Financial Careers: Trading Jobs
By Brian Perry This chapter will examine trading jobs. Trading jobs generally involve buying and selling stocks, bonds, currencies, commodities, or some other financial instrument either to facilitate customer needs or to take a proprietary position in order to benefit from expected market movements. The work can be stressful, challenging, and exciting all at the same time and the rewards can be great for successful individuals. If this sounds like an appealing combination to you, read on to learn a little bit more about the trading profession.
Where the Jobs Are
Trading jobs are found at a variety of institutions including commercial and investment banks, asset management firms, and hedge funds. Government regulations evolving from the aftermath of the financial crisis have change the landscape for trading jobs somewhat, but in general traders at commercial and investment banks focus upon providing liquidity for their clients and earning a profit via a bid/ask spread. Traders at asset management firms seek out the best price when buying or selling securities for their client's portfolios. Finally, traders at hedge funds are interested in taking proprietary positions in order to benefit from expected market movements.
Note: Due to ongoing government regulatory changes, the field of trading is in some flux. If you are considering a career as a trader, you should pay careful attention to news headlines depicting the continuing evolution of government financial regulation.
How to Get a Trading Job
Applicants from a wide variety of backgrounds wind up in trading jobs. Although the most common path is to come out of a good university and take a job at a bank or hedge fund to learn the ropes, the career path is somewhat less defined than in investment banking. Some traders (a declining percentage) lack a college degree, while many have advanced degrees such as an MBA. Because of the increasing prevalence of higher mathematics in the financial markets, PhD's from a variety of statistical, scientific, or mathematical disciplines are also becoming more common on trading desks. Many traders take the Series 7 & 63 exams early in their careers. Typically, an individual will start off in a junior position as an assistant trader before working their way up as they earn their employers confidence. As time goes by, the trader will be allocated more and more capital depending upon their performance. Many of the most successful traders eventually attempt to start their own hedge fund.
Types of Trading Jobs
- Sell-Side trading jobs
Many trading jobs can be found at banks and investment banks (in practice, there is little difference anymore between banks and investment banks.) Early in their career, the new employee is usually placed in one product area, and specializes in that area for much of their career. Broad product areas can include equities, commodities, or fixed income. At smaller banks, an individual may all of the government bonds, or perhaps even all of fixed income. However at larger banks, individuals usually specialize more. For instance, an individual might trade only ten year Treasury bonds or only technology stocks. In years past, many banks ran large proprietary divisions that used the bank's capital to buy and sell securities with an aim towards profiting from market movements. This practice has been called into question due to the financial crisis and ongoing regulatory changes make it likely that this activity will be greatly diminished in the future. Therefore, the main trading activity at sell side firms in the future will likely be buying and selling for the benefit of clients. This diminished capacity to take risk may benefit the financial system as a whole, but it likely means that individual traders at banks will be paid less in the future. Nevertheless, traders will still find that they can make plenty of money working at a bank. (For more, see Traders: Profit From Other Investors' Fear.)
- Buy-Side Trading Jobs
There are also trading jobs available at buy side firms such as asset management companies. At some asset management firms, portfolio managers will buy and sell securities themselves. However at others, the portfolio managers might decide what to buy or sell but then give instructions to their traders who actually do the buying and selling. Because they are generally following the instructions of a portfolio manager, dedicated traders at buy side firms often have less discretion in their activities than traders at other types of institutions. However, this does not mean that they have no discretion. For instance, a portfolio manager might dictate that they want to buy a particular security, but it is up to the trader at when and at what price and when to execute a trade. Or, a portfolio manager might indicate that they want to buy a particular type of security but leave the exact security and timing of the trade to the trader. Nevertheless, the function of a trader at a buy side firm is often to get the best price for the portfolio manager within limited parameters, making these jobs somewhat less challenging than many other trading jobs. As might be expected, this also means that trading jobs at asset management firm tend to be somewhat lower paying then jobs at banks or hedge funds. (To learn more, check out Buy Side Vs. Sell Side Analysts.)
- Hedge Fund Jobs
Trading positions at hedge funds are among the most sought-after jobs in the financial world. Depending on the firm and the level of the trader, these jobs can involve taking orders from a portfolio manager or using discretion on what to buy and sell on a proprietary basis. Top traders with the discretion to manage their own portfolio can make outrageous sums of money, with figures in the tens or hundreds of millions of dollars not unheard of. The best hedge fund traders often eventually set out on their own by starting their own hedge fund. Unlike traders at a sell side firm, hedge fund traders are not attempting to satisfy client orders but instead seek to benefit from future market movements. Because they are taking more risk, the potential rewards are greater, but so too is the stress. Individuals considering a job trading at a hedge fund must be comfortable risking large amounts of money on a daily basis and be comfortable with the possibility that if their performance lags for a period of time they may very well be fired. Nevertheless, the truly massive rewards that accrue to the top hedge fund traders guarantee that competition for these jobs will remain fierce. (For more, see Can You Invest Like A Hedge Fund?)
The career path to these jobs is less defined than for investment banking jobs, but most individuals should have an aptitude for math, an ability to react quickly to changing conditions, the fortitude to withstand market volatility and the ability to make quick decisions based upon incomplete information. Most successful traders are truly passionate about what they do and often spend their off hours studying the markets. If the previous profile sounds appealing, then a career in trading may be right for you.
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