrill of getting completely random questions all the time.

What about the technical and markets-based questions? I’ve heard all sorts of stories there, ranging from people claiming that you need to know how to derive Black-Scholes to saying that you don’t need to know much at all.

A: I think the best answer here is: “You determine your own fate.”

If you lead them into thinking that you know something, or you list advanced knowledge on your resume, you’ll get questions about it.

Overall, you’re less likely to get extremely advanced technical questions for sales & trading interviews at large banks – they will ask brain teasers and such, but it’s nothing beyond what you’ve already covered.

With prop trading, I got questions on the following topics:

  • Market-making, arbitrage, and Vega (since I had listed all of them on my resume)
  • Tricky stats and probability questions about poker – one guy from MIT grilled me since I had listed poker on my resume
  • Brain teasers and even math and probability tests in the early rounds of interviews, as a screen for second round candidates

Q: Any differences in terms of the mix of qualitative and technical questions in different stages of the process?

A: With prop trading interviews, they tended to start heavy on the technical and “math test” side to weed people out, but then later rounds were more about qualitative and “fit” questions.

With S&T interviews it was more of an even mix, and I got both quantitative and qualitative questions in each round; I know you’ve written before that the later rounds have more quantitative questions, and that’s probably true to some extent.

The bottom-line: sales & trading at a bank is more about presentation and answering questions the way they want to hear them, whereas prop trading is more about having the right skills and knowledge in the first place – which is harder to fake.

On the Job

Q: Thanks for that overview.

It seems like you made your decision to do the S&T internship based partially on the non-compete and commitment issue, but also because you had seen firsthand what it took to be an independent trader and what the future there might be like.

How do you view the jobs / internships themselves as different?

A: Prop trading has a much different feel because you dive right into the real work from the start, even in an internship. If I had accepted, I would have been doing statistical and math work and either assisting traders or trading myself during the internship.

Whereas with sales & trading, you never get to trade as an intern and you pretty much shadow traders, rotate between different desks, and so on.

The skill set is much more specialized in prop trading since many firms will only focus on one specific strategy, unlike at banks where there are at least many different desks.

And the trading itself is quite different: S&T is more about serving clients (with prop trading there becoming more and more limited), whereas prop trading is 100% driven by creating markets, liquidity, and, of course, profits.

And then there are the differences that come from being in a corporate environment for S&T: you have to be a lot more formal and can’t swear via email or ask stupid questions, whereas in prop trading people only care about results and office politics is barely even a concern.

Q: Any thoughts on the pay and hierarchy?

A: I think the pay figures you’ve already quoted for prop trading are realistic; for S&T, entry-level salaries are all standardized and bonuses obviously become much more variable as you move up.

For internships you might receive a bit less in prop trading just because base salaries are more variable than what you see for S&T at large banks.

The main difference is not that the pay itself is much different, except possibly being lower at some prop trading firms that operate like “chop shops,” but that there’s a “trial period” for prop trading.

They might give you 6 months… 9 months… maybe a year… to prove yourself, and if you can’t do it by then, you’re out.

At a bank they’re a little more lenient and “trial periods” tend to last for a longer time period once you’re working full-time. But they’re still not going to keep you around for 5 years if you’re not producing profits by then.

The Future of Trading?

Q: What do you think about the future of trading and all the regulations that have been introduced? Will investment banks no longer have trading in the future?

A: For me it was sort of like the Yankees vs. Red Sox rivalry (yes, I’m linking to Wikipedia in case you’re outside the US and don’t know about this one) – prop traders were encouraging the regulations, because it meant more business and talent for them, while traders at banks hated the regulations and constantly complained about them.

There’s so much internal compliance required now that trading at banks is nothing like what it used to be in the 80s, 90s, or mid-2000s.

Profits are way lower, though interestingly the profit per employee hasn’t necessarily decreased since there are fewer people working there now.

Prop trading still exists within banks, but to a much smaller extent.

Many independent prop trading firms blew up during the crisis, but the ones that survived have sustained themselves well and the top ones are actually growing and benefiting from all this regulation.

Q: So it sounds like prop trading firms have the better future?

A: I think there will always be merit to starting out at a bulge bracket bank (similar to what I’m doing), but the best opportunities for serious traders are moving more and more toward prop trading firms and hedge funds, due to the lack of regulations there.

Now, that may change in the future and who knows, maybe they’ll come down really hard on those firms and introduce new taxes or legal requirements.

If you’re undecided about what you want to do long-term but you’re interested in the markets and trading, starting out at a bank is better – but if you’re 100% set on trading, a smaller, dedicated firm may be better.

Q: Any final thoughts on how to decide between prop trading and sales & trading at a bank?

A: It’s pretty much what I said above – if you know you want to be a trader for life, go to a prop trading firm and hit the ground running immediately.

If you’re more hesitant, go to a bank.

The truth is that you have no idea whether or not you’ll actually like either one until you try the job

So in my mind, it’s better to start at a large bank, build a bigger network, open up more options for yourself, and then decide what you want to do long-term after working there for a few years.

There are no real “exit opportunities” in prop trading unless you go to business school or jump into a completely different field – it’s go big, or go home.

So that’s why you need to be 110% certain it’s for you before diving in.

Q: Awesome. Thanks for the chat!

A: Sure thing, I enjoyed speaking with you.

M&I - Brian

About the Author

Brian DeChesare is the Founder of Mergers & Inquisitions and Breaking Into Wall Street. In his spare time, he enjoys memorizing obscure Excel functions, editing resumes, obsessing over TV shows, traveling like a drug dealer, and defeating Sauron.

Break Into Investment Banking

Free Exclusive Report: 57-page guide with the action plan you need to break into investment banking - how to tell your story, network, craft a winning resume, and dominate your interviews

We respect your privacy. Please refer to our full privacy policy.

Comments

Read below or Add a comment

  1. Stock Broker Aspirant

    Hi! I have few questions to ask. I am 22. I have no degree. I am from an Asian country in Germany on a student visa. I came 3 months back. I am interested in working as a Stock Broker. I did 2 accounting certifications. I worked 2 years as an Accounts assistant and 3 months as a Stock Broker Internee. How should I get a job? I am interested in London or Dubai but will work anywhere if offered a permanent job. Kindly tell me what should I do? I am willing to study for CISI exams if I can get job. I want to study degree part-time rather than studying full time as I am too old to study now. Kindly advice me. I am stressed and do not know how to get job or an internship. P.S: I do not want to go back home for at least 4-5 years. Waiting for your reply. Thanks :)

    1. M&I - Nicole

      I’d network with people on LinkedIn, and reach out to local stock brokerage houses in Germany, London, Dubai.

  2. Amazing article ! As 2015 has already set in i would like to ask you whether one can go from S&T for 1-2 years to a Hedge Fund trading job in that current market situation. And i am not talking about execution trading, but a trader who is behind the ideas. Is that really possible or a general investment banking analyst or PE analyst junior position is better ?

    1. M&I - Nicole

      Yes it is possible to move from S&T to a HF, and I think it’s easier to move from S&T/equity research vs. PE/IB since you’re closer to the markets. https://www.mergersandinquisitions.com/hedge-fund-recruiting/

      1. Thanks for the fast reply My main concern is that from what i have researched on the web, current conditions do not allow for S&T to proprietary trade which means that Hedge funds would prefer an anlyst. Is that true ?

        1. M&I - Nicole

          I’m not 100% sure what you mean?

          1. Well, less proprietary trading in banks means that traders there do more market making. Then a a market maker from a bank won’t be as suitable for a hedge fund as it used to be because they , generally speaking, don’t generate ideas.

  3. This is the interviewee speaking… feel free to ask away…

    1. Questioner

      Hey Great Article! Got a few questions for the Author:

      1) What books would you recommend for the Brainteaser part of interviews that I could get off Amazon?

      2) I want to get into FX Sales & Trading.

      I’ve read that most of the FX risk that the BBB take on their books comes from holding FX Futures contracts. They do not keep any FX Spot exposure as they seek to offset their cash trades a few seconds after they execute a client’s principal transaction.
      Can you confirm or deny this?

      3) Off all the 5 asset classes, which one do most of the major dealers take proprietary risk off in their market-making business?

      4) For the 5 points that comprise ‘Your Story’, I am thinking about doing the following or Point #4 ‘Your growing Interest’ – I want to talk about how my interest in trading/financial markets conforms nicely with the target Bank’s ‘unique culture’ and ‘values’ and about how much I admire it. What do you think?

      Regards,

      1. 1. Most of the stuff you can just search on google.. “brain teasers wall street” or any combination of the sort… I downloaded the pdf copy of “heard on the street” but those are much tougher than your typical S&T and even prop questions… much more quant based… but it can’t hurt…. Most important is asking around to those who have done interviews.. I am, and was, always inquisitive when speaking with an analyst(someone who recently interviewed) about questions they got. To start you off with the basics: angle on a clock between hour and minute hand (think 3:15pm as most basic) expected value of a dice roll – two dice rolls. How many golf balls can you fit in the empire state building (abstract no answer).

        2. Can’t help you much with FX, never rotated through that area. But most areas typically hedge positions depending on size and product. For equities they will typically use sector ETFs or options. For Munis and corp. bonds typically use treasuries and sometimes CDS to hedge i-rate risk and credit risk.

        3. ???

        4. I would work on your answer.. don’t butter up a response you think they want to here. I failed miserably in my first BB interview thinking in that mindset. Genuine passion is what they look for. If you truly are interested in the markets that should become apparent in your answers.

        1. Questioner

          Hey thanks for the response.

          For the 3rd question, I was wondering which asset class do most of the Banks prefer to do prop. trading off from their client trades. Would u know anything about this?

          Q5:
          There is a firm that I have done a great deal of research on and have been tracking for years. Over time I couldn’t help but admire the way it does business so I want to link my interest in trading with me joining this firm, but I will probably talk about that briefly and only towards end of my 5 points; the vast majority of my ‘talk’ will be obviously ‘trading/markets-focused’.

          Another thing, if I tell them that I am very intellectually curious about trading/financial markets, will they ask me: “Well if you are, then why didn’t you apply into Strategies, or Research instead?”

          1. Not sure if he can comment on question #3 as it may depend on the bank and group.

            For question #5 you need to better articulate why *trading* specifically instead of strategy or research… so rather than just talking about the markets, talk about specific trading strategies that you want to use, or specific securities that you want to trade… which you would not get to do in strategy or research.

    2. Is there much room for someone who doesn’t come from a quantitative background? I mentioned my background a little earlier (English major/Math minor). I’m okay with quick mental math and I’m interested in options trading but I’ve poked around a lot of forums and the general consensus is that you need a great math background to be a player.

      1. If you can demonstrate your math skills in some other way, yes. Classes or a major definitely help but as long as you can prove that you have math skills on par with everyone else it can still work.

  4. Great read. One question though, would it be possible for us to see your resume?

    1. You mean the interviewee’s resume? He did this anonymously so I don’t think he wants to share it. I’ll ask and see if he could share a general template for what he used.

      1. Seems like you’ve learned alot. Who taught you all of this? I feel like you prob had the best mentor ever!

        1. Def. had a great mentor… was also fortunate to have a family background in trading… but not that long ago I was extremely naive on how everything worked… simply put, it takes time to learn… not a born talent, except for the raw components.

  5. S&T groups joke about how people in IB are just monkeys but it sounds like prop trading are where the real bad boys are. I bet they laugh at how people in S&T how to dress up everyday and deal with corporate BS.

  6. Axel Ayala

    Great article! Very informative. Right now I’m entering my sophomore year as an English major/math minor at UCLA . I’ve been trading my personal account for about a year and learning as much as I can about this field. Is it possible to break into prop trading or even BB S&T?

    1. Sure, but as the interviewee mentioned a lot of it comes down to networking. UCLA is a target school for most banks but I’m not sure how much S&T recruiting they do there. So you’ll probably have to do some pounding of the pavement on your own, especially since most trading groups are in Chicago and NYC rather than the west coast.

      1. Axel Ayala

        Alright, so networking is key. Would me being an English major put me at a great disadvantage? I know that prop shops and a lot of S&T desks look for people with technical backgrounds. I’m okay with quick mental math and my math GPA is pretty good (albeit I’ve only taken a couple calc classes so far) but I hope I’m not totally screwed.

        1. Somewhat of a disadvantage but you have the math minor so it’s probably OK. Maybe try to complete some finance / math-related coursework though.

  7. What do you mean there are no exit ops in prop trading? Can’t you go into HF?

    1. It’s possible but more difficult. Most prop traders keep trading there because the styles of trading at hedge funds and prop trading firms are very different, for the most part (quote from other interview):

      “It’s not even particularly easy to move from a prop trading firm to a hedge fund or bank because the styles of trading are so different. You would be overly specialized unless you happen to find a hedge fund that uses a very similar strategy.”

      1. Or, you could start your own hedge fund.

  8. Thanks, love the trading article.

    One question- if the ultimate goal is trading at a hedge fund (global macro/commodities etc where you wouldn’t be an execution trader but an idea generator), do you think out of undergrad it would be better to start in S&T or at a prop shop?

    Thanks

    1. Thanks! Hmm S&T would still probably be better because prop trading is sometimes more execution-focused… though obviously that depends a lot on the group and firm and so on. Unless you get into a prop trading firm that focuses on global macro or commodities it might also be harder to move to a hedge fund afterward.

    2. Wouldn’t getting work at the Prop Firm still be available experience, if you are graduate entering finance. I.e. If you want experience before entering the banks, wouldn’t this be a good starting point?

      Thanks the article,

      Elliot Warren

      1. I think it could be a good internship to have before joining a bank. But probably not the best full-time experience because the trading styles and corporate culture and so on are so different, they might be skeptical about whether or not you can really do it.

    3. Wouldn’t getting work at the Prop Firm still be available experience, if you are graduate entering finance. I.e. If you want experience before entering the banks, wouldn’t this be a good starting point?

      Thanks for the great article,

      Elliot Warren

Leave a Reply

Your email address will not be published. Required fields are marked *