Traders and Brokers: Bud Fox vs. Gordon Gekko?
Assuming you’ve seen Wall Street (the awesome, original one, not the watered-down sequel) – it is a requirement to work in finance, after all – you know something about traders vs. brokers.
The traders are like lone wolves who go in and make tons of money by making quick decisions…
But supporting every successful trader is his/her broker – the one who actually connects buyers and sellers and makes trades go through.
Both traders and brokers are linked to the market and need to stay on top of everything that’s happening – but beyond that, they’re quite different.
So, what do traders and brokers actually do?
Which one is a better match for your personality? How do you break in?
And most importantly, who makes more money?
Definitions and Types of Traders
You might remember from the guide to fixed income trading that we defined 2 types of trading: agency trading, where you simply execute orders for the client, and prop trading, where you invest the firm’s own money and make your own trading decisions.
But the outside world has no idea what those terms mean, so they usually refer to prop traders as “traders” and agency traders as “brokers,” which is what we’re sticking to here.
Prop traders exist at dedicated prop trading firms and hedge funds, and they used to exist at investment banks before the US government banned them (the verdict is still out on other countries).
Brokers exist at both banks and at independent firms called brokerages; the difference is that these smaller agency-brokers are pure middlemen and only fulfill orders while large banks have a lot more going on.
There’s more to it than that and as with other areas of trading, the dividing lines can get blurry, but that’s the basic difference and how we’ll be using the terms here.
- Gordon Gekko – Trader
- Bud Fox – Broker
OK, back to how they’re different…
What Do Traders Do?
Traders are at the top of the food chain – entire teams in the back and middle office support all their trades and fix annoying IT issues for them.
They analyze equities, derivatives, fixed income, forex, commodities, and anything else they might be trading and decide on what to trade, what strategies to pursue, and how to invest the firm’s money.
If the trading floor were a jungle, traders would be gorillas who pound their chest constantly while stealing bananas from everyone else.
Everyone wants to be a trader, but it’s tough unless you have the right education, background, and personal connections.
Brokers – Support Staff?
After a trader decides what to buy or sell, he would call the broker and say, “I want to buy/sell XX of XX – can you make it happen?”
Technically, brokers “support” the traders but they’re completely different from the back and middle office crew.
Unlike the back and middle office, brokers generate revenue – they connect buyers and sellers and make a commission on each successful transaction.
The more shares that a trader trades through the broker, the more money the broker makes – and the more traders the broker services, the more money he makes.
Personalities – Traders
Traders are judged almost 100% on performance – it’s one of the few professions on Wall Street where you can excel even if you show up without shaving for a week or two.
If you bring in massive profits for the firm, you’ll be rewarded.
Traders spend most of the day in front of their 8 or so computer screens – they might discuss ideas and market news with other traders, but overall there’s less teamwork than in management consulting or investment banking.
So the trading profession attracts more introverted individuals who are good at math and great at working independently: think math and engineering majors, with a few random frat boys thrown in for good measure.
Brokers: Got Extrovert?
For brokers, it’s all about relationships and networking: you’re judged based on your ability to bring in traders and keep them on board.
Profit still matters, but the quality and quantity of clients you bring in also plays a big role.
If you’re a good schmoozer and you’re always the first to hear about rumors and gossip, you’d be a great broker.
If Malcolm Gladwell were writing a new column about traders and brokers, brokers would be part-maven, part-connector – they know everyone, and they track of tidbits of information to entertain and inform traders.
If a client really liked Turkish food, a broker would know all the best Turkish restaurants within a 5 km radius.
There’s a lot of back-and-forth with traders on the phone during the day, so brokers often invite traders out for food, drinks, and sports (and sometimes “other forms of entertainment”) after work.
It’s nothing like the back office-trader relationship where they barely acknowledge one another unless given a reason to work together on a project.
Breaking In: Trading vs. Brokering
Large banks do take sales & trading summer interns and make S&T full-time hires, but the numbers are lower than what you see in investment banking.
With the 2010 financial reform, those numbers will shrink even further as banks disband their prop trading groups and everyone migrates to hedge funds.
For networking, resumes, and interviews for trading, check out this podcast Jerry recorded – recruiting is similar to investment banking but there are significant differences, especially in interviews.
With brokers, there’s even more of a focus on experienced hires: on-campus recruiting is rare, especially for smaller agency-brokers, and you pretty much have to network your way in from related fields.
Some brokers also post ads online and if you have the right experience, applying online might actually work – that’s because they’re looking for very specific experience and as you move up, you get more and more specialized.
Resumes and interviews are similar to trading at the entry-level, though there may be more of a focus on relationships and sales skills – similar to sales itself – at dedicated firms.
Advancement depends on how business is going: if your desk is profitable, wants to expand, and everyone likes you, then they might give you your own portfolio or trading book once you’ve proven yourself.
Note that even as you “advance” within trading, your actual work may not change that much – you’re still trading all day.
It’s not like investment banking where MDs are wining and dining clients and analysts are pumping out pitch books – you just get more responsibility and a higher percentage of the profits.
On the brokerage side, advancement and upside depend on how many new clients you can bring in and the commissions you generate – just like with trading, the work itself doesn’t change dramatically as you move up but you work with higher-volume clients and earn more.
Work hours are roughly the same for traders and brokers – they get in an hour or two before the market opens and leave an hour or two after market close.
Brokers might try to get in earlier than traders and leave after the traders leave just to make themselves available at all times.
Both are completely different from investment banking: no all-nighters and no 100-hour workweeks.
Think 60-70 hours per week rather than 90-100.
Who Makes More Money?
And now to the $50 million (or should that be billion?) question.
Most people would say, “Traders make more money!”
After all, some traders make tens of millions per year, and then there are special cases like John Paulson – he made over $2 billion in cash each year in 2008-2009 by betting against subprime mortgages and CDOs.
No one noticed or cared what his broker made.
The problem is that everyone focuses on these once-in-a-lifetime success stories rather than the average trader: for every profitable trader, there’s a trader somewhere else that lost money.
Meanwhile, the broker in between made decent money even if one of the traders did not.
Multiply this by dozens of trading clients and you can see how broker commissions can add up to a comfortable lifestyle, all with far less market risk.
Specific Numbers, Please
Numbers are tough to verify, but most brokers start in the mid 5-figures range and the most successful brokers might be in the mid 6-figures range – it’s not like trading where the stars could make in the tens or hundreds of millions or billions of USD each year.
If you want to believe Salary.com, they have a nice graph here.
Keep in mind that the average (prop) trader makes nowhere close to that each year – some small prop trading firms don’t even pay you a salary and instead base everything on your trading performance, so you could end up with a “paycheck” of $0.
The maximum pay for traders is a completely different order of magnitude, but the standard deviation is also much higher – so the median pay may not be much different between traders and brokers at the entry-level.
And don’t underestimate how much you can make as a broker: brokerage firms often make more than trading firms that are suffering from a lackluster year.
Are the Machines Taking Over?
You’ve probably read about how trading is becoming more and more automated – should you even bother getting into the industry if computers will take over anyway?
Keep in mind that there will always be a human element – someone needs to program algorithms in the first place and continually test the programs.
So it’s not as if the industry is dying – it’s just shifting in more of a quantitative direction.
There’s no denying that trading itself has become more of a science club over time – so unlike with investment banking, advanced math and programming skills would be helpful here.
Even on the brokerage side, more and more agency trading activity is becoming computerized as well – there will always be a need for the outgoing broker who knows everyone, but the math nerd might not be far behind him.
This article was guest-written by Zeke Lee, a Stanford graduate, former management consultant with Booz & Company and former derivatives trader on Wall Street (Oh yeah, he’s one of my friends from school as well).
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
48 Hours in the Life of a Sales & Trading Intern
The following takes place between 6 AM and 6 AM, at a large investment bank in Tokyo.
6:00 AM: The alarm goes off. I really want to snooze but via sheer willpower I jump out of bed – need to impress my boss and co-workers.
6:50 AM: I am one of the first people at the office. I breathe a sigh a relief after confirming that my boss isn’t here yet – sometimes he comes in early too.
I had promised myself that I would prove to my boss what a hardworking intern I am. I hastily start the menial task of copying and passing out materials (e.g. research reports, recap of other world markets, latest rates data, etc.) to each trader’s desk. I wonder how many of the traders actually read what I pass out.
8:00 AM: The trading desk is almost full now. I am skimming articles on financial websites and Bloomberg, preparing myself to sound well-informed on the markets when talking to people for the rest of the day (Note: Many trading interns do not get access to Bloomberg since it is very expensive… to the tune of $1500 USD per month). I try to predict how the news will affect the markets for the day.
8:15 AM: All the equity traders have arrived at their desks – fixed income trading is on another floor. Everyone gathers for our morning meeting. Some of the salespeople that work with the traders float over to listen in.
Traders that specialize in each sector or type of trading – vanilla equity, options, portfolio trading, agency trading, etc. – give quick overviews of what happened the day before and their predictions for the upcoming trading session.
What happened overnight in the US/European markets is also naturally a point of discussion, since markets tend to follow each other.
Sometimes I struggle to understand all the jargon or the specific concepts underlying their comments, but overall I can grasp what they’re saying. Everyone speaks in English at the meeting, but many revert to Japanese afterward.
9:00 AM: The Japanese stock markets open. Today I am spending the first couple hours sitting next to an equity options trader, having gotten his permission the day before. I make sure to stay especially quiet right before and after the market close, since those are the busiest times for traders.
Out of his 6 monitors, he has Excel open on 2 screens, Bloomberg open (usually charts) on another 2 screens, Reuters open on 1 screen, and another screen for Microsoft Outlook. The numbers in Excel update every second. I see the trader wrinkle his eyebrows and I wonder why.
10:00 AM: I wait for a moment when the trader seems less busy, and I ask him about what happened. Apparently his gamma had not been hedged as well as he had thought – shortly after the market opened his gamma rose to a higher level than he had anticipated, which meant more risk than he wanted.
I nod in appreciation; I know that some other traders would not have bothered to answer my question.
11:30 AM: Today is a volatile day in the market, and many traders don’t feel comfortable leaving their desks for lunch. I am sent to McDonald’s to buy burgers for most of the equity traders. I’m OK with doing a bit of grunt work; after all, I am an intern, and I’m way better off than the interns in Liar’s Poker.
12:30 PM: By now my eyes and neck are a bit sore from looking at the equity trader’s 6 screens while sitting at the edge of his desk. The market is slowing down a bit now anyway, so I return to my own desk and read some articles and midday market recaps.
I work on the stock picking analysis project that my boss assigned to me, but I know I won’t be able to get any serious work done until the late afternoon.
1:30 PM: I figure I’ve annoyed the equity option trader enough for the day, so I try to find someone else on the desk that’s approachable enough to let me sit by them. I end up sitting next to an equity trader who focuses on retail stocks. Unfortunately, he is one of the more introverted types, and it’s hard to get him to say much. I see him make two trades for the rest of the day.
3:00 PM: Japanese stock markets close. Of course, there’s still after-hours trading, and much work to be done. I see the equity options trader I sat with get up and go to the coffee room. I “coincidentally” happen to go to the coffee room for a break.
There, I thank him again for letting me sit with him, and I do the best job I can of commenting on what happened in the market that day, while asking his opinion on a few points.
He comments that I am pretty knowledgeable for an intern, and it seems like I have made a good impression on him. I think to myself, “Yes…. one step closer to getting a full-time offer…”
4:00 PM: I go out for coffee with a guy from the middle office, an appointment made previously. He’s one of the junior guys, so he’s not too much older than me.
As an intern, not everyone is willing to go out to coffee with you – and sometimes you can learn a lot from people other than the managers and star traders.
I milk him for information: Which traders are more approachable? Exactly how do you interact with the traders? What happens when a trade doesn’t settle correctly? We also bond by talking about which girls in the office are cute.
5:00 PM: My manager takes me to a small conference room for my 10-minute weekly meeting. How much have I learned so far? Which type of trading was I most interested in? Did I have any questions? He reiterates that the competition is tough and that I’ll have to keep working really hard to impress everyone if I want a full-time offer.
5:30 PM: I start working on my stock picking analysis project once again. By downloading data (both fundamental data and technical analysis data) from Bloomberg into Excel on thousands of stocks, I try to figure out a handful of stocks that would be good long trades, and some that are good short trades. This is only one of several projects I am working on.
7:00 PM: Many of the traders have left their desks by now. I wander around the trading floor trying to find someone who’s not in a hurry to go home, and I try to start a conversation to learn something about their trading that day.
Sometimes traders are more relaxed at this time of the day and it’s easier to talk to them.
7:30 PM: I get an email with a link to 50-page economic report from the research team. I interrupt my work to skim the report.
8:00 PM: Almost all of the traders have left the office. Why is my manager still here?
8:30 PM: My manager finally goes home. Whew. I try to wait at least 15 minutes after he leaves so it doesn’t look like I am leaving right after he does.
While there’s less face time in trading compared to investment banking, you still don’t want to leave before your boss – especially as an intern.
9:00 PM: Meet up with a friend and some of her friends for dinner. Most of them are done eating by the time I arrive, but at least I get to say hi.
11:00 PM: Arrive at home. I plan to go to sleep within 30 minutes but after checking email, I end up staying up past midnight. I cringe when I think about how hard it’ll be to wake up the next day.
Then I think about my investment banking intern friends – who are still at the office – and I feel a bit better.
5:40 AM: Wake up. I had set my alarm earlier because the day before I had trouble finishing the grunt work on time. I pummel my own head in an attempt to feel awake.
6:30 AM: I arrive at the office… and there is only one other person there. Hmmm, am I working too hard? I tell myself it’ll all be better once I am a full-time employee – which is usually true, at least in trading – and then I begin copying research materials that need to be passed out later.
7:00 AM: The copier is jammed, and I didn’t notice for 15 minutes. Crap. I start to multitask, using 3 copiers instead of 2.
8:00 AM: Today, before the general traders’ meeting, I go to the agency traders’ smaller meeting, which is only in Japanese. The agency traders are responsible for executing the large orders placed by large buy-side institutions, like mutual funds.
They talk mostly about news and overseas market movements, but they also talk about the previous day’s order flow, and about how a research report produced by our firm today might cause a lot of orders for a specific stock. The meeting lasts about 10 minutes.
9:00 AM: The Japanese stock markets open. Today I am spending the first couple hours sitting with the agency trading team. Agency trading is really different from proprietary trading because all the decisions about what and how much to trade are decided by the client – the only decision made by the trader is how to divide the order into smaller trades and when to execute them.
The trader I am sitting with has been doing this for years, and is able to constantly submit trades while barely looking at the screen and talking to me at the same time.
I pray that his discussion with me doesn’t cause him to make any mistakes. Fortunately, he doesn’t have fat finger syndrome. The trader has 4 screens – 1 for order submission and order details, 2 for Bloomberg (charts), and 1 for email / browsing. I am able to ask a dozen or so questions, which is more than usual.
11:00AM: The Japanese market closes for the lunch break (1.5 hours). I go out to lunch with the agency traders, who have less work than the other traders since they don’t have to do as much analysis.
Half of our conversation is about trading, and the other half is about Japanese celebrities. My knowledge of celebrities helps me bond with them… which might increase my chances of getting a full-time offer? I later realize that bonding with traders and being liked are quite important for getting an offer.
M&I Note: This is an important and oft-overlooked point. As an intern, people need to like you if you want a full-time offer – and the same goes for entry-level interviews as well.
12:30 PM: Since the agency traders don’t seem to be annoyed by me, I keep sitting with them until the markets finally close at 3 PM. I start to get bored and tired near the end, but I keep myself busy thinking of new questions for them.
3:30 PM: I had previously made an appointment for coffee with one of the sales traders, but he cancels on me for the second time. Maybe I just should give up on talking to this guy.
4:00 PM: The Head of Prop Trading is having a meeting with some other traders and some middle office guys and suddenly calls me and another intern into the meeting. He wants me and the other intern to help with trading commission calculations, and I have to collect some of the information necessary to do so myself.
I am surprised that a bulge bracket investment bank doesn’t precisely track its trading commissions – but later, I realize that even the biggest financial institutions are full of problems you wouldn’t expect.
I think about how I already have a big trading analysis project AND an equity research project AND grunt work AND other random stuff I have to do, but at the same time I can’t bring myself to say no. This guy is an MD, so I’ve got to impress him. Fortunately the other intern pipes up and finds excuses for why we can’t help.
4:30 PM: Afternoon snack. I go downstairs and make sure nobody I know is in the room, and then I eat a sandwich while massaging my eyes and neck. I don’t want to come off as stressed or physically strained to anyone.
5:00 PM: I spend an hour trying to figure out some Excel VBA for automating organization of data in the trading analysis spreadsheet I’m making. After some trial and error, I get it to work.
The other intern sucks at Excel and is having trouble doing his analysis, so he comes to annoy me with questions. I wonder why an MBA knows less than me about Excel.
7:30 PM: I eat some ramen. Mmmmm. No matter how unhealthy or cheap it is, I still love ramen.
8:00 PM: I feel really tired, so instead of working on my project I just read tons of financial articles. Nobody is paying attention to what I’m doing, anyway.
8:30 PM: Half of the trading desk is still here, mostly junior people. What are they still doing? I go over and talk to them – they are planning and analyzing trades for the next day.
I conclude that if these people weren’t workaholics, they probably wouldn’t be here. Then again, if you’re making or losing millions of dollars every day, sometimes overnight, maybe you’d never be comfortable being away from work anyway.
9:00 PM: I go home and cook noodles with canned fish, seaweed and soy sauce and eat them while watching Japanese music videos. Actually, it’s a pretty good way to cool down. I read a chapter of Future, Options, and Other Derivatives by John Hull.
11:00 PM: I crawl into bed. Wow, I’m going to get almost 7 hours of sleep!
6:00 AM: Wake up. Back at it…
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