Morgan Stanley Sales and Trading Interview Questions

Morgan Stanley offers one of the strongest sales and trading platforms for a young person to join. However, relative to its peers like Goldman Sachs and J.P. Morgan, it is quite distinct in how it's structured. 

When applying to Morgan Stanley, you'll need to apply to one of four categories: 

If what you're interested in is the "traditional" sales and trading experience, then you'll want to choose between either fixed income or institutional equities. If you're particularly interested in areas like repo trading - which is a very underrated part of the floor - then you would need to apply to BRM. 

For structuring, what is being looked for are quant skills - such as coding and stats knowledge - so that should only be of interest if you're coming from a quant background (which is inclusive of just doing your undergrad in math, stats, or computer science). For structuring, you should expect more brainteasers, probability-based questions, and computer science questions more analogous to what you would find in a tech interview. 

Given my own experience - which is in the "traditional" sales and trading vein - we'll be covering interview questions for Morgan Stanley that you can expect to crop up in the first two categories listed above. These are also the categories that take the most people as they represent a pipeline to the largest diversity of desks. 

Morgan Stanley Sales and Trading Interview Questions

When interviewing at Morgan Stanley, because you'll be applying to a specific division (like fixed income) you should expect more technical interview questions regarding the products traded in that division. Below are some of the questions you can expect and their answers.

Question 1: Why Morgan Stanley?

Question 2: When we talk about dynamic hedging - in the delta hedging context - what does this mean?

Question 3: So market makers - like Morgan Stanley - will be hedging their exposure to calls in volatile equities by buying the underlying. What happens when the stock begins to go down in value?

Question 4: Imagine we have a put option and the price of a stock has appreciated rapidly. Is there anyway our put option will be worth more money as a result?

Question 5: What are the two major regulatory changes that have affected sales and trading since the financial crisis?

Why Morgan Stanley?

This is a rather obvious question, but it's worth going over because you will get asked it in nearly every interview. Further, not all answers to this question are created equally. You want to show your strong knowledge of Morgan Stanley in the sales and trading ecosystem and what specifically has drawn you to the Morgan Stanley S&T summer analyst program.

There are two major things that your answer should touch on.

First, you should touch on the unique nature of the sales and trading program. Since you'll be interviewing for a distinct division - either fixed income or equities -you want to say that compared to a program like Goldman, where there's no guarantee your rotations will be in the division you want, at Morgan Stanley you do have that certainty. 

Second, you want to touch on the sales and trading league tables. This is particularly true for equities. Morgan Stanley is a leader in equities and had an incredibly profitable 2020. Both fixed income and equities have done far better than expected and have had their best year in nearly a decade.

However, Morgan Stanley does buck the trend of the other large banks in that equities has always been significantly larger than fixed income. If you're applying to the equities stream, you should feel free to note that and mention that part of your interest in equities stems from the priority placed by the firm on their equities trading (which is the crown jewel of their trading operations).

When we talk about dynamic hedging - in the delta hedging context - what does this mean?

If you're applying to the equities stream you should expect reasonably technical questions like this one.

When we talk about dynamic hedging, in the context of delta hedging, what we mean is that as a call option (for example) gets heavily in the money (ITM) then in order to hedge out your exposure you need to start buying more and more of the underlying shares.

The "dynamic" word is utilized because as the delta increases so too must the amount of shares being purchased to hedge out your exposure. 

This has quite famously been done recently with stocks that have significant amount of short interest outstanding (like Gamestop). Retail traders have hypothesized - somewhat correctly - that if they buy lots of call options then that will put upward pressure on the stock price by virtue of the fact that market makers will be hedging out their exposure by buying the underlying.

So market makers - like Morgan Stanley - will be hedging their exposure to calls in volatile equities by buying the underlying. What happens when the stock begins to go down in value?

Of course, what was described above works in both directions! This is perhaps a point that retail traders haven't quite internalized yet.

As a highly volatile stock declines in value then hedges need to be "taken off" by selling stock to keep a delta neutral position (where you aren't making or losing money by virtue of the call you've written).

The same holds for if one writes a put option, or a more complex equity derivative, you need to hedge dynamically as the underlying fluctuates in value. 

As you'd probably guess, as a stock becomes more volatile if a lot of options are written on that stock - in any direction - then that will lend the stock to being even more volatile because you have the second-order effect of hedging happening. If a stock has primarily calls outstanding, with no offsetting puts, then volatility is increased even more as people "crowd" into hedging all in the same direction (lots of buying on the way up, lots of selling on the way down).

Imagine we have a put option and the price of a stock has appreciated rapidly. Is there anyway our put option will be worth more money as a result?

Absolutely! Remember that the primary thing that moves option prices is volatility. What we've seen recently - with all these meme stocks - is rapid price appreciation that has ballooned volatility. 

Even if one currently holds a put - assuming the expiry is still a few weeks away - then this volatility has likely led to the put increasing in value over what it was before all the price appreciation (and volatility) happened.

Remember that enhanced volatility makes it more likely that a stock will end up being ITM because of the wild swings that could occur. A stylized, although not perfect, way to think about is would be that as vol increases even if the general trajectory of the stock is up it still allows for the possibility (or option) of the stock reaching back down to where the put was struck. 

What are the two major regulatory changes that have affected sales and trading since the financial crisis?

Part of what any interviewer wants to see if that you have contextual understanding about what sales and trading really is in practice. It's not just making proprietary bets in certain asset classes, for example.

A way it is often sussed out as to whether you really understand what you're getting into is asking broad questions about regulations. No one expects you to dive into the minutia and understand everything. However the expectation will be that you have some understanding of the major forces affecting sales and trading.

As I wrote significantly on when discussing if sales and trading is dying, the two major pieces of regulation are Basel III and Dodd-Frank. Both were forecast up to a decade in advance and slowly rolled out over the past decade and now are fully in force. 

Basel III put in place stronger capital requirements. Basically meaning that the bank needs to set aside more of its own capital when it engages in risky trading (since, remember, not every type of asset can be perfectly hedged nor is there the requirement for this to occur).

Dodd-Frank was wide-sweeping, but probably the largest element of it that affected S&T was requirement to disband all purely proprietary trading desks. This does not mean that sales and trading desks are precluded from holding any risk, of course. They hold lots of it! But what it does mean is that banks need to have carefully calibrated risk limits and can't just buy lots of a certain security because it looks cheap.

Conclusion

Morgan Stanley offers one of the best places to begin your career in sales and trading (or figure out whether or not it's right for you via a summer internship).

Because of how MS categorizes applicants into distinct buckets - as opposed to having a rotational program like Goldman - one needs to have a reasonable understanding of fixed income or equities prior to applying. You don't need to be an expert, of course, but you do need to know what the products are and generally what moves them.

If you're looking for even more sales and trading interview questions, along with dedicated desk guides to help you prepare, be sure to check out the guides put together. 

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