The term "derivative" covers a lot of territory. Technically, derivatives get their name because they derive their value from the instrument on which they are based. They include swaps, futures and options. This market was estimated to be about $1.2 quadrillion, providing a range of opportunity for finance professionals. Let's take a look at the derivatives market from the perspective of someone who may be considering career opportunities here.

Types of Derivatives

Derivative instruments can be traded either on an exchange, such as the Chicago Mercantile Exchange, or over-the-counter in a dealer market. The following is a sample of the type of derivatives you commonly encounter:

  • Equity derivatives are often associated with futures contracts on various indexes such as the S&P 500, Nasdaq, FTSE (U.K.), CAC (France) or DAX (Germany).
  • Debt/interest rate derivatives would be the Treasury complex on the Chicago Board of Trade or Treasury bills, eurodollars and interest rate swaps on the Chicago Mercantile Exchange. Contracts for interest rate swaps and credit derivatives are also traded over-the-counter in a dealer market.
  • Foreign exchange derivatives are often the most popular trading opportunities and, as stated above, can be traded either in futures contracts on the Chicago Mercantile Exchange or over-the-counter in a dealer market.
  • Physical commodities derivatives are most often agricultural futures contracts and more recently energy futures contracts.
  • Options contracts are traded on everything you can imagine from cash stocks to futures contracts.

Four Career Paths

People outside the business have a great many misconceptions about the jobs and career paths available to them on the sell side of the investment business. Generally, there are four venues in which one could start:

1. Sales

The public is most familiar with salespeople or brokers. Salespeople are responsible for bringing in clients (and their assets) and transacting their business. Salespeople are not paid to be market gurus or prophets, although it certainly helps if you can guide your clients toward making good decisions. Within the sales function, there are two very broad categories: retail and institutional.

Retail: The typical retail derivative client is almost certainly a speculative account. In these accounts, investors place trades (usually in futures contracts) for the sole purpose of making a capital gain on their positions. The burnout rate is quite high, so constant solicitation for new clients is a mainstay of the job.

Institutional: Institutional accounts are almost always using derivative instruments to hedge a position in a corresponding cash security. The consequence of this is, while it's more difficult to gain their business, these clients tend to have a considerably longer tenure.


Traders are the people who trade the actual instrument, whether over-the-counter or on an exchange floor. Traders are charged with the responsibility of "making a market." This means making competitive bids (if the client is selling) or offers (if the client is buying). Traders often have an inventory of positions to make a liquid market for clients.


Analysts are the people who forecast future events or analyze current ones for their effect on the markets. You probably have seen research reports on any number of items from bonds or stocks to foreign currencies or physical commodities and the analysts' subsequent forecast on possible outcomes and interaction between various sectors of the markets.

Back Office 

Back-office people include everyone from compliance officers to accountants. Your personality type will determine what position appeals to you most. People in these positions, while having similar educational backgrounds, have very different psychological make-ups. How extroverted, introverted and cerebral you are plays a crucial role in what position would suit you best and might be offered to you.

Who to Work For

With the blurring of the lines between investment banks and commercial banks, your options are considerable; it more or less comes down to a choice of what corporate culture suits you best. Consider the following as just a small sample:

  • Major banks: Every major money center bank, domestic or foreign, has a trading desk and an investment bank subsidiary. For example, Citibank owns what used to be Salomon Brothers in addition to its own trading capabilities. Major Canadian, U.K., French, German, Japanese and Dutch banks are major players as well.
  • Regional banks: In addition to the larger banks, smaller regional banks have entered the derivatives game.
  • Major investment banks and broker-dealers: There are a lot of these companies, but a few examples would be Goldman Sachs, Merrill Lynch and Morgan Stanley. They are bigger and less dependent on your individual opinions. They also give you greater access to larger companies and clients.
  • Regional broker-dealers: The size of the firm you choose will have an impact on your work environment, the work you perform and the level of support vs. autonomy you are given. In these regional broker-dealer positions, you will have more of an individual responsibility than at Merrill Lynch, but less than in a self-employed position.
  • Futures commission merchants (FCMs): These organizations tend to focus on retail accounts. They can work for themselves or an organization and can handle futures contracts for customers and offer them credit to buy the futures contracts. Because of increased regulatory requirements, the number of FCMs has diminished since 2010.
  • Self-employment as an exchange member and independent trader: There are no formal educational requirements for this position, but you do have to be properly licensed. You should also know exchanges are placing increasing emphasis on upstairs market-making as opposed to pit trading, so if you work independently on the trading floor, there may be a lot of deals you will not have access to, which could put your clients at a disadvantage.

Educational Background

The vast majority of brokers, traders and analysts have business educations. Undergraduate degrees in business are almost universal and graduate degrees in business are becoming more commonplace. In general, if you plan to get into the big-time institutional business with a major investment or commercial bank, it will undoubtedly demand an MBA and more often than not, one from an Ivy League school. The joke on Wall Street is an Ivy League education is like a "union card."

The Working World

Assuming you go to work for the sell side, your level of involvement in the derivatives markets is a function of the size of the firm, its risk profile (or propensity to take or position risk) and the type of client you cover. Some firms are more specialized by product or type of client, while others are very general. Some firms will limit you to exchange-traded derivatives, such as futures and options, while others focus on over-the-counter or dealer derivatives. This is the type of business no amount of schooling can prepare you for. As such, it is very common that once in the field, you will find yourself drawn to a particular aspect or specialty. It could be anything from crude oil futures to interest rate swaps.

Once you are hired, you will be trained in the securities and derivatives markets and be required to pass a test in to receive your license to practice. For example, in the U.S. you will have to pass what is known as a Series 7 for general securities and a Series 3 for derivatives. But the real education begins once you get your desk and start taking on clients.

Success in the Derivatives Market

Although brokers tend to assume investors are most concerned about making money, many investors deal with a particular broker because they like and trust the person.

The markets and products offered are continuously evolving, and that concept remains a fundamental part of working as a broker. Therefore, the true product is the level of customer service and quality of advice. Whether retail or institutional, your clients will deal with you if they know you, like you and trust you. The cardinal rule in the investment business is, "Know your customer."

The Bottom Line

The derivatives market offers some unique opportunities for career seekers, not least of which is the growing interest in and complexity of these securities. If you're hoping to work in this market, remember, like most jobs in finance, it will take education, ambition and long hours to rise to the top. (For related reading, see: A Guide to Financial Careers.)

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