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Making Millions or Losing Billions – The Truth About Trading

Trader-running-from-crashing-stock-marketIt’s April 2005 and your name is Brian Hunter. You are 31 years old and Steven Cohen has just offered you $1 million to join SAC Capital Advisors.

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.

Getting In

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?

{ 8 comments… add one }
  • AA

    Hey you have a very helpful blog.

    I need some help because I feel a bit lost right now.

    I did humanities in my undergrad (philosophy and lit) and religion for my masters. I have barely any work experience to speak of.

    I’m trying to find a hedge fund internship (yeah I know am crazy!).

    What would you recommend I do with my unusual background?

    Start studying for the CFA? Join an MBA at the same time? Any good MBA programs in London?

    I am willing to do internships even if they are unpaid if that’s the way to get in. It seems that in my stage networking might be the way to go.


    • Why the heck does AA want to go into investing?

      That was my first thought when I read your comment. That is also the first question anyone in the business will ask you. You need to be able to demonstrate (and prove with some sort of past experiences) that you have a passion for investing. This might take some creativity on your part, but if you can land an internship that would be an excellent way to get your foot in the door.

      If you can’t show your passion for investing (or you aren’t completely sure that you have a passion for investing), then business school can certainly help you make the transition. As far which business schools, check out the CFA partner schools in the link below since you can work toward the CFA at the same time and prove your passion for investing.


      Good luck!

      • Aitor Astobieta

        Thanks a bunch jq!

        I have been trading in forex for the last year or so with minimal amounts of money ($500 or so) with my father.

        I bought your career center product, and am enjoying it so far.

        Keep up the good work!

  • Jack

    I was wondering about being a trader. When one starts out in a firm and would like to work on the trading floor, how long would it take to get there, do the new guys just get coffee for the big dogs or do they start out on the floor?

    Thank you

    • Trading “floors” are only at the big banks and the biggest asset management firms and hedge funds. As such, they typically have organized recruiting for recent graduates which can get you trading fairly quickly following some type of training program. Your best bet is to seek out a trading internship to get your foot in the door.

      • Jack

        If I was going to get a trading internship in college, would it benefit me more to go to a college around NYC or doesn’t it matter?


        • The quality of the college matters far more than the location. Being near NYC just makes it easier to network and job/internship search.

  • JD

    Hi Mike,

    I had a couple questions regarding internal movement. I’ve been working a middle office role on the trading floor (periphery of the desk) at a fairly large FI AM. I’ve been promoted within my first 6 months at this position but ultimately want to move into a junior role as a corp or ABS trader. I have regular contact with these guys and want to know what is the best way to approach/initiate my interest? I’m constantly worried about being pigeon holed, what is a good time frame to realize this might not happen and start looking outside the firm? Also any advice, tips, courses (currently studying for CFA1 in December) that would elevate my minimal trading experience would be greatly appreciated. Thanks for the blog, have sent it along to other guys in my office everyone reads LBS now.


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