Do you take it?
Nope. You just turned down $1 million. Sorry. After a fair amount of convincing and an offer to run his own book, Amaranth was where Brian Hunter chose to stay. He was on top of the world.
Fast forward 17 months. Top of the world? Hardly. Brian Hunter’s natural gas trades have gone horribly wrong. During the month of September 2007, Amaranth reportedly lost $6.6 billion. Failed trades needed to be unwound as investors pulled their money from the hedge fund causing a death spiral. Brian Hunter and Amaranth were finished.
Making millions or losing billions – such is the life of a trader.
Truth be told, most trading is not as dramatic as the high-profile blow-ups would make it seem. This post will hopefully give you a little peek behind the curtain at trading.
As with research, the world of trading is broken down into sell side traders and buy side traders.
Sell Side Traders
Sell side traders typically take the form of position traders and sales traders. Position traders are best thought of as market makers. They will usually specialize in a group of stocks and buy and sell those stocks in the market. They make markets, provide liquidity, and collect commissions along the way. They are the brokers that facilitate trading for asset managers and hedge funds.
Sales traders are slightly different in that they typically have more contact with clients. Sales traders are the relationship guys communicating with clients and sharing market information, whereas the position trader is more concerned with working orders. The primary job of the sales trader is to sell their firm’s trading capabilities.
Buy Side Traders
Buy side traders generally break down into two camps: alpha-generators and cost-minimizers. At your typical asset manager or hedge fund, there are portfolio managers and research analysts that make the investment decisions for the firm’s assets under management. The trader’s job is to execute the decisions of the investment team with as little cost as possible. That’s not an easy job in today’s HFT (high-frequency trading) world where the HFT players are just sitting in the (dark) pools waiting to pants you as soon as you wade in.
At trader-centric hedge funds and proprietary trading groups, the role of the trader is actual a combination analyst, trader, and portfolio manager all rolled up into one person. Here the goal is to take a pool of money and trade it to make more money. These are the alpha-generators. This is where the big money is in trading, but it’s also where the biggest risk is as well. Risk and return are inextricably tied together on Wall Street.
Breaking in as a trader typically follows a similar path to equity research analysts as finance and math-related degrees are preferred. An MBA is also typically preferred, but as always the enterprising undergrad can break in with the right networking and strong credentials.
There are simply too many different entry-level jobs to cover in one post, but there’s an easy way to determine if a potential job is going to be that stepping stone to $1 million paydays. Ask yourself, “How far removed is this job from the investment decision?” Just as aspiring portfolio managers need to focus their efforts on the front office jobs, aspiring traders need to focus on the trading action.
Typically, you will see entry-level jobs where you start as a junior trader working under the watchful eye of a more senior trader. Alternatively, you could start in an analyst role providing research to the traders making the ultimate investment decisions (i.e., at prop desks and trading hedge funds). Once you are in, though, the meritocracy of Wall Street takes over and you will advance based on your performance. Trading is very much an “eat what you kill” business.
Internships are always the best way to get your foot in the door, so finding a summer internship gig should be your number one goal during your junior year. If anybody has some worthwhile trading summer internship stories, I’d love to hear them.
Meantime, do you have what it takes to make millions? Or will you make headlines as the trader that lost billions?