by Zeke Lee Comments (110)

Traders and Brokers: Bud Fox vs. Gordon Gekko?

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.

Unless, of course, you’re Jerome Kerviel, but we all know how that one turned out.

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.

Major trading desks such as credit, equity, and forex might only hire 1 or 2 per desk – whereas in banking, groups like ECM or M&A might take on 5-10+ new analysts depending on the team size.

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 our coverage of sales & trading vs investment banking – 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.

Potential Advancement

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

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, 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).


About the Author

Zeke Lee is a Stanford graduate and former management consultant with Booz & Company and derivatives trader on Wall Street. He founded GMAT Pill, a top-rated online GMAT Prep course designed for busy working professionals who want to study less and score more.

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by Brian DeChesare Comments (120)

From Middle-Office Operations to Front-Office Sales & Trading: How One Reader Made the Leap and How You Can Do It Too

From Middle-Office Operations to Front-Office Sales & Trading: How One Reader Made the Leap and How You Can Do It Too

It’s no secret that I’m not a fan of the back office.

Much of the work is mundane, and it doesn’t give you many options: advancing is difficult and breaking into front-office roles is even harder.

Or is it?

While it might be difficult to get into investment banking front-office roles, it’s easier if you’re interested in trading – as we’ll find out in this interview with a reader who made the leap from a middle-office trade support role to front-office trading at a major investment bank.

Holla Back, Office

Q: Let’s go back to the beginning. How did all of this start, and how did you wind up in a middle-office support role?

A: My first few years of college, I was set on going to medical school and becoming a doctor – but I kept hearing about finance and investment banking from friends, and got a lot more interested in those over time.

Like many others, I heard about the lavish lifestyle and money and wanted that without really understanding what was involved.

Through cold-calling and networking, I got a couple finance internships with local firms in my area, but these were all “fetch the coffee”-type experiences where I just did grunt work for financial advisors.

I got some full-time interviews when banks came to my campus to recruit, but I never made it past the 1st or 2nd round for any front-office roles.

So I had nothing lined up following graduation. To make things even worse I decided to go on a 3-month trip to Asia with my parents over the summer, right after I graduated.

Luckily, I stayed current with recruiters and always made myself available for phone interviews – otherwise I would have had no chance.

Q: That’s impressive – most people would be freaking out about their lack of post-graduation plans, but you took a 3-month vacation instead. What did you do when you came back to the real world?

A: By this point I had exhausted all my connections – and the ones I could still go to were unhelpful because I had bombed my full-time interviews.

So I tried the next best alternative: I went for the Hail Mary and applied to positions via banks’ websites.

Q: Normally I tell readers that online applications are useless unless you get insanely lucky. Did they actually work?

A: They weren’t helpful for front-office roles, but I managed to find a trading support role on one bank’s website that seemed alright, even though it was a middle/back-office gig.

I sent my resume and application, and actually got a callback – so I went in to interview there.

Q: What were the interviews like? And how did you keep a straight face when they asked if you were really interested in a support role?

A: Interviews weren’t too difficult – and I actually told my interviewer straight-up that I was doing this because I wanted to become a real trader eventually.

He was skeptical because he had heard that line many times before – he pretty much said, “That’s fine, and we hear that a lot, but to be honest a lot of times it just doesn’t work out. Sometimes you have what it takes, and sometimes you don’t.”

On the Job

Q: I’m impressed with your directness. So what happened after you got the offer and started working?

A: It was a standard trade support role – I did a lot of P&L reconciliation, helped with trade settlements, and more tasks like that. I learned a lot about trading, but got bored early on because a lot of the work was repetitive.

Q: So when did you begin making the move to the front-office?

A: I didn’t do much networking at first – especially compared to all my peers.

They took the approach of, “I’ll ask the traders lots of annoying questions, buy them lunch, and suck up to them so that maybe they notice me.”

This backfired and it just annoyed the traders – none of my peers who took this approach advanced to the front-office.

Traders won’t think of you as a peer if you use this strategy – networking in the workplace is different from what you do while in school.

My first week on the job I did some networking with the traders, but I didn’t ask many personal questions – I limited myself to business and asked about how trading worked, why they made certain trades, and so on.

This is an important difference in networking in sales & trading vs investment banking – bankers don’t like talking about business quite as much, but with traders you’re better off starting conversations by discussing the markets or other business-related topics.

Q: Ok, so how did you actually make the move to the front-office if you weren’t networking aggressively with traders?

A: My chance came when my group was handed a big project – we had to completely revamp the order management system, which controlled the whole flow from how a trader makes trades to how they’re recorded to how everything is synchronized.

That project put me in contact with a lot of traders and people from other groups at our bank, since the order management system affected everyone.

I used that project to take the initiative and to get to know traders better – but I still didn’t do it by sucking up or asking personal questions.

Instead I came in and said, “Hey, I noticed you were making trades this way – but actually if you changed X, Y, and Z, we could increase the efficiency and save xx% more time per trade, which would help you make $xx more money.”

I positioned myself as an asset that could make them more money as opposed to an obnoxious middle-office guy who kept asking annoying questions.

Leapfrogging to the Front Office

Q: So you made a good impression with this big project – how did you make the move once you had done that? Did you jump, or were you pushed?

A: It was a combination of both. As the project was underway, one of the traders left to move elsewhere – so I asked the head trader, “I noticed _____ left, I was wondering if you guys were considering anyone to replace him.”

Make sure you’ve developed good rapport with anyone you ask these types of questions to – you can’t just grab some random MD and ask him for a job.

He said that the trader who left had a lot of experience and that I wouldn’t be able to fill such a senior role, but that my name was on the short list for a junior role that they had. They weren’t sure of their budget for the next year, so it was still up in the air.

I had impressed them with my work on that revamp of the order management system, but 2 other factors helped me as well:

  1. The head trader wasn’t an alumnus, but he had gone to a nearby university and knew my school well.
  2. The head trader had also come from the back-office, so he was more sympathetic to my background.

Q: So the possibility was out there – what happened next?

A: A few months after that, my boss brought me into a conference room – and for a second I panicked because I thought I was getting fired! I blame this one on you because of your article on how you always get fired in the conference room.

Q: Sorry for the scare. At least I set your expectations low!

A: Yeah, I guess. Anyway, after my boss took me into the conference room, he told me that the head trader wanted me to join their desk as a junior trader.

It took me almost a year, but finally I had the offer I had been looking for ever since university.

Needless to say, I pretty much accepted on the spot and made the move over to the trading desk.

Q: Wait a minute, so there was no formal interview process? They just hand-picked you for the role and you got it without going through real interviews?

A: Yup, no real interviews. My entire first year working on that big project was my “interview” – I had proven myself on the job there, so there was no need to interview me again.

But What If…

Q: That’s a great story, but what would you say to someone who wants to move from the back or middle-office to investment banking instead?

A: It’s a lot tougher because you don’t work directly with bankers. I wasn’t that interested in banking after I started my job – a lot of my friends were bankers and they had no lives.

I almost think it’s easier to get into strategy consulting if you’ve done operations at a large bank before – you’re familiar with the business flow of a trading desk and how a company operates, so you might want to think about going to consulting rather than banking as an easier first step.

Q: Interesting. When you made your move, you had the order management system revamp project that gave you major visibility and let you impress the traders – but not everyone is that fortunate.

What would you say to someone who’s working in the middle or back-office right now who doesn’t have that kind of opportunity?

A: I would say, “Make your own opportunity.” Don’t go about your day just reconciling trades and settling positions – solve problems, be proactive and look for ways the traders could save time or make more money.

You can’t be annoying about it or constantly pester them – instead of asking about models and bottles on Thursday nights, go and say, “Hey, I noticed you were doing X, Y, and Z, but I think if you made your trades this way instead you could make a lot more money.”

Wherever you are in a bank or on a trading desk and whatever you do, you are constantly being judged by everyone who is affected by your work. Though back/middle office and other ops jobs may seem trivial, they are quite important to running a good trading desk.

Missed/wrong bookings, missed trade confirmations, and poor reconciliations can lead to lost money and lost clients – don’t focus on impressing the front office directly, but be proactive in your own job and most of the time, it will make theirs a lot easier.

The bottom line: Do your job, do it well, and foresee and fix issues before they happen (very true because of the top-to-bottom flow of the front-back office).

Solve problems that traders don’t even know they have, and then give them solutions that save them time or make them money.

That’s how you get ahead and how you move from a trading support role to real trading.

Q: Great, thanks for your time.

A: No problem – hope you enjoyed hearing my story.

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.

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by Jerry Chi Comments (46)

Trading Psychology: How to Think Like a Trader

Trading Psychology: How to Think Like a TraderTrading – it’s all about using your brain to analyze the options and then make the best decisions, right?

You might hear that from a trader at a cocktail party when he’s trying to impress people, but most traders know that psychology plays a huge role.

Some traders would go as far as saying that psychology and emotions are 80% of the battle.

Do not overestimate your ability to be unaffected by emotion.

Real Life vs. the Trading Floor

Even if you’ve been a calm, analytical guy or gal most of your life, don’t assume that you’ll be able to stay relaxed on the trading floor.

The pressure and stress you’ll face will be far greater than anything you’ve ever experienced – especially if you’ve only been a student before.

When I first started trading, I was confident of my math and analytical skills – so I thought I could base all my trading decisions purely on analysis, unaffected by emotion.

Nothing could be further from the truth – to see why, let’s walk through the emotions of a trade.

Trading Highs and Lows

This example is actually a short series of trades that spans one trading day – but similar emotions can occur over weeks or even months.

9:30 AM: You watch as the market opens. You are looking for a good buy entry point into Microsoft [MSFT] because they are going to announce earnings shortly after the market close today, and based on your analysis you think that they’re going to beat analyst expectations and that institutional buyers will load up on the stock throughout the day.

10:30 AM: MSFT inches upward for an hour, and then takes a small dip. You think, “Great chance to buy on the dip!”  Originally you were planning to buy 20K shares, 10K for intra-day trading and 10K for holding until after the earnings announcement.

20K shares? That means even if you successfully catch a $1 stock price move, you only make a measly $20K? Better double that.

You buy 40K shares of MSFT at $28.50 (Emotion: greed), contrary to your initial plan and risk guidelines. Based on your technical analysis, you plan to take profits on half of your shares at $28.80 and cut losses at $28.20.

11:00 AM: The broader market (that is, the S&P 500 index) zooms upward based on bullish comments by one of the regional Fed governors. MSFT zooms upwards along with the broader market. $28.60.. $28.70.. $28.80.. you’ve reached your profit-taking point!

But wait! You don’t take profits yet (Emotion: greed) The rally isn’t over. $28.90..$29.00..$29.10.. sweet! This is awesome! (Emotion: elation) You’re not sure why it’s going up this far, but who cares?

You’re making money. You pat yourself on the back. Maybe you’ll buy yourself an expensive lunch to celebrate.

11:15 AM: MSFT’s rally starts to weaken.. then it starts to move sideways.  C’mon, this rally has got to have another leg up, right? (Emotion: hope)

Then MSFT starts to fall slowly… $29.00… $28.90… Well, that doesn’t mean the rally is over, right?

Your technical indicators tell you a falling trend has began, but your heart tells you that this could be just a slightly oversized downward correction and that the rally hasn’t ended yet (Emotion: denial).

11:30 AM: MSFT starts to trend down further. $28.50… $28.30… You want to bash your head against your keyboard. Why didn’t you sell earlier? Why is this dropping so much anyway?

Some %^$^*%@# hedge fund must be short-selling huge amounts to manipulate the price. It’s not fair that hedge funds are bigger than I am. (Emotions: anger, frustration).

$28.20… $28.10… you’ve hit your stop loss point but you fail to hit the sell button. After all, MSFT was having a great day. Surely the price will bounce back up eventually? (Emotion: hope)

11:45AM: $27.60…$27.50… the selling spree is not relenting. You minimize the window that shows your losses because it is too painful to watch. Why didn’t you sell earlier?

You’ve just erased everything you’ve made from weeks of trading. How are you going to ever make this money back? (Emotion: despair)

You stop caring about how much MSFT drops (Emotion: resignation). It’s already a huge loss anyway… what’s a couple more thousand matter anyway?

1:00 PM: $26.80… your technical analysis indicators show that right now may be a good buy entry point.

You know that you already have 40K shares and you can’t afford to take any more risk. But you are mad at MSFT and you want to get revenge.

Your boss is probably going to yell at your later anyway, so you might as well go all out. You double down and buy another 40K shares, bringing your total share count to 80K (Emotion: desperation).

1:30 PM: MSFT starts to nosedive. Wait, what!? MSFT dropped 20 cents in 10 seconds!? $26.20… $26.10… What is going on? What are you going to do? (Emotions: panic, fear)

You cringe as you submit a market order to sell all of your 80K shares at $26.10. Almost immediately after you sell, MSFT stops nosediving and recovers slightly.

You sold your shares at the worst possible price; if you weren’t so panicked, you could have divided your order into chunks and used limit orders and achieved better price execution. You want to cry. You are a failure. (Emotion: depression)

4:15 PM: You spend the rest of the trading day wallowing in misery without making trades. Shortly after the market close, MSFT announces blowout earnings and it shoots up to over $30.00.

You stare in disbelief… but there is nothing you can do now – if only you had followed your initial plan… (Emotions: helplessness, regret).

If You Could Do It All Over…

What would an experienced trader have done in the above situation?

Actually, even experienced traders are affected by emotion – I’ve seen a white-haired trader at a bulge bracket investment bank turning red, swearing his head off, and pounding at his keyboard – but I’ve also met a trader in his early 30’s who never once lost his cool.

So the question should be, “What should this trader have done in the ideal scenario?

In this example, the trader should have followed his own plan and rules strictly – he should have stayed within his risk limits, sold the stock when the price hit the pre-determined stop-loss level, and he should have taken his profits when the stock reached the pre-determined profit-taking level.

In short, he should have sold immediately when the stock hit $28.80 – yes, that’s “only” a profit of $12,000, but it’s way better than losing $124,000 as this trader did.

Experienced traders know when to break their own rules because they have the discipline to not break the rules too often and to keep the risk-taking from getting out of hand.

Traders without such discipline such stick to strictly to their rules to protect themselves. As the saying goes, “plan your trades, and trade your plan.”

And if all else fails, you can just get your own trading stress bracelet.


About the Author

Jerry Chi graduated from Stanford, worked in equity research and trading in Japan, and then started and sold his own prop trading firm in China. He earned his MBA from Wharton, and then worked at Google and Supercell in Japan.

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