Some of the most exciting and desirable jobs in investment banking are in sales and trading. These professionals are responsible for selling the financial products of the bank (stocks, bonds and derivatives). They also serve as a crucial link between sellers (corporations and governments) and buyers (investors).
Though sales and trading are sometimes grouped together, they perform different functions. Sales people build relationships with key institutional clients and keep them informed of new offerings. They advise clients on how to manage their portfolios and sell them various financial products.
Traders develop in-depth knowledge about certain markets, companies and industries. They “make markets” by maintaining a position in a stock which their firm has underwritten, quoting bid and ask prices and buying and selling securities. They may also put together major trades by negotiating with salespeople and traders at other firms.
Traders at investment banks usually have one of two roles: 1) “making a market” by buying or selling securities for a client’s account and at the client’s request; or 2) proprietary trading, where traders buy and sell securities for the investment bank’s own account.
In addition, most traders usually specialize in one type of security or market, such as equities, fixed income (bonds and cash equivalents), foreign currencies (forex) and derivatives. Equity traders spend time persuading other traders why what they’re offering is a good investment. Fixed income traders use their analytical skills to price and sell inventories of bonds and other financial instruments. Derivatives trading is technically demanding, and requires strong analytical abilities. Finally, foreign exchange traders rely on their knowledge of macroeconomic factors and market events to gauge the direction of markets.
Trading is a high energy, high stress job. Successful traders must have great math skills and be able to analyze data quickly. They must be able to juggle a number of tasks simultaneously in the high-pressure environment of the trading floor. They must instinctively understand markets when setting prices, grasp supply and demand pressures, respond to changing circumstances quickly and have a good understanding of human psychology.
Traders generally do not leave their desks while the market is open from 9:30 a.m. to 4:00 p.m. The difference between earning or losing thousands or even millions of dollars can rest on the click of a mouse or just minutes between trades.
Some of the investment banks that are well known for their successful proprietary trading have included Salomon Brothers, Drexel Burnham Lambert and Goldman Sachs. Of course, sometimes things go in the opposite direction, with disastrous results. You may recall how rogue trader Nick Leeson managed to bankrupt Barings Bank, one of Britain’s oldest and most established banks, when his trades when horribly south and the bank lacked adequate oversight and risk management controls.
Next time, we’ll look at the training and skills required to be a successful trader.