On the Trading Floor
This article was guest-written by Zeke Lee, a Stanford graduate, former management consultant with Booz & Company, and current derivatives trader on Wall Street (Oh yeah, he’s one of my friends from school as well). He founded the GMAT Pill based on his experience scoring in the 98th percentile on the GMAT in just 2 weeks with a unique study method.
Have you ever seen a trading floor?
No, we’re not talking Liar’s Poker here…
We’ve all seen the so-called “pit traders” on CNBC yelling and screaming at each other. But what’s it like on a typical trading floor at a large bank that you might work at?
Usually, you’ll see one large open room – no cubicles. On the outskirts of the trading floor you’ll see conference rooms and occasionally the offices of the Managing Directors.
On the floor itself, you’ll see rows of really long desks that are sectioned off per person. Traders within the same group will naturally sit within close proximity of each other. So you might see the foreign exchange group in one area, the credit group in another, and the equity guys somewhere else.
But you’ll notice something unique about each trader’s desk: the monitors. No, not that they are eco-friendly and conserve energy – just that there are so many monitors on each desk and that some of them are blinking constantly.
If you’ve never worked in trading before, you might think there’s no reason you would actually need between 3 and 8 monitors – the other 7 must be for playing World of Warcraft, right?
Partly, it’s for showing off: some traders view the number of monitors they have as a status symbol on the trading floor. Hey, even if you can’t see my BMW, my 8 monitors mean that I own a really expensive car, right? Or at least that our P&L is higher than that of the other group over there with only 2 monitors.
The actual rationale – status symbols aside – is that speed is extremely important in trading, and you don’t want to waste time toggling between windows. Alt + Tab is for bankers.
You need to be able to look up and know that Apple surged 4% in the last 10 minutes.
Then you need to monitor the market news and major headlines coming in through Bloomberg – is some analyst raising their forecast for the number of iPhones sold? Was there an announcement that just came out regarding Apple’s contracts with AT&T and Verizon? Did consumer spending numbers just come out?
As an active prop trader, you’re multi-tasking all the time and constantly thinking about these kinds of questions, assessing risk, and making quick decisions.
Bloomberg is an expensive news/finance information service that all banks and trading firms have access to.
Beyond just watching the news, you also need to track stocks you’re interested in and see their prices updated in real-time – so you use another monitor for that. These screens are constantly blinking as the prices of securities are changing every second.
Bloomberg has a price feature that lets you organize and track stocks by sector (Technology, Financials, Energy, etc.) and lets you see where everything is trading.
You can also get a real-time heat map of the market, so you can see which sub-sectors of the S&P are up, and by how much.
Next, you use another monitor to actually make your trades – this might be Merrill’s MLX platform, Goldman’s REDIPlus platform, FlexTrade, Fidessa, or anything else.
If you’re trading equity derivatives, you need to enter your orders for stocks, puts, and calls quickly and monitor any pending orders that are waiting to be filled.
Why do you need an entire monitor just for making trades?
Because you might be trading over 100 individual stocks, and each of those stocks might have over 20 positions in option contracts, with various maturities and strike prices.
Depending on what you’re trading, you might actually need 2 monitors to track everything.
Option Valuations / Other Calculations
If you’re not trading derivatives, you won’t need to value options – but you may well have to make other calculations, whether you’re valuing bonds, analyzing the yield curve, or back-testing a trading strategy.
While the “math” itself is not quite rocket science, it goes beyond what most bankers deal with: simple arithmetic. While investment bankers may come from liberal arts, finance, or engineering backgrounds, derivatives traders primarily come from mathematical / engineering backgrounds.
Your firm might have a proprietary way of valuing options, developed by a senior IT programmer (see, the back office may have some merits after all) – and depending on what you’re trading, it might be very complex.
Getting these programs working properly can be difficult because they need to be synced up with other programs you use. Getting the # of shares and contracts held, exposure to risk, and other variables linked together dynamically rarely works perfectly – and this complexity means you’ll be calling the back-office tech guy or floor IT guy to fix technical issues quite frequently.
Of course, you’ll also need a monitor for Outlook – the standard email program at banks – to handle email and see incoming messages from broker and the rest of your team.
The Rest of Your Desk
So what else is on your desk?
Just like at a bank, you get a phone terminal along with a headset and regular phone – but be careful about the conversations you have, because anything between brokers and clients is recorded.
Talking about bottles may not get you fired – but you probably want to postpone talking with your model(s) until later. Even if it’s not recorded, everyone else on the desk will hear what you’re saying.
The phones are also connected to CNBC audio, so you can listen to what’s going on in the news throughout the day.
So What Else Do You Do On the Phone Besides Chatting with Models?
For one, the phone actually rings quite often – especially between the trading hours of 9:30 AM and 4:00 PM.
Most of the time, brokers call to tell you what their clients are looking to buy and sell and see if you have any interest. Some of this is shifting to online chat instead, but it’s still common for brokers to call to get your attention on larger orders.
Sometimes junior traders will screen the phone calls first before bothering the traders – you already have to multi-task a lot, and getting called every 20 seconds makes your job even tougher.
Forget About the Bathroom – or Trips to Starbucks
This also brings up another key point and a major difference between banking and trading: most traders hate leaving their desks for fear of missing out on something important.
- Lunch breaks are limited to 15 minutes (and often the junior guys or interns will go get the food for them).
- Bathroom breaks are rare unless you really need to go.
- Forget about 10 trips to Starbucks during the day: bankers can do that only because they have so much down time.
- No friendly chats with the cute marketing intern – at least not until the market is closed.
This also means that it’s common for traders to gain weight: they pretty much just sit there all day, eyes glued to the monitors, only taking the occasional break to eat.
If you walk up and try to talk to a trader, half the time he won’t even look at you: this might seem rude to you, but to him not paying attention for even a few seconds might result in a loss of thousands or tens of thousands of dollars.
And part of it is just habit: they’re so used to having their eyes glued on the screen that it’s almost weird to look away from it.
Hey, if you had that much money on the line constantly, you probably wouldn’t give the time of day to bright-eyed interns or newbie traders either…
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Credit Derivatives Trading in Tokyo: Interview
Continuing our series of interviews with bankers / financiers in different parts of the world, today we’re speaking with a friend of mine from Stanford who worked in credit derivatives trading in Japan and then founded his own trading firm… after only 1 year of work.
A lot of readers are interested in going to Asia, and an equal number are interested in starting their own investment firms one day – so I figured this would be a good read.
1. Tell us about yourself.
I’m Taiwanese American, born in the states and raised in Silicon Valley. During my studies at Stanford, I had the opportunity to study abroad and intern in Japan.
It was so cool that I decided Tokyo was the place I wanted to be after graduation. While in Tokyo, I gained experience on the equities trading desk of a major U.S. investment bank and the fixed income trading desk of a major European investment bank.
Now I run my own trading firm out of Beijing, but I trade U.S. and Japanese equities.
The Recruiting Process
2. What was the recruiting process like for trading?
I applied for full-time jobs by going to the Boston Career Forum, which is the largest Japanese-English bilingual career fair in the world.
Many Japanese and non-Japanese find their jobs at top investment banks in Tokyo this way. Before attending the career forum, make sure to submit your resume in advance and fill out any online forms/questionnaires of firms you are interested in.
The interview process at the career fair can be grueling – possibly more than 15 interviews jam-packed in one day.
Most top-tier firms will interview you at least a half dozen times before giving you an offer, which might be given out on the spot or a few weeks later.
For finance professionals already working in Tokyo, much of the hiring goes through acquaintances, former colleagues, and headhunters.
Trading interviews are naturally different from investment banking interviews – for students, there will be some basic fit questions and math / brain teaser questions to test quantitative aptitude. For experienced professionals, the questions will focus on previous trading experience and your understanding of financial markets.
3. Was the process any different because you were applying to Japan?
For US or European investment banks in Tokyo, the process is pretty much the same as everywhere else, except you sometimes go through different channels – such as the Boston Career Forum – rather than sticking to on-campus recruiting or networking.
At Japanese securities firms, recruiting happens much earlier (over a year before the job starts). I’m not sure offhand how much the actual process differs because I didn’t really apply to any Japanese companies.
In terms of getting offers, commitment to living in Japan and ability to speak Japanese come into play, but language ability is not as crucial to trading as it is to other finance jobs like investment banking or private equity.
4. How much networking did you do when getting your job? How essential was that?
My internship at the equity trading desk was due to networking with an alumnus.
I found the fixed income job via the career forum I went to, so no networking was required there.
I got in without a huge networking effort for 2 reasons:
- I went to a “target” school and had a finance background.
- The market was much better when I was recruiting.
These days networking would be pretty much required to get in, unless you get lucky or have some crazy connection(s).
The Job Itself
5. What did you think the job would be like before you started? How did that change once you got there?
I expected the fixed income trading job to be exciting and extremely quantitative, but I later realized there was a lot of repetition and that most of the real quantitative work was being done by the quants, not the traders.
The traders simply use the tools developed by the quants.
Trading volume and the outstanding notional amount of non-government fixed income securities in Japan is pretty small. Trading volume of Japanese equities is high but tick-sizes are controlled so that stocks seem to move much more slowly than U.S. equities.
Traders used to fast-paced U.S. markets might be somewhat turned off by this. That said, each market has its quirks and some people enjoy trading the Japanese capital markets.
Also, I expected to spend most of my time trading – but a lot of my time was actually spent resolving IT issues and organizing data.
6. Is there any activity in credit derivatives (where you worked) these days? Or is it completely dead?
Yes, there is. The activity of credit default swaps actually increased after the credit crisis started, since previously Japanese companies didn’t default much and the market didn’t move much.
The Itraxx Japan CDS index, for example, moved about 3 basis points in the half year before July 2007, and then exploded by over 200 bps in a few months.
On the other hand, try selling a synthetic CDO stuffed full of subprime mortgages to a conservative regional Japanese bank… yeah, good luck. It was already really hard before the credit crisis, and now it’s even harder.
Some investors are still willing to take risk given that corporate credit has pretty juicy yields now – but overall, the already small group of credit trading professionals in Tokyo has gotten even smaller since the credit crisis.
7. What other options were you considering? Were you glad you chose what you did in terms of geography/industry?
I only considered jobs in Japan since I liked the country so much.
I was also thinking about consulting or equity research – but those are also more difficult to get into and require native speaker level proficiency.
In retrospect I might have chosen a derivatives structuring job over credit trading, since I am analytical and disliked the repetition involved with flow trading.
Culture / Pay / Models & Bottles
8. Do bankers still lust after models and bottles in Japan? Or is it just sake bottles?
Haha. Oh man. Some guys come to Japan just for this.
If you want to indulge in in Tokyo, it’s pretty easy to do so – until your boss wants you to work overtime.
I won’t get into all the details here since this is PG-rated, but just use your imagination.
One common practice is “goukon,” or blind date parties, where 5 guys and 5 girls might go out for drinks together. I organized one myself before. Even non-finance people in Japan work long hours and it’s hard to meet people otherwise, so these have always been popular.
The selection of bars, pubs, and nightlife in Tokyo is also awesome (not just sake bottles; it’s very international). It’s not like Hong Kong where there is basically only one area (Lam Kwai Fung) to go drinking.
That said, you should come to Japan because you really like the country, not for the models / bottles aspect.
9. What was the culture of your firm like? Was it more because of the firm itself or because you were in Japan?
Foreign investment banks in Tokyo have a mix of the parent bank’s culture and Japanese culture. That means:
- Longer working hours than Western counterparts, but maybe not as long as Japanese securities firms.
- It’s a meritocracy, and young people can get paid a lot – unlike in Japanese firms, where you typically get paid a fraction of US salaries.
- Women are valued and respected more than at Japanese companies, but maybe not as much as they are in the West.
- Diversity is more important than at Japanese firms.
In my view, most people would be crazy to work for a Japanese securities firm over a foreign investment bank.
10. What were the hours / pay like in Tokyo?
My starting salary out of college was about 7 million yen base plus a 2.5 million yen bonus, so about $100K USD total. If you start out at a Japanese securities firm your salary could be as low as 1/4 of this (yet another reason why lots of Japanese youth still live with their parents – try getting by in Tokyo on $25K per year!).
Hours were around 13 hours a day plus an occasional Saturday. I know traders in Tokyo who work from 10 hours a day to 17 hours a day, but most are in the 11-14 hours per day range.
Just like at any other trading firm, your salary can quickly escalate into millions of USD depending on your performance – but that rarely happens and given the financial crisis, most firms probably won’t let you take that sort of risk anymore.
11. These days many readers are concerned about how they’ll pay for their apartments in Manhattan given lower pay – what was that like in Tokyo, where real estate is even more expensive than New York?
Keep in mind, everything in Japan – even the most expensive apartment you can find – is much smaller than what you’d find in the US or other parts of the world.
I paid about $1,000 USD per month for a 25 square meter (270 sq ft) place but the location was excellent.
If you are willing to take a short 30 minute commute then your rent can be a lot cheaper. The public transportation system in Tokyo is second-to-none, and Japanese products can help save space in the apartment (like really small but effective vacuum cleaners). Some companies also use an accounting trick to pay for an employee’s housing before taxes, then subtract it from the employee’s pre-tax income.
Next Moves / Starting a Trading Firm
12. You didn’t stick around too long before starting your own firm – why did you leave the industry when you did?
I left my fixed income trading job in Japan because I wanted to start my own company, and because I felt my job was overly repetitive.
I’d like to say that I foresaw the credit crisis and all, but it was just good timing that I got out before things turned really bad.
13. Many readers are thinking of starting their own investment firms one day – what was it like going through that experience after having worked in trading for only a year or so?
Staring my own trading firm was a pretty tough experience, but I learned a lot. My advice: do not do it for the money.
You need to think carefully first about your desired work-life balance and your passion, and only then should you think about the money.
Although my firm is doing OK, I think I started it a bit too early on in life – I would have benefited from a bit more experience at a big company.
Starting the firm in China, of all places, was also “interesting” to say the least. Founding a company in any location is really tough, but all sorts of factors made it even more difficult and grueling here.
14. Where do you want to be 10 years from now?
I hope I can be back in Tokyo, and I’m open to career options outside of finance. I haven’t done too much long-term planning because things change too quickly – if you had found me 2 years ago, I never would have expected to be running my own trading firm today!
15. Many readers are thinking about going to Asia to find opportunities in finance/business these days – any advice or recommendations on that?
I think it is an excellent time to be coming to Asia, especially Hong Kong, Singapore, Beijing, and Shanghai.
If you choose Tokyo, your career prospects might not be as bright but the lifestyle is great. Beijing and Shanghai have lifestyle issues (like pollution, etc.) and the financial system is not as advanced, but they are improving and growing rapidly.
Singapore and Hong Kong are the most advanced financially, they have excellent corporate-friendly legal systems, they are more diverse, and everyone speaks English.
16. Any words of advice for anyone interested in going into trading today?
Be confident but don’t be overly confident. Don’t think that you are always smarter than the market. Do your own due diligence when entering into a trade. Make sure you can handle the pressure of losing money before you take the job.
Trade because you really like doing it – not just for the money.
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