Top 4 Scotiabank Sales and Trading Interview Questions

In a recent desk note from Goldman, the current state of affairs was summed up well: “August has arrived and with it the summer exodus post a challenging and confusing year. The buoyant headline markets seem at odds with much of the bearishness 2023 has been characterized by. In reality in spite of everything this year has had to deal with, nothing has really caused much sustained damage.”

It was only a few months ago that many were hyperventilating over regional bank failures and how they were a signal that the Fed had finally gone too far. Because it was the assumption of many – including some notable market participants – that the Fed engaging in the fastest rate hiking cycle in forty years would eventually break something, and so when regional banks began to spiral it was immediately thought that the day of reckoning had finally arrived.

But, as I wrote at the time, the hysteria that engulfed markets for those few brief weeks was entirely unwarranted and based on a misunderstanding of the nature of the bank failures. It wasn’t a credit issue, it was a duration issue. In fact, given that the root of the issue involved the accounting treatment of treasuries it was per se the furthest thing from a credit issue! However, when depositor flight happens, regardless of the reason and if it's justifiable, it’ll put strain on any bank.

Turning to the present, we’ve come full circle: from bearish sentiment prevailing in the early parts of the year due to fears of continued bank failures, a technical default occurring, and a recession looming around the corner to market participants slowly (and painfully) capitulating to the equity market rally we’ve seen.

To give you a sense of how many market participants are beginning to buy into the rally and the soft landing narrative that’s propelling it, below is a screenshot from a recent Goldman note. It illustrates that leverage is beginning to pick up again as well.

This is notable because earlier in the year many market participants were dipping their toes into increasingly risk-on waters but hedging out a significant part of their exposure. However, now we’re seeing the tell-tale signs of market participants unwinding their downside hedges and more fully participating in the rally...

July was one of the largest de-grossing months for hedge funds of the past decade due to all the short covering that occurred. It may be a bridge too far to say that people are fully buying into this rally, but it’s certainly true that few now want to bet against it.

Further, the ebullience in markets isn’t exclusively an equities story. In the past few months we’ve seen a meaningful tightening of high-yield credit spreads and most commodities rebounding significantly (i.e., right now WTI is back at its eight-month highs).

Scotiabank Sales and Trading Interview Questions

Below are four interview questions, two market-based and two that commonly come up during sales and trading interviews in Canada. Something to keep in mind is that if you’re interviewing in Canada you should know what the BoC is doing, where important economic indicators in Canada are, etc. But it’s more than fine for most of your market-based answers to focus on US markets – the point of market-based questions in a sales and trading interview context is just to see how you think about and articulate your views on markets.

1. How would you react if you saw a trader get mad and break their phone?
2. What economic data do you think the ten-year treasury is most sensitive to right now?
3. Where do you think we are in the equity cycle right now?
4. If you had the opportunity in the future, would you be interested in moving to New York or London?

How would you react if you saw a trader get mad and break their phone?

This is a question that a few different Canadian banks have asked in sales and trading interviews over the past year. It’s a hilarious question to ask. Primarily because it’s the kind of question that’d never be asked at GS or MS these days (as someone in the financial press would end up finding out and then write a think-piece on what the question says about the culture of the firm, the kind of people the firm is trying to hire, etc.).

But the trading floors in Canada have a reputation for being a bit more raucous and old-school. More similar to the how they were in NY a few decades ago, as opposed to how they are today. So I have no doubt that the per-capita number of phones being broken in the Great White North is much higher than in NY, LDN, or HK.

Note: Before moving forward, I should probably clarify what breaking a phone even means in this context (as some younger readers may be visualizing an iPhone being angrily slammed on a desk and having its screen shattered or something). If you visit a trading floor you’ll see that most have what’s called a “turret” on their desk, and this turret will have an old-school style phone receiver on it. So they’re pretty easy to break if you just hit the ear-piece component on the end of the desk – and most everyone will have seen it happen a few times in their career.

Anyway, this question isn’t really a bad one, as it’s really just a way of (indirectly) asking you how you would navigate the different personalities that invariably exist on a trading floor (as some are a bit more temperamental or disagreeable or aggressive than others).

So the best way to approach answering this is to say that you understand that the trading floor will have an assortment of personalities – including some that a bit temperamental – and that the nature of any trading role will involve periods of high-pressure or high-stress that people deal with in different ways. Therefore, you wouldn’t be fazed or bothered by someone breaking their phone, as it’s not directed at you personally. Rather, it’s just the individual expressing their irritation over the situation that they find themselves in.

What economic data do you think the ten-year treasury is most sensitive to right now?

The best way to approach this question is to think one layer deeper. Needless to say, the rates market is most sensitive (i.e., will react the most) to data that it believes will change the forward trajectory of the Fed. So the real question here is what economic data is most informing the Fed’s reaction function (i.e., growth data, employment data, general inflation data, wage inflation data, etc.).

As Goldman illustrates in a recent note, the rates market has become increasingly sensitive to a number of different economic measures. For example, during 2021 the ten-year treasury barely budged regardless of the economic growth data coming in higher or lower than expected because the Fed’s reaction function at the time, as they continually stated, was to keep rates low for the foreseeable future.

However, with the Fed changing its reaction function and embarking on its aggressive rate hiking cycle, the ten-year treasury has become much more sensitive to growth surprises than in the past.

But the type of economic data that’s most informing the Fed’s reaction function, and that moves rates markets the most when it surprises to the upside, is obviously inflation data.

In fact, since we’re much closer to the end of this rate hiking cycle than the beginning and since the Fed has said they’re now entirely data-dependent regarding future hikes, this has only amplified the sensitivity of the rates market to inflation data.

Because, for example, if we suddenly start getting hotter than expected core CPI and core PCE prints, thereby illustrating to the Fed that more work needs to be done to bring inflation back to target, then the Fed’s trajectory will change (i.e., it’ll become increasingly likely to see an additional few rate hikes priced in by markets unless other data, like employment or growth, falls off a cliff).

Here’s how Goldman puts it: “On the inflation side, we continue to expect above-average sensitivity, even as inflation begins to approach the target. Spot inflation data will be pivotal for investors and policy makers assessing progress on the last mile — the task of lowering the inflation trend into the low-to-mid 2% range we view as the Fed’s comfort zone. And for the Fed, the distinction between 2.5% and 3.0% is arguably more important than the distinction between 3.5% and 4%.”

And here’s an overview of how different types of data surprising to the upside has impacted the ten-year treasury yield recently...

Note: Earlier in the year positive payroll surprises moved the ten-year yield quite a bit more than they have recently. This was due to folks earlier in the year expecting the Fed to pause and hold rates – despite the backdrop of still elevated inflation – due to the expectation of softer growth materializing. However, as jobs data kept surprising to the upside, and inflation hadn’t begun to meaningfully moderate, this signaled that growth would remain resilient and pushed yields up in the (accurate) anticipation that the Fed would be hiking rates a few more times.

Where do you think we are in the equity cycle right now?

This is a classic markets-based question because there’s no correct answer. If you get ten market participants in a room, you’re almost certainly going to get ten different answers to this question – some of which are bound to be completely contradictory.

So, to keep things interesting, let’s talk about Mike Wilson’s latest note on equities where he discusses where he thinks we are in this cycle. For the uninitiated, Wilson is an equity strategist over at Morgan Stanley and he’s become the (unwitting) face of those believing we’re still in a bear market.

This is a bit unfair as Wilson isn’t all doom and gloom in his predictions. He simply believed that equities would fall significantly this year, due to believing there would be more earnings deterioration than the market was pricing in, and that equities would rebound significantly next year due to a sharp rebound in earnings.

Anyway, despite the duration of the rally we’ve seen, it’s still not the view of Wilson that we’re in a new cyclical upturn. Rather, Wilson believes that we’re in a “late-cycle rally” that’s been driven by supportive policy and the market fully pricing in a soft landing (despite the fact that we’re still a long way from securing a soft landing).

In Wilson’s theory, the current equities rally we’re seeing is being driven by three factors: exceptionally strong fiscal support, supportive global liquidity, and the market’s anticipation that inflation fluttering down closer to target will allow the Fed to begin cutting rates soon (despite them saying they won’t consider it for at least a year) to help support growth.

Wilson sees a clear parallel between what was driving equities in 2019, and what’s driving them today. Back in 2019 the Fed paused, began cutting rates, and actually expanded its balance sheet to support growth. This led to a significant rally that was driven by multiple expansion, not earnings. And, as you may remember, was a time when tech stocks led the way higher.

Here's a little correlation he did of different industry groups and their performance in the 2019 equities rally and the rally that we’ve seen since the October lows last year...

Today, as Wilson notes, there’s a big difference: the Fed hasn’t (officially) paused and are steadfast in stating that they won’t be cutting rates anytime soon. So, per Wilson, it appears the market has gotten ahead of itself – especially since multiples are already 1x higher than their peak in the 2019 equity rally.

Wilson doesn’t discount that equities could still go higher, especially if we continue getting moderating core inflation data. But he doesn’t see the rally we’ve been in since October as a new cycle. Instead, he sees it as the last major rally of this cycle and that we’ll still end up going lower, at some point, before we truly enter into a new upward cycle.

If you had the opportunity in the future, would you be interested in moving to New York or London?

It’s relatively common if you’re based in NY that you’ll be asked to go spend a few years working on a desk in LDN or HK at some point. However, in Canada it tends to be much more common (i.e., someone on the rates desk at RBC in Toronto will move to NY or HK or LDN for a few years).

So if you’re interviewing in Toronto at RBC, TD, Scotiabank, etc. and are asked this, you should say that you love Toronto but if you were ever asked to go join a desk in NY or HK or LDN you’d be really excited by the opportunity.

I can imagine that many people who are asked this question think it’s a bit of a trick question and that the question is trying to probe if they are going to try to lateral to GS, MS, JPM, etc. in New York or London. Therefore, they reflexively say they wouldn’t be interested in ever moving from Toronto.

However, the question is really just asking if you’d be open to moving (internally) to support a desk in a different geography. Since this is quite common to see happen, your interviewer wants to hear that you’d be open to it (although it’s not a given that you’ll ever have to move, and it’s not a deal breaker if you say you’d strongly prefer to stay in Toronto). But, for interview purposes, just say you’d be interested and excited about the possibility of exploring a new city sometime in the future.

Conclusion

There’s a certain tension in markets right now. It’s hard to find too many who don’t feel like there’s significant volatility of some kind lurking under the surface despite – or perhaps because of – the significant rally that we’ve seen across almost all asset classes.

Since this post was started with an excerpt from a desk note at Goldman, here’s another one from August 2 that captures how many market participants are feeling now...

“So where does this leave us? Well this felt one of those hated rallies and the 'recession' that everyone feared has yet to materialize (and questions circling will it ever?). Hedge funds have covered and the rates outlook is (hopefully) cleaner. Although while we can continue to grind higher in 2H23 given the amount of dry powder in money market funds–how much of that is sticky given the new found yields in these vehicles? I am also still not convinced we can give the all clear on the econ either especially when PMIs mostly continue to print a bit softer around the globe. Not to mention this 'resilient' consumer is continuing to spend but at what cost?...hint: consumer credit card & revolving plans lvls hit ATH in July.”

There’s been a whipsawing of narratives driving markets this year, so there’s no shortage of market themes to discuss in interviews. Just remember that you want all your answers to be delivered in two or three minutes and you want to include a few data points to support your answer if possible.

In preparing for interviews, make sure to go through the longer list of sales and trading interview questions and make sure you have answers to the different types of questions (i.e., behaviorals) that you will get. For most interviewers, answers to the market-based questions are the most important. But you’ll get a pretty diverse assortment of questions, so make sure you’re properly prepared for them too.