Sales and Trading Primer: How the World of S&T Really Operates
Sales and trading is unlike any other industry in finance. When I got started as a summer analyst at Goldman Sachs - as part of what was then called the Securities division, now renamed Global Markets - the diversity of the trading floor was quickly overwhelming.
The vast range of desks and what they trade naturally makes it difficult for someone to get an idea for what sales and trading really is all about from the outside looking in.
Due to the large number of moving pieces that make up the trading floor, there is terribly little insight into the actual workings of the industry from the perspective of someone working within a sell-side bank.
Instead what I observed while in college and still today is a kind of caricature of sales and trading existing on the internet; pieced together from popular culture due to the popularity of books like Liar's Poker (which is fantastically outdated).
The reality of the industry is much different than the portrayal in the media. The primary rationale behind the creation of this site is to shed light on what the industry is actually like and is aimed at those who are interested in potentially joining it.
Far too often I've seen those come into summer analyst programs - which is the primary way folks are hired into S&T - who have a completely distorted perception of the field.
...Not only does this end up making them bad summer analysts, it also wastes their time as perhaps they'd be better suited to some other line of work.
While I'm obviously biased, I think there's no better place to be than in sales and trading. However, it's not for everyone and the best way to know if the industry is right for you is to have as holistic an understanding of the inner machinations of large sell-side banks as possible.
Sales and Trading Guide
This is an incredibly long post, so I've decided to break it down into nine distinct sections. You can use the links below to navigate to whatever area you'd like to read about (although I recommend, if you have the time, reading this entire guide from start to finish).
When a layperson hears the word "trading", they likely are thinking about someone day-trading while looking at technical FX or equity charts. If they're perhaps a little bit more knowledgeable about the world of finance, they may think about a trader at a hedge fund - with walls of Bloomberg screens in front of them - building up a position of some kind in a security they think will increase in value.
Whatever the conception of trading is that the lay person has, they likely are not thinking about what the practical reality of working in sales and trading is.
The reality is that sales and trading is a broad term that buckets an incredibly diverse array of functions under one umbrella.
What sales and trading really amounts to are a set of sales people, traders, structurers, and quants working at sell-side banks who have the task, first and foremost, of making markets for clients.
Sales and trading is about providing liquidity to clients
The best way to explain the role of someone working in sales and trading is that their fundamental job is to get as many clients as possible coming to them to trade - both frequently and in large size - and then executing those trades.
In sales and trading parlance, you want to be on a desk that sees a lot of flow (a lot of trades) relative to the same desk at other banks because that engrains your reputation with clients, gives you color into how markets are trading, and generally increases the desk's profits.
While in decades past the trading floor would have a number of proprietary trading desks on them, due to changes in the regulatory environment (to be discussed later) that is no longer the case.
Today every desk on the trading floor will be involved first and foremost with making markets for clients and providing them with liquidity.
When folks are told that modern sales and trading revolves around making markets, many have a few points of confusion:
- Aren't markets already liquid? Why do clients even need to go to a large bank?
- How does the floor make any money doing this? Shouldn't profits be negligible if you're just being a middle man?
Let's go over each of these in turn...
Why do clients need sales and trading services from a large bank?
This is a fundamental question that may sound a bit naive to even ask, but is nevertheless crucial to understand.
First, not all products are liquid in the way that single-name equities (e.g. the stock of Tesla or Ford) are. As will be discussed later, you have a wide array of desks in products that the layperson has never heard of before.
While anyone can open up a brokerage account and buy equities - or even reasonably simple equity derivatives - not everyone can open a brokerage account and buy distressed bonds, mortgage-backed securities, or collateralized loan obligations.
This is largely due to the obscurity and sophistication of these products along with the size in which transactions occur. One can't just go and buy $100 of a certain tranche of a CLO, for example!
So the first reason for why clients utilize S&T desks is that they are the only game in town for getting access to certain kinds of products.
Second, clients will come to a sales and trading desk for more traditional products because they engage in such large size (meaning their trades are very big).
For example, a pension fund may want to come to a treasury trading desk and sell $100mm of 2-year treasuries, and buy $300mm of 5-year treasuries. In order to facilitate that kind of trade, you need to have a large inventory of those bonds and have the capital necessary to partly or wholly hedge out the exposure you've been given by the client.
Further, the client doesn't want to sit around for days as you try to find these bonds. They want a price right away, which they'll compare to the price given by other banks, so you need to be able to execute this transaction and work through the risk of it right away.
This is true even of cash equities, which is the name of the trading desk that deals with single-name equities. While cash equities is a very deep, very decentralized area - meaning anyone can buy them - the issue becomes, what if you want to buy tens of millions worth of stock? Can just any online broker do that?
In reality, for many stocks such large buying or selling will push the price around (depending on how large the market cap of the stock is) and a client may not be able to know with certainty what the blended purchase price or sale price will be.
This can be ameliorated by coming to a cash equities desk and saying essentially, "Hey, we want to sell $Xmm of Y stock, what price can you do that at?"
The bank will then buy that amount from the client - at a discount to what the prevailing stock price is at present - and slowly try to work out of the position so as to not alert the general market of there being a large seller (this is where the concept of dark pools can come into play, which you may have heard of before).
So from the client vantage point, they get a known, guaranteed price for a large block of equity they're either trying to buy or sell. From the banks perspective, they get the capacity, but no the guarantee, of making a profit off of the transaction.
How do sales and trading desks make money if they aren't taking proprietary positions?
This is all quite complicated, but let's try to break it down.
First, when market making you are, of course, making a market that will have some level of spread (where you'll buy from a client at a lower price, and sell to the client at a higher price).
For liquid markets these spreads are tight - such as equities and treasuries - and for more illiquid markets these spreads are wider (such as with distressed debt).
Further, spreads are wider for larger transactions generally speaking and for transactions that are a bit thornier (e.g. equity derivative or interest rate swap trades that aren't overly vanilla or simple).
One can think of the spread as really being like a transaction fee. It's a level of built in profit that comes along with every transaction. The obvious caveat to this is that the prior sentence assumes you can buy low, and then immediately turn around and sell high, which is normally not the case!
Caveat aside, if you are on a desk that has more flow, meaning it does more trades, then you could be continually "clipping spreads" and earning these little transaction fees (that can add up over time quite significantly).
Second, we need to deal with the fact that while proprietary trading is banned under the Volcker Rule - a subsection of the post-criss Dodd-Frank regulation - that does not mean that desks do not have continual exposure to the markets where they can make profits (or incur losses).
For example, in order to be able to successfully mark markets for clients, traders need to have significant amounts of inventory at any given time in those securities clients are most likely wanting to trade. This inventory is what is referred to as a trader's "book". A book is simple a listing of the type of securities a trader holds and what amount of each security a trader holds.
While on some desks a trader can try to be market neutral - by putting on hedges that equally offset their positions - that is largely impractical and/or infeasible to do perfectly. For more esoteric products - like almost anything in credit - you can not hedge away your exposure cleanly.
What this means is that all traders carry a large amount of risk with them continually - via their book - and try to position their book in order to try to take advantage of how they believe the market will move.
Unlike in proprietary trading, where you can just hold the securities you want to hold and sell the securities you don't want to hold, a trader at a sell-side bank must hold a substantial inventory in order to meet client demand. What this means is that if you have someone trading treasury bonds, and treasuries across the curve sell off (yield goes up, price goes down), a trader will have a bad profit-and-loss (PnL) day because they can't just liquidate their entire holdings even if they know a few bad days are coming up.
What these traders can do is try to use a reasonable amount of discretion in putting in place hedges against securities they think will dip in value, or buying up securities they think will go up in value.
As you probably are beginning to realize, while proprietary trading is banned there is a large amount of discretion that traders still have, which regulators understand.
This is why a common phrase that you'll hear, when discussing sell-side trading regulations, is "reasonable expected near-term demand" or RENTD. Traders have the discretion to sell off positions, hedge positions, or buy up positions if they feel there is reasonable or anticipated demand for trading in these securities by clients in the future.
What this creates is a kind of grey area where traders can act out of their own discretion, but must always do so with their eye being toward best servicing clients by providing them liquidity in the future.
So if a trader normally carries $50m of a certain security on their books - to facilitate client transactions - but then all of a sudden the trader has $500m of that security on their books, compliance will probably call to wonder why this has occurred. On the other hand, if the security is trading quite actively, and the trader thinks it will continue to do so and likely increase in value, they have (broadly speaking) discretion to increase their position if anticipated future demand warrants it.
As you'd likely also anticipate, this varies from desk to desk in terms of how much leeway traders have, how regulators expect traders to conduct themselves and build their books, etc.
The important takeaway, however, is that it is not true that traders operate in some kind of vacuum where they are just being a middle man; sitting around for clients to come calling and then making a small spread from each trade.
In reality traders carry huge amounts of risk and while their primary goal is facilitating client trades, a large part of their PnL will come from how their book of risk does.
The banks that have large sales and trading activities tend to be what some would call "full-service banks". What this means is that they generally will have a retail banking division, wealth management division, investment banking division, and sales and trading division.
Prior to the great financial crisis you had several "traditional" investment banks - like Goldman Sachs, Morgan Stanley, Bear Sterns, and Lehman Brothers - who had all of the above with the exception of retail banking. This means they didn't have branches and didn't take small dollar deposits from individuals.
However, during the great financial crisis those traditional investment banks that existed were forced by regulators to turn into bank holding companies (which increased their regulation and brought it in line with banks such as J.P Morgan and BAML).
What separates banks for sales and trading
Given that all the banks with large sell-side sales and trading operations fall under the same regulatory framework, it's natural to wonder what separates them from each other.
There are two primary things:
- The relationships and reputation of the firm
- The balance sheet
The first thing - the relationships and reputation of the firm - means that certain firms have been very active in certain areas of sales and trading for decades. For example, Goldman Sachs has always put a heavy emphasis on commodities training and many C-suite executives have come out of that business.
Many firms have sought to differentiate themselves by not trying to be the best in all aspects of sales and trading - since there are so many different desks that trade different products - but rather to have one or two areas they are particularly strong in.
This is part of the reason why I'm a big believer in those looking to get into the industry to try to get an idea of what area of sales and trading they are most interested in as not every bank will be the best possible platform to begin on for every product.
The second thing - the balance sheet - refers to how large the, well, balance sheet of the bank is. Since the great financial crisis regulators have put heavy emphasis on making sure that banks don't get overextended, which just means not having too much capital pooled into risky, illiquid assets in their trading operations.
What this boils down to, in layman terms, is that if you have a lot of risky, illiquid assets - like distressed debt - you need to hold back more of the bank's capital than if you hold safe, liquid assets such as treasuries (or cash).
The firms that have the biggest balance sheets - as you can probably imagine - are those with the largest retail banking operations. So firms like J.P. Morgan and Bank of America are better positioned to hold lots of assets (including risky assets, such as those found in the credit space).
The sales and trading league table
Chances are you've heard of the term "league tables" before. Probably in the context of M&A league tables that are compiled by a number of different firms.
Compiling league tables for M&A is relatively straight forward. You just look at the announced transactions of a certain bank - for example Goldman Sachs - and tally up the dollar value of those transactions.
In sales and trading, things get a bit more complicated. However, league tables do exist that break down how the major sell-side banks rank among themselves when it comes to various products. The way in which the banks are ranked is by the estimated amount of deal flow that comes through their desks that trade certain kinds of products.
Now, it should be stated that flow does not necessarily correlate to PnL as we discussed before. There are many star traders (and sales people) at smaller banks, that don't rank that well, who do incredibly well despite not having lots of client flow.
However, generally speaking the more flow that comes through your desk the more opportunity that exists (and the larger the trader's books generally are).
Below is the most recent publicly available league table. It's not that different in 2022 than it was in years past.
What you can see here is that, as I mentioned before, almost every bank has a special little niche in which they are particularly strong in. For example, Morgan Stanley has always put a heavy emphasis on their equities trading and has always been a strong player in that space (despite being much smaller than some other banks).
You can also see, as I mentioned earlier, that those banks that have large balance sheets - because they have large retail banking operations - generally are the best performers in more illiquid areas such as credit.
One thing I can't emphasize enough is that being at a lower ranked bank, per league tables, in some asset class does not mean you are joining a bad desk. For example, while Goldman Sachs isn't strong in credit according to league tables, in reality the credit trading team is just smaller. However, they are viewed very highly in the industry and exit opportunities are very strong compared to other banks that actually rank better on league tables.
In other words, league tables give you a rough idea of the landscape, but they don't tell the entire story. What league tables can really help you do is understand where banks place their emphasis, because the reality is that all banks are somewhat capital constrained. No one, not even J.P. Morgan, has enough balance sheet to be excellent in every area of sales and trading.
Every bank has their strengths and weaknesses and generally speaking banks try to double down on what they're know for with their balance sheet.
A note on sales and trading outside the major sell-side banks
Of course, there are sales and trading operations that exist outside the major sell-side banks contained in the league table above.
Generally speaking, these banks will not focus on trading all major asset classes - like those listed above do - but will instead focus on just one or two areas they have a particular area of expertise in.
These banks tend to more inline with the "traditional" investment banks of old - like GS and MS - and are more agile. An example of such a bank would be Jefferies, which doubled their revenues to start 2020.
Joining these banks provides less of a well-known platform, however can provide heightened upside potentially. One should carefully do their due diligence to ensure they understand exactly what some of these smaller banks focus on, what mandate their traders have, etc.
Unlike with major sell-side banks, these smaller banks will also have a less commoditized analyst and associate environment.
It's also important to note that certain smaller countries will have sales and trading operations within their prominent national banks that are often the most strong across all products within their respective countries.
Every year like clockwork forums, like Wall Street Oasis, light up with questions concerning whether or not sales and trading is dying, whether there's any future there, and whether or not it's worth pursuing at all.
The reality is in 2015 I was in the same position. I enjoyed markets, I enjoyed the lifestyle that S&T provides compared to investment banking, but was concerned by what I read.
It's natural for young people - especially at top colleges - to be risk-adverse and want to not end up on a stagnant career path. They want to end up in a place with prestige and excellent exit opportunities.
This is partly why you see people striving to enter into certain M&A groups - like Goldman FIG - despite having absolutely no interest in modelling out financial institutions.
I think one reason for the concern about sales and trading is that it is a fundamentally dynamic industry, whereas M&A is much more static. While the hot desks to be on in S&T are always changing, new technology is being introduced, and new regulations are being conformed to, in M&A things move much more slowly.
Before getting into the state of S&T today, I would just offer a piece of advice: you can't be risk adverse forever. Further, being risk-adverse and being miserable for your entire twenties - or God forbid your entire thirties too - just because you want to be on some known, prestigious path in the eyes of some of your peers is a terrible decision.
Sales and trading isn't right for everyone, but you should take a step back and understand that sales and trading isn't going anywhere, people have long careers within it, there are always exit opportunities, the compensation can be incredibly good throughout, and the work / life balance is unbeatable in high finance.
The two issues facing sales and trading
I wrote a longer post on this, which I'd encourage you to read if you have the time: Is Sales and Trading Dying? The Future of S&T
What that post tries to do is set out the two primary factors affecting sales and trading. Further, what I've tried to do is set the current sales and trading environment in its proper context.
The two factors affecting sales and trading are:
- Regulation (stemming from Dodd-Frank and Basel III)
While many young people look at these as being new and novel phenomenon, in reality these have been factors affecting sales and trading from the get-go.
Part of the reason why I don't call these challenges or headwinds is because regulation and automation have allowed sales and trading to become the profit-powerhouse of many large banks over the past three decades.
Regulation opened up sales and trading to alternative asset classes - outside of just equities and treasuries - like credit. And automation undergirds many novel asset classes that are actively traded on nearly every floor like mortgage-backed securities and CLOs.
Regulation in S&T
Since the great financial crisis, we have seen additional regulations that have affected how leveraged sales and trading operations can be along with banning certain forms of trading.
For example, Basel III and Dodd-Frank have tightened up the amount of leverage traders can utilize; requiring that more balance sheet be held back when trading riskier securities.
This has meant that credit desks can't have as large trading books as they had prior to 2008 unless they want to dedicate more of the firm's balance sheet toward it.
This in and of itself is not an issue. What it has meant simply is that firms need to decide more carefully where they want to place their resources, which has resulted in many banks trying to specialize in particular asset classes a bit more than before.
As we also covered above, part of Dodd-Frank, namely the Volcker Rule, necessitated that certain proprietary trading desks needed to be shut down. What's important to recognize is that prop desks were a phenomena of the late 1990s to the late 2000s primarily.
They have never been viewed by banks as being the primary profit centers of a trading floor. Rather, they were just nice add-ons that allowed for enhanced profits if the desks performed well (or added losses if they didn't).
While many have wondered whether or not sales and trading is now boring because of the lack of being able to take on proprietary risk, such a view is a bit naive. It discounts the reality that all desks have some element of proprietary risk. No desk is purely transactional and just clipping spreads (taking an effective transaction fee) for doing trades.
During my rotational program I rotated on a number of desks and nearly everyone I met who was viewed as being a "star" trader has left to a hedge fund, just as they would have if they were on a prop trading desk. The notion that such exits are impossible or that such exists are severely hampered is simply not the reality. It would require believing that everyone on a trading floor in the early-2000s went to work at hedge funds and now just a fraction do, which is not the case at all.
Now we turn to the dreaded automation. In my view, automation comes into sales and trading in waves. While these waves are disruptive, they have always led to sales and traders moving toward more intellectual, less repetitive work.
However, there is no doubt that certain prominent areas of the trading floor - most notably, cash equities - have few humans left as a result of automation.
My personal view, having thought about the topic a reasonable amount, is that we are currently in a lull or a new normal as it pertains to automation on the floor.
The low hanging fruit, like cash equities, have been automated away and we are now left with what the floor will look like for the foreseeable future.
It is impossibly difficult, with the current technical capacity of banks, to imagine credit trading, any form of derivative trading, or even the vast treasury trading to be automated in an analogous way.
Further, one needs to keep in mind what I said before: most of the PnL on desks is driven by book positioning, not by transactions from flow. As a result, just because you could have some automated platform that allows for vanilla trades to be done - in say treasuries - that doesn't mitigate the need for clients to talk to sales people to get them to transact with the firm, or the need for traders to manage and position that risk.
This last paragraph shouldn't be overlooked. Keep in mind the incentives in play for a bank. Even if hypothetically you could have an automated platform that could perfectly execute trades across the spectrum of S&T products (which is currently not possible), then what happens to the risk? Certainly regulators would want it all perfectly hedged, less some algorithm causes idiosyncratic risks to build up. However, you can't perfectly hedge the vast majority of products on a trading floor and you can't just turn around and sell products after you buy them (or vice versa) on most desks.
The need for dealing with clients (sales) and the need to manage and position risk (traders) will always be a human responsibility.
If automation is to deal with the low hanging, low risk fruit that's not bad. It could result, hypothetically, in a smaller trading floor (less need for so many sales people and traders), but this ignores just how lean trading floors are now. If anything, further automation could result in higher volumes, more clients coming to a bank, and more need for humans.
It's important to think about the derivative to trends you're seeing in sales and trading. While I personally think we're in an automation lull, even if we aren't in ten years does that mean everyone on the trading floor will be made obsolete? Absolutely not. Keep in mind how trading floors make money and what the real responsibility of the humans are (it's not just executing transactions for clients in a vacuum, that's just the superficial level).
Every major trading floor will be broken down into a series of desks that trade a distinct product. Every one of these desks will have some mix of traders, sales people, salestraders, quants, and structurers (although the degree varies by what desk we are talking about).
Unlike in M&A where the work is quite similar regardless of the coverage group you're in - say healthcare or industrials - on the trading floor the work can vary quite widely.
For example, treasury trading is flow based. Trades are constantly coming in, you have a large book to manage, and the product isn't overly volatile (although your book is so large that small basis point moves can have a large impact on PnL). On the other hand, in CLO trading trades are much less frequent, conversations are constantly being had with clients as they decide what to do, and the book (inventory of CLOs) you're carrying is smaller (but some tranches of CLOs, like the equity tranche, can be incredibly volatile).
Generally speaking, you can break down the desks on the trading floor into four distinct buckets:
- Equities trading
- Fixed income trading
- Commodities trading
- FX trading
On top of this, you have some desks that handle things that don't cleanly fit into any of these buckets (for example, those that deal with cross-assets for certain emerging markets or general liquidity positioning).
Equities are undoubtably the product most have heard of and they do make up a significant portion of most trading floors.
Within equities trading you have a number of different desks. These desks will be called different things, depending on where you are, but can generally be broken down into:
- Cash equities: the trading of single-name stocks in large size
- Equity derivatives: the trading of vanilla or quite complex, one-off derivatives based off of equities
- Delta One trading: Derivatives that have a delta of one, meaning they act like cash equities
- Convertible bond trading: convertible bonds are often under the equities umbrella as their price movements are so tied to the underlying equity
The largest desk, in terms of the number of people employed, are generally the equity derivative desks (there can be a number of sub-desks to equity derivatives). Cash equities is largely automated today with some traders overseeing the operations of it (and dealing with larger, more thorny transactions).
Delta One and convertible bond desks tend to be quite small given the nature of the product being less popular among clients (relatively speaking).
The strongest banks for equity trading, as can be seen in the league tables above, are generally Morgan Stanley, Goldman Sachs, and J.P. Morgan.
Fixed Income Trading
Fixed income makes up the broadest set of desks that can themselves vary widely in the type of products being dealt with. You can broadly think about fixed income desks as dealing with products either originating from the government, or from corporates.
Some of the kinds of desks included within fixed income are:
- Treasury trading
- TIPS trading
- Interest rate swap trading
- Mortgage-backed security trading (CMBS, RMBS)
- Money Markets trading
- Investment grade credit trading
- High yield credit trading
- Distressed debt trading
- CLO trading
- Bank loan trading (sometimes included in another credit desk)
- Hard asset trading
Within most of these desks you'll be dealing with the straight product itself, and then various forms of derivatives or futures / forwards / swaps as well, which adds an element of complexity to these products.
Another feature of fixed income is that it runs the spectrum from very safe, very liquid products (treasuries) to very risky, very illiquid products (distressed debt).
The strongest desks in the fixed income world will depend on if we are talking about rates products (products backed by government) or credit (products backed by corporates).
For rates, the leaders tend to be Goldman Sachs, J.P. Morgan, and Morgan Stanley.
For credit, the leaders tend to be J.P. Morgan, BAML, and Citi (Deutsche Bank is less strong than it was a few years ago).
These leaderboards should make sense to you based off of what I've said before regarding balance sheet. While holding treasuries (and analogous products) are very safe, thus quite balance sheet light, holding credit is more balance sheet intensive. Therefore, those most active in credit tend to be the large balance sheet banks.
Commodities trading is not something that every major sell-side bank engages in, or at least engages in fully.
While the way the desks are broken down can vary quite widely, generally speaking you can expect there to be desks focused on:
- Oil and oil derivative trading
- Natural gas trading
- Power trading
- Agriculture trading
- Precious metals trading
On top of this, within the commodities division you can often expect there to be niche lending or structuring desks as well.
Given that not every bank engages widely in all aspects of commodities trading, the four terms that are consistently at the top are: J.P. Morgan, Goldman Sachs, Morgan Stanley, and Citi.
The final category of S&T desks are the FX desks. FX desks are typically quite large, but are broken down into just a few different desks.
- G10 FX
- Emerging markets (EM) FX
- FX options (sometimes rolled into the two desks listed above)
FX trading is the definition of flow-based and like cash equities is largely electronic. However, FX operates under a slightly different regulatory regime than the rest of the floor (as it pertains to Dodd-Frank) so traders have further latitude in how they manage their books.
Outside of classic flow trading, FX desks will focus on creating bespoke FX options for clients in order to meet their desire for certain kinds of idiosyncratic exposure that can't be achieved with "off the shelf" FX products.
In the U.S. J.P. Morgan and Citi are the leaders. HSBC for anything EM-related is strong given their diverse global client base and they are particularly strong in EM FX.
The trading floor is a lively place with all kinds of folks with different roles and responsibilities.
However, broadly speaking you can categorize folks into four buckets:
- Sales people
We'll start with sales people. Personally, if someone were to ask me what the most underrated role in all of finance is, I'd say being on a good sales desk (and that's not because I'm on one!).
Part of the issue with sales within the S&T context is ironically that folks have done a bad job selling it.
I've written a bunch longer post on the sales side of sales and trading, which covers exact what the nature of the role is.
Ultimately, being in sales is all about managing a book of people as opposed to a book of risk as a trader would do. What this entails is having to be constantly in touch with your clients, figuring out what they need, and trying to figure out how the desk can help serve them (by then talking to traders or the structuring / quant team, depending on the desk).
For senior sales people they will get a cut of the profit for all the trades that they bring in. So there is very much a variable PnL component to the sales role as well although, unlike traders, they aren't having to manage any risk after closing the trade.
What's important to note is that great sales people - who can make as much as great traders, for what it's worth - work in collaboration with their clients. Their advice and views on the markets are valued by their clients most of the time and when a sales person leaves one bank to go to another, the clients will tend to follow.
A very common misconception is that sales people within S&T are wildly extroverted. That's not necessarily true at all. Remember, sales people are talking to extremely sophisticated investors all day; they aren't looking to deal with someone they don't respect intellectually or that they think are unserious.
Note: There will sometimes be hybrid "salestrader" roles (the name will differ depending on the bank). These roles just involve the traditional sales role along with executing more straightforward trades themselves. This stands in constant to the traditional sales role of relaying the client trade to the trader.
When most summer analysts roll through the trading floor, what they really want to do is trading.
This is perfectly rational. In popular culture folks tend to glamorize the role of trading; with a wall of screens in front of you trying to manage a book swinging wildly around.
Trading is a fantastic role, to be clear, but not everyone is cut out for it. While trading - just like every other role in sales and trading - offers a much better work life balance than what you would find in traditional investment banking, one should not discount the continued stress of always having a book of risk.
Great traders, in my view, have the capacity to dissociate well from their book of risk. They can turn themselves on and off. While this can probably be developed to a certain degree over time, I think it is a more foundational trait that people either have or not (there's nothing wrong with not having it!).
While sales people can be thought of as managing a book of clients - clients who they are responsible for trying to get to do trades with the bank - traders are responsible for two separate objectives (that are sometimes in tension).
First, traders are responsible for trying to execute the trades that clients come to the bank (via the sales people) wanting to do. This requires beating out other banks who the client has also gone to looking to do a trade. Traders are, at the end of the day, judged substantially, but not wholly, on their capacity to get flow through the desk.
You can think about it this way: if a desk has no flow - meaning no client trades coming in - then aren't they essentially acting as a proprietary trading desk? Since the only moves being done in their book would by definition have to be for themselves, not in service of clients.
Second, traders need to be responsible for managing their book of risk. Since all trades can't be - and don't need to be - perfectly hedged a trader will always have risk.
Risk in the context of sales and trading is much more complex as traders will often have big inventory, across a number of different securities in their asset class, along with hedges meant to dull down just how wildly their inventory can swing. This leads to some idiosyncratic risk that a trader must understand and be able to cleanly deal with.
As mentioned, these two objectives are often in conflict. If you have a smart hedge fund coming to the desk wanting to sell out of a position - thus having the desk buy it - that's often because the price will probably go down, rather than up.
This leads to traders very frequently grumbling that sales people are bringing them garbage trades to do -- leaving them with lots of "wrong way" risk they don't want!
Obviously the way a trader tries to get out of this is by immediately trying to sell what they've bought - clipping a spread - or trying to hedge out or otherwise manage their exposure. It's all much easier said than done and why great traders are paid a handsome piece of their overall PnL.
Over the past few decades the lines between all roles on a trading floor have begun to blur together a little bit.
Quants have a bit of an amorphous role depending on what desk we're dealing with. Generally speaking, quants are those with advanced degrees in math, stats, physics, or computer science who are responsible for creating tools that provide leverage to the traders and sales people.
For example, these can be tools to better understand a traders risk, better keep track of clients, or better price highly sophisticated instruments (like bespoke credit or equity derivatives).
Some quants have a role that's a bit more analogous to a trader where they will be dealing directly with clients on pricing and executing trades.
While it used to be the case that all quants were paid a set salary - as they couldn't be tied directly to the PnL of the desk - that has changed on some desks depending on how involved quants are in bringing in and executing the business of the desk.
It's also important to note that quants are hired through a separate process at nearly all major banks to traditional sales people and traders. The interview process for quants is much more analogous to what you would find in a tech interview.
The final category, which is the smallest, are the structurers. These folks don't exist on every desk and how they are hired can vary (it can be those coming through a normal sales and trading process, or through a separate process like what quants go through).
A structurer is somewhere between a trader and a quant. They will handle the structuring (as you'd expect!) and pricing of one-off or otherwise thorny transactions on certain desks (like those surrounding credit or equity derivatives).
Structurers need to understand the practical business need of clients - meaning what they really want to do - while at the same time understanding the risk profile of doing a certain transaction and where it should be priced.
Again, all these roles begin to blend together a bit in modern sales and trading. You can think about the primary difference between a quant and structurer as being that a quant is developing tools and a structurer is best positioned to use some of these tools (most of the time).
For complex desks that have traders, sales people, quants, and structurers on them thorny trades will often involve a high level of communication and collaboration.
However, as mentioned, some desks that have less complex products will not necessarily have dedicated quants or structurers. Further, the role of a quant on a more vanilla desk may purely be to develop tools and they won't be much engaged in the PnL-generating aspect of the desk.
Of course, salaries in any area of an investment bank are highly variable. As you get more senior in an investment bank your compensation will begin to be tied - at varying levels - to how much PnL of the desk can be directly attributed to yourself.
However, at lower levels before you hit VP, compensation is much more structured. If you're on a hot desk and are a top performer, in the eyes of the head of your desk, you may hit the higher range of the bonus range and vice versa, but things can be known with a bit more certainty.
Therefore, what we'll go over below are rough compensation ranges for your analyst years and associate years. These numbers reflect being at a top U.S. BB in New York for analysts and associates.
The numbers will likely be different if you're in a different city, at a different caliber of firm, etc. Also, some analysts may be promoted after two years if they are a top performer and well-liked, but the tradition is after three years.
|Title||Base Salary||Bonus Salary|
Graphically, you can see the top range of salaries progress as follows:
One thing you'll note in the salaries above is that as you get more senior the bonus buckets become much wider in their spread. This reflects the fact as you get more senior, with more responsibilities, you desk head will have a better understanding of how you preform relative to your peers and others in the past.
The table above also demonstrates that while there may be a slight haircut to investment banking compensation, when you think about sales and trading salaries on a per-hour basis - or adjusted for work / life balance - I think it's indisputable that sales and trading is the better trade to make for those who value that.
One final point I'd make is that many joining sales and trading worry about employment being more variable. Meaning, they worry about being laid off. Just like in investment banking analysts and associates are incredibly cheap compared to VPs and MDs.
As a result, it's very rare to see anyone get fired from a sales or trading role at the analyst or even associate level unless they've made a large mistake or there is a wholesale change in the desk. Just like in investment banking at the VP-stage you become more expensive and thus have to "prove your worth" a bit more.
While many college students worry about just breaking into the industry - which is entirely understandable - part of the reason behind creating all these resources on this site is because what desk you ultimately join is so important.
I know far too many people who just wanted to be on any desk and ultimately ended up on a desk that ill-suited them. As a result, they performed less well than they would have elsewhere, which is bad for the firm and the individual.
While many firms have rotational programs to try to mitigate people ending up on the wrong desk, if you have no prior understanding of the desks on a trading floor your internship can be so overwhelming that you really don't know where you'd fit best.
Part of the reason behind the creation of all the desk guides is that I think it's critical for you to have a rough understanding of what desks you're interested in, what they do, and why they could align with your personality or skillset.
Not only is having an idea of what desk being right for you good for your own future within S&T, it also makes you stand out from the crowd in an interview (since most people have no idea of what area they're interested in).
Here are three general principles I'd keep in mind.
Principle #1: Don't Go For The Hot or Prestigious Desk
Every year summer analysts get it in their minds that there is a certain "hot desk" and a mass of summer analysts try to join it.
The problem with this is not only that you may try to go to a desk because it's hot, not because you enjoy the product, but also because by the time you join full-time the desk may no longer be the hot one reaping in excess profits.
The same holds true for going after "prestigious" desks. Just because a desk has a lot of pedigree does not mean it's the right desk to be on for you or that the career prospects are better than other desks.
I should be clear in stating that you should join the hottest and most prestigious desk possible, but only if you like the product and the people there. There's no point being miserable and relying on the crutch of prestige.
You should have a list of three or four desks you'd like to join prior to beginning and then try to get on with the one that seems to have the best prospects for a junior joining it. Period.
Principle #2: Choose The Right Product Fit
No one person - no matter their education, intellect, or motivation - is the right fit for every type of product traded on the floor.
You should be evaluating desks based on whether the product and how it is traded fits your personality and skillset. For example, if you enjoy a slower pace where you're thinking about various securities more in-depth, then distressed debt or some form of structured lending desk may be the place for you.
If you like being in the market, like analyzing lots of data, and find macro policy to be fascinating then you should look to a desks in rates or FX.
There's no one size fits all and your job should be to figure out what products gel with your personality and skillset (by skillset I'm primarily meaning math, stats, and/or coding skills).
Principle #3: Focus on the People
Finally, how much you enjoy the day to day work will largely hinge on the people you're working with.
Every desk has it's own unique culture, just like cafeteria tables in a high school do. Some desks are a bit more social, some are a bit more intense, some are a bit more methodical.
There's no way to really know the culture of a desk prior to beginning, so if you have a summer internship lined up (whether it's rotational or not) you should spend some time trying to analyze the personality types that are drawn to each desk.
Your Desk Choice Matters
Funnily enough many people spend scarce amount of time thinking about where they would best be suited on the trading floor. Don't expect anyone to make this decision for you.
You should try to always, insofar as you can, be in control of the process and trying to evaluate where you best fit. Don't go for a hot or prestigious desk, but rather focus on the best desk that fits your personality and skillset with people you would actually enjoy working with.
There's a fit on the floor for everyone, your job is to find it.
The path into sales and trading usually comes via either a summer analyst position or a full-time position. I'd say, at most major banks, the division is roughly 90 / 10.
This means that securing a summer analyst position is the first step. In a longer post, I wrote up what the process for securing an internship looks like and some tips to keep in the back of your mind.
The interview structure, almost irrespective of the bank you're applying to, will be as follows:
The first round will be a HireVue at most banks although some are still using phone screens.
In yet another post, I detailed exactly what to expect in a HireVue interview, how candidates are evaluated, and how candidates move on.
What candidates move on to - if they pass the HireVue screen - is a superday, which in sales and trading means three back-to-back interviews with folks working in sales and trading.
Typically those that interview you in a superday will be high-level associates, or more junior VPs.
What should be obvious is that while breaking into sales and trading as a full-time is not impossible, banks have a preference for taking summer analysts. Part of the reason for this preference is not just that this allows for the banks to further evaluate a candidate, but also because the bank wants to ensure the candidate lands on the right desk.
While many banks do rotational programs for their summer analysts - like Citi and Goldman Sachs - very few banks do rotational programs for full-time hires. They want to make sure those that come into the bank full-time are ready to "hit the desk" on day one and begin to contribute.
With that being said, there are three plans you should make whether you're gunning for a summer analyst position or for a full-time one within S&T.
- Networking Plan
- Interview Plan
- Desk Plan
Let's look at each of these in turn.
While networking can be quite structured and defined within investment banking, many approach recruiting for a position within sales and trading without much of a networking plan at all.
This is partly why I put together the networking guide, which lays out a detailed plan for you.
What any good networking plan should do is:
- Select targets to contact who are on the desk you would potentially like to be on or who have something in common with you
- Have a networking e-mail template to send out to these targets in order to try to get them on the phone
- Have a follow-up plan in place (in case your initial targets don't respond to your e-mail)
Networking doesn't need to be time intensive. In fact, all you really want to do is ensure that your resume is pushed to human resources in order to ensure you're flagged as a strong candidate for an interview.
While networking is less effective than it was ten years ago - primarily due to the rise of HireVue - you should treat your networking as setting the foundation for the continued networking you'll have to do on the job.
Next, you should have an interview plan. Because sales and trading interviews can be less structured than in investment banking, many spend far too little time on their interview preparation (deciding to effectively roll the dice and hope no one asks them questions outside of what they know).
This is a bad idea not just for the obvious reason - that you want to come into interviews prepared! - but also because preparing properly for interviews can help you understand what sales and trading really is and if this is the right career path for you.
Finally, we have the desk plan. As I mentioned many times in the guides, one of the best ways to stand out in an interview is to have a strong idea, and good rationale, for what desks you want to be on.
The best way to do this is to have a broad understanding of what kind of desks are out there, what the underlying product is, and how it matches your personality and skillset.
Having a strong understanding of desks also helps in networking as it shows you aren't entirely naive.
Remember to Apply Broadly
Many make the mistake of only applying to a few banks for sales and trading roles. It's important to cast a wide net and then evaluate offers as they come in (hopefully more than one does!).
As was mentioned when discussing the league tables, every large sell-side bank has at least a few areas they're particularly strong in. While everyone would like to start their career at the most prestigious brand-name, you should be more than happy to just get your foot in the door as moving between firms within sales and trading is much more likely than it is in other areas of finance.
Further, just because a bank doesn't have a stellar brand-name doesn't mean that it isn't a market leader in certain areas.
Part of the reason why I decided to begin writing on sales and trading is that unlike in investment banking, there was no real resource for those wishing to prepare properly for sales and trading interviews.
When I was trying to prepare for my summer analyst interviews at J.P. Morgan and Goldman Sachs - and the operative word is trying - it involved a lot of haphazard reading of forums, Bloomberg, etc. with no idea of what to actually expect.
Fortunately, preparation for S&T interviews does not need to be so haphazard. The types of questions you'll face can be broadly placed into five distinct buckets.
While the guides contain over 200 questions broken down into these categories, I've posted some of the most common questions in a few different articles to give you a feel for what to expect:
- J.P. Morgan Sales and Trading Interview Questions
- Sales and Trading Internship Interview Questions
- Top 5 Goldman Sachs Sales and Trading Interview Questions
- Top Sales and Trading Interview Questions
One of the things that I try to get across in the guides and interview questions above is that if you give thorough answers that go above and beyond you'll be well poised to get an offer.
Further, unlike in investment banking where one wrong answer can result in you getting rejected, in sales and trading if you can answer several questions very well then getting a few wrong isn't necessarily going to result in you not getting an offer.
Preparing for any kind of interview, in an industry you're not familiar with, can be daunting. The key to preparing effectively and efficiently is to have a methodical approach where you are covering the most common types of questions and will be able to speak intelligently about the industry.
Question 1: What area of sales and trading interests you?
In every sales and trading interview there are questions that are low yield (have a low probability of being asked) and high yield (have a high probability of being asked).
This question is among the highest yielding questions. It also is an open-ended question that will allow you to show off how much you understand about sales and trading.
As I've continually stressed, you should have identified a number of different desks (around 2-4) that you are interested in prior to your interview. No one is going to hold you to having to go to these desks. Even if you're joining a non-rotational program, like the one J.P. Morgan does, you will have time to change your preferences after you get the offer.
A great answer to this question will start by you stating that obviously you never really know if a desk is right for you prior to joining. However, you should then list a few desks that are of particular interest and state reasons why. These desks don't need to be in the same broad category, but should have similar attributes.
For example, you can say that you think you'd enjoy the more fast paced nature of flow trading that involves having an outlook on macro policy, and thus treasury trading or G10 FX trading would be top choices. You should then begin to contrast them, showing that you understand the differences. To continue our little example, you could note that while treasury trading is obviously more closely tied to Fed policy and the general U.S. economic outlook relative to the rest of the world, in G10 FX you need to take a broader look at G10 economies, their monetary and fiscal policy, and how these compare and contrast. So treasury trading involves a narrower, but deeper focus.
This is an excellent answer and offers a good template, which can be distilled as follows:
- State that you obviously can't know exactly what desk is right for you, prior to beginning
- State a few desks you think you'd be interested in
- Give a rationale for how these desks are similar to each other (in terms of attributes of the desk)
- State the differences that the two desks would have (in terms of what things drive the assets the desk is trading)
Question 2: Why does the Fed care about having long-term yields lower?
In contrast to investment banking interviews, in sales and trading interviews most questions present the capacity for you to give more in-depth answers.
Often the difference between candidates who get an offer, and those that don't, is simply that some are able to give in-depth answers that show they have a deeper understanding of markets more broadly.
A good answer to this question will note a few different things. First, that the Fed has been engaged, off an on since the financial crisis, in buying up long-term bonds in particular (thus pushing up the price, and lowering the yield). When the Fed does this it results in a flatter yield curve, as is shown below:
The primary rationale for doing this is that corporate credit is inherently tied - or perhaps better put swayed - by where treasuries of similar maturities are. If treasury yields are higher, chances are corporate credit yields are higher. Further, by having a flat yield curve that gives corporates confidence that we'll be in a "lower for longer" rates environment, making them more apt to take on more leverage (more debt) because debt servicing costs will be lower. This obviously has an effect of stimulating the economy as companies can deploy the cash they've raised from issuing debt cheaply to build new plants, hire new employees, etc.
A secondary rationale or consequence of Fed intervention is that treasuries of low yield, especially at long duration (like the long-end of the yield curve), are less appealing for investors to hold. This pushes investors to go "hunt for yield" by investing or lending in riskier types of products (like corporate credit), which stimulates the economy.
Question 3: What do you think about equity valuations today?
This again is a broad, open-ended question that is typical for sales and trading interviews. You shouldn't get caught up in thinking that there is one right answer as there are dozens of equity strategists at every bank who will have divergent views on equity valuations at any given time!
What your interviewers are really looking for is that you have some kind of view and can express it in a relatively articular fashion. Don't be concerned about rambling, however. It's far better to demonstrate what you know, as opposed to keeping your answers short and not getting across your entire view.
First you should define what market you're speaking about (U.S. equities, emerging market equities, European equities?).
Once you've narrowed in on what specific market you'll be speaking about, you should state some broad market measures that are commonly looked to. For example, you should talk about where the P/E ratio currently is, and where it has been historically, and what the forward P/E ratio is and where it has been historically.
You should then have a thesis for if these ratios are likely to inform future market moves. So while the current P/E ratio is stretched for U.S. equities, the forward P/E ratio is significantly lower. This illustrates that the market recognizes that current earnings for many U.S. companies are still artificially suppressed due to the massive disruption to many companies seen due to the pandemic.
You can then narrow your focus in and talk about specific industries that compose major indices and if some seem rich and some seem like they have room to grow. For example, you may say that tech seems frothy due to the increase in IPOs (and IPO pops) that have been seen in 2021 and that industrials and utilities seem like they still have room to go. So perhaps your view is that over the next year the market will trade sideways - at roughly the same P/E ratio - because tech will begin to fizzle, but more "real world" economy equities will increase in value roughly offsetting themselves.
You may also tie in a broader comment that in a lower rates environment, it is unlikely that equites will tumble that much because investors need to put their cash somewhere and real yields on treasuries are almost uniformly negative. This potentially puts a floor under just how far equities can really fall.
Like I said, this is an open-ended question. No one expects you to say that you have developed an algorithm model that perfectly forecasts equites over the next year and explain it.
What folks are looking for is just that you know some key terms and factors that can drive equity prices. You shouldn't be spending more than 2-4 minutes answering any given question, so no one expects a complete run down of where we are, how we got here, and where we're going.
When I got started in the industry, I felt paralyzed by whether or not I was making the right decisions. Perhaps like you, I had a number of different potential ways in which I could spend my summers. I could do investment banking, equity research, or try my hand in a tech-focused role.
The best advice I got at the time - although I did not necessarily internalize it at the time - is that your life will twist and turn in directions you can't possible know today.
You should not base the internship you pursue, or the first job you have out of college, on whether or not you can see yourself in that exact role thirty years from now. Whatever industry or job you pursue will change in ways you can't possible imagine and more importantly you yourself will change as well.
Instead, you should look at opportunities while you're young that:
- Provides great compensation today
- Provides the potential for higher compensation in the future
- Involves doing something you think you will enjoy
Every career has some level of tradeoffs. While the notion that sales and trading is dying is entirely hyperbolic, in my view, it is a more volatile industry than investment banking to be sure.
However, this needs to be weighed against the work / life balance, compensation, and overall enjoyment you'll find in your work.
If you wind up on a desk that suites you, sales and trading offers an incredible opportunity to do something interesting that helps you develop a deep expertise in some kind of product or asset class.
I would always recommend sales and trading for those who find this space to be interesting. Not everyone does, of course, but for those that do they often can't imagine themselves doing anything else.