Is Sales and Trading Dying? The Future of S&T
Every year like clockwork prospects thinking about applying to sales and trading (S&T) positions ask the same question: is sales and trading a dying industry?
This was the same question I was asking myself in 2015 when I had my first S&T internship.
It's of course entirely rational. No one wants to join an industry on the decline and no one wants to put years of hard work and effort into becoming an expert in a field that one day will no longer exist (or no longer have room for them).
However, some necessary perspective on the future of sales and trading is needed. Simply relying on what you read on forums from people who haven't even been a summer analyst in S&T is not going to provide you any nuanced answers you should be basing your decision off of.
The reality is that sales and trading has been occurring in an organized, institutional manner for centuries and will persist as such. S&T is not dying.
However, there's no getting around the fact that sales and trading is a fluid industry. It's constantly evolving and (sometimes) cannibalizing itself. This is a stark contrast to what is observed in other front-office roles within an investment bank - like traditional M&A banking - which is rather static and stable.
Further, sales and trading is a broad industry. While M&A work is largely the same at its core irrespective of the coverage or product group being dealt with, in S&T there is an incredibly large, fundamental difference between cash equities trading and distressed debt trading, for example. The products dealt with on the trading floor are wildly different, the tools used are wildly different, the roles of sales people and traders are wildly different, and saying that because one product is on the decline all others are is per se incorrect.
Having spent time on two separate trading floors at major investment banks I've thought significantly about whether sales and trading is dying, what the future of sales and trading holds, and whether this is a place to be moving forward.
I'm still immensely bullish on S&T not only as an industry, but as a place to begin a career. However, that doesn't mean you should walk into S&T with your eyes shut.
You should be cognizant of the threats that exist, what they are, and how to position yourself in the best possible way when you hit the floor as a summer analyst or new hire.
Part of the reason why I created S&T Interviews course was because I wanted to shed light on various desks and help young people gain contextual understanding about where they should want to be. That's also why I wrote nearly 10,000 on what sales and trading is all about.
I purposefully - as I go over in the course - avoid going over areas like cash equities where we have seen meaningful headcount reductions and instead focus on the vast majority of desks that are in a kind of equilibrium or that are actively growing.
With all that being said, let's get started on what the future of the industry is, in my view...
On This Page
On this page we'll be covering a number of different topics related to the future of sales and trading. Feel free to use the links below to navigate around or read the entire post from start to finish.
There are two primary "threats" to the future of sales and trading. However, like any threats these do not spell gloom and doom for everyone on a trading floor. For some, these will open up new opportunities and for others they will limit what their job entails.
These two threats are, as you may have guessed, the following:
What's important to note about both of these threats is that they have been an essential, integral part to sales and trading from the very beginning.
Many prospects naively believe that regulations and automation are recent phenomena; that trading floors at major investment banks were the Wild West and static at the same time prior to the great financial crisis.
For regulation, the reality is, as Lloyd Blankfein said while he was CEO of Goldman Sachs, regulation is like a pendulum swinging back and forth. During some periods regulations are lighter, then a crisis hits and they get stricter (whether it's warranted and effective or not), and then regulations are rolled back to some middle ground as the years march on.
This has happened with many pieces of post-crisis regulation already and will likely continue to be refined as time moves forward.
For automation, it has always been a part of sales and trading. Long before my time on the trading floor, cash equities made up the vast majority of the trading floor with lots of paper being scribbled on in order to originate and execute trades. Today cash equities is made up of just a few people - mostly institutional sales people - and execution is largely handled by algorithms.
However, this doesn't mean that trading floors are per se smaller. The rise of technology automated certain jobs away, true. But technology also allowed for new products - like most forms of complex derivatives, MBS, CLOs, etc. - to be created.
Over the past twenty years dozens of new asset classes have been developed that are now traded on the floor of most major investment banks.
While technology and its sibling automation are bad for some, they also open up new opportunities for others and those are primarily the youth of the trading floor.
Regulation has always been a central aspect of sales and trading. Since the crisis there has been a large increase in the amount of compliance staff and lawyers who roam the trading floor, overview new strategies being undertaken, and review the e-mails, messages, and phone calls of traders.
While going over all the regulations that impact S&T would be a near Herculean task, there are two pieces of regulation that define what sales and trading is today more than any others.
Knowing what these are would be highly impressive in an interview and is something - perhaps more importantly - to be vigilant of when you think about what area of a trading floor you want to join (as these regulations impact different areas quite differently).
Dodd Frank (The Volcker Rule)
After the great financial crisis the seminal piece of financial industry reform was Dodd-Frank.
The regulation within Dodd-Frank that had the largest impact on sales and trading was the Volcker Rule - named after former Fed Chariman Paul Volcker - which stripped banks of (largely) their ability to engage in proprietary trading.
Prior to the crisis, most investment banks had numerous proprietary trading desks where their mandate was not to make markets for clients, but rather to have profitable books based on their own discretion.
While it is not clear that such proprietary desks had a negative impact on banks during the financial crisis (in fact, some helped bring in profits that augmented losses on market making desks) nevertheless proprietary desks were viewed as necessary risks to have in banks that were so systemically important to the financial system.
What the Volcker rule ultimately aimed to do is strip banks of their proprietary desks and leave just the market makers. This is largely what's happened.
However, over the years the Volcker rule has been refined - after much back and forth prior to its full implementation in around 2015 / 2016 - around what is and is not proprietary.
For the vast majority of desks, traders are not simply making markets for clients and clipping spreads. While the first priority of a trader is to provide clients with fair, reasonable prices the trader also has the capacity to hold a large inventory of securities in their book and buy or sell securities in anticipation of future client demand.
As you can probably tell, there's a lot of ambiguity in terms of what is and is not proprietary trading and generally speaking regulators have done a sound job of ensuring that market makers can still provide liquidity with large book sizes.
The reality is that you should think about a modern trading role on a desk as being one in which you make markets for clients and manage a book of risk. This doesn't mean that all traders are created equal or that traders are compensated for the profit and loss (PnL) of their books. There is still a tremendous amount of skill involved and great traders are compensated accordingly (although at lesser levels than the eight-figure bonuses that weren't that rare pre-crisis).
Basel 3 (Full Implementation in 2019)
Basel 3 is an international agreement - that the U.S. has signed onto, or rather had its own regulations comport with - that was fully implemented in 2019 (although it has been in the works for years).
Prior to the crisis it was viewed that banks did not hold back enough capital for the amount of risk they were taking. Thus when markets turned south the "equity cushion" of the bank was quickly bled through, which led to the insolvencies seen at places like Lehman Brothers and Bear Stearns.
While Basel 3 is very complicated - and involves certain regulations that don't have much to do with sales and trading directly - what is important to understand is the concept of risk-weighted-assets (RWA).
What RWA means in laymen terms is that if a bank holds lots of very liquid, very safe securities (like treasury bonds) the amount of capital they need to "hold back" is quite small. That's because it's hard to imagine a bank losing that much money very quickly on a bunch of treasury bonds (in particular since they are backed by the full faith and credit of the United States).
However, if a bank has a large book of distressed debt (which are assets from the perspective of the bank) this carries a lot of potential risk. Distressed debt securities are illiquid and volatile. As a result while a bank is able to hold as much of these as they want (for practical purposes) they must hold back a higher percentage of capital relative to the amount of assets (in dollar terms) than they would for the same dollar amount of treasuries.
So a bank, which obviously has limited equity or capital reserves, must decide whether they want to hold lots of very safe assets or a smaller amount of safe assets and some risky assets. The exact composition is up to the bank, they just need to adhere to the RWA requirements and insure they have enough capital set aside.
RWA requirements have been around for decades. However, it was viewed that prior to the crisis these levels were too low. Therefore, what Basel 3 does is further solidifies the minimum levels of risk-weighted-assets and how much capital the bank must have set aside (in the event of market volatility that leads to losses).
Banks now must keep a minimum of 8% capital to RWA. What this means practically is that riskier assets require more balance sheet (capital) set aside for it. So, a bank needs to choose between holdings lots of liquid, relatively stable assets or a smaller amount of illiquid, volatile assets (like distressed debt).
Capital must also be increased beyond the 8% for banks that are Global Systemically Important Financial Institutions (GSIFIs) by 2.5%.
What Basel 3 does practically is reduce down the possible ROE (return on equity) of banks because the amount of equity a bank must hold is higher than it has been in the past and regulations skew toward incentivizing banks to hold assets that allow for less returns as well such as treasuries (because less volatile assets obviously produce less potential returns).
You can learn more about Basel 3 here, from the BIS directly.
Any industry that has been around for centuries – as organized institutional sales and trading has – will go through waves.
Young people, naturally enough, will always consider the wave they think they’re observing to be novel and unique. However, long before my time was the first computer revolution on the trading floor. This resulted in the floor going from being paper and phone based to being phone and computer based. Thousands of jobs were lost and thousands of new ones – often more highly paid – were created.
Likewise, over the past number of years you’ve likely read news stories, forum threads, etc. about the demise of sales and trading. You’ve read about how algorithms – overseen by no one, monitored by just one Caltech PhD in physics – are taking over all of sales and trading with no one left behind in traditional roles.
The reality is that this latest wave of sales and trading automation is (in my view) almost entirely done and was largely complete 3-5 years ago. This last wave simply put the final nail in the coffin of areas like flow FX trading and cash equities that are heavily commoditized, very liquid products where risk can be hedged out near perfectly.
When I look around a modern trading floor now – and for what it’s worth I did partly study computer science although remember very little of it – I see very few areas where the same level of automation can occur.
Big data, AI, whatever. You can’t trade structured credit that way with nearly every deal being somewhat unique, you can’t trade most (or all) bonds easily this way because of their unique issuance dates, you can’t reasonably expect clients to interact (solely) with some monolith AI unless it has passed the Turing test (in which case everyone in every career is in trouble).
Here’s a thought experiment: we all agree that cash equities – the business whereby a customer calls up and says I wasn’t to sell 100,000 Apple shares – has largely been automated away. Algorithms are just better, faster, more efficient, and less prone to mistakes at executing and hedging something so liquid and commoditized as common shares of large companies.
We’ve seen serious job losses – over two decades with the end tail being over the past 3-5 years – in these areas of equities. However, during this same period, we’ve seen no real job losses in other areas of sales and trading when you adjust for the fact there’s no longer any prop trading, there are more stringent regulations, etc.
Well why is this? Commentators talk as though equities were the first domino to fall and that now fixed income (for example, rates trading) is next to fall.
So what precluded these things from happening in parallel? It’s not like there was one guy automating all of equities and was too busy to ever think about fixed income.
Do not get spooked by waves. Waves of automation and change happen in every industry. I am confident that S&T will be around, and actually look quite similar to how it does now, for the foreseeable future.
Even areas like equities I think are roughly where they will be for the foreseeable future. It’s already a lean area at most banks and it’s unlikely a further diminishment in employment levels will occur unless due to regulatory changes (which I also don’t foresee).
Ultimately, regulation and automation are things that don't appear out of nowhere. They are forecast. The post-crisis regulations took between eight (Volcker Rule) and eleven (Basel 3) years to fully come into effect!
Further, the automation of an area of the trading floor like cash equities while real took decades to fully occur.
There's no doubt that sales and trading looks different than it did pre-crisis. In terms of the kinds of trading that can occur (market making vs. proprietary trading) and the kinds of capital that must be held back to absorb losses (RWA requirements).
However, my personal belief is that we are now in a kind of status-quo or a new equilibrium of sales and trading. The major pieces of regulations that have re-shaped S&T have been fully implemented now and no new major pieces are on the horizon (there may just be some tweaking around the edges).
For automation, the low hanging fruit has been picked fully. Trading floors now run about as leanly as one could imagine, in this technological environment, they could. Any further automation would be forecast well in advance; you could see it coming and adjust yourself accordingly.
One thing that I've noticed is that when young people talk about sales and trading dying or about the future of S&T in general, they focus on the con-side of the ledger, but not the pro-side of the ledger.
What potential risks there are to starting a career in sales and trading need to be counterbalanced by the positives.
First, the salary of a first-year analyst is somewhere between two and three times what the average American earns per year. As you progress through your first five years (roughly) your pay is bound within quite a tight pre-determined range and will bring you up to at least $200,000, but likely more.
What I always tell college students is to consider the fact that if you have any "normal" job that appears to have more stability, your savings over a decade may not match your savings in just a few years within sales and trading. Putting money away and investing it when you're young is critical and S&T offers one of the few careers in which you can stash away meaningful amounts very early on.
Second, a major benefit of sales and trading is the work / life balance. While S&T at the junior level pays slightly less than M&A investment banking will, you are also likely not going to push over 60 hours a week often compared to those in M&A who will routinely be doing 80-100 hours.
While desks vary, you'll be working largely market hours with minimal to no weekend work. In other words, you get the high pay while still having time to enjoy your twenties and thirties.
Third, you have the opportunity to be engrained in the markets, which is an incredibly special opportunity. Once you are placed on a desk full-time, you will quickly develop an expertise in that product, be surrounded by smart people, and get to see how savvy market participants think about their trades.
The thing those that leave S&T always miss is the action of the market and being surrounded by smart people all focused in on one market. It's special to be involved in that kind of environment.
Fourth, you get tremendous exit opportunities. The exit opportunities in S&T are generally unlike M&A banking where exit opportunities are more defined and the recruiting process more structured.
Depending on the desk you're on, exit opportunities can vary wildly from startup roles, to investor relation roles, to working at a hedge fund.
Some new entrants to S&T are spooked at the fact that exit opportunities aren't as defined as in M&A. One thing that's important to recognize is that with the role and name-brand of the bank on your resume, doors will always be open for interesting opportunities. The prestige of what you've done will carry forward and give you a variety of exit opportunities (albeit, different ones than in M&A) even if your new role isn't that connected to your old one.
One of the most frequently asked questions every year when recruiting roles around revolves around whether or not sales and trading is dying and what the future holds for sales and trading.
In this post I've tried to lay out - in as simple a manner as possible - what the primary threats are for S&T moving forward. However, as I've hopefully convinced you the largest changes - that absolutely have changed the composition of the trading floor - have already occurred. In my view, we're in a new form of equilibrium or status quo that will likely be the case for another decade or so.
With all that being said, no one knows what the future of any industry holds. Any industry is prone to change due to regulation or automation. Sales and trading has been around for centuries in an organized fashion and will continue to do so.
It's also worth keeping in mind not just potential cons related to sales and trading, but also the very real pros. As I laid out above, the pros in my mind consistently have outweighed the potential cons. The money, work / life balance, and general opportunities that starting a career in sales and trading provide are, in my view, unmatched and that's why I'm still as bullish as ever on a career in S&T.
I hope this has been helpful. If you're gearing up for interview, be sure to check out the blog for more sales and trading interview questions and commentary on various functions within sales and trading, such as the sales role.