Traders live and die off their DEaR limits. Today we delve into the details of the DEaR limit.
DEaR is calculated differently at every firm. A very common method is taking three years (750 trading days) of data and finding the desired percentile worst day. So if you're looking for a 95% DEaR, you line up your portfolio's simulated performance on those 750 days and take the 37th worst one as your current DEaR. It's a measure of how much you have at risk on a given day.
Trading desks at banks tend to use DEaR as the limiting factor in taking on risk, while at many hedge funds the limiting factor is balance sheet as opposed to DEaR. If a desk is allocated $5M in DEaR, then the simulated portfolio cannot exceed $5M of draw-down on that simulated 37th worst day. So effectively your risk is simulated and you are held at a loss limit based upon historical catastrophes.
DEaR simulations are used for the portfolio because of the off-setting effects your portfolio can have. Let's say you are long $100M 10year on-the-runs (On the runs are the latest issue of government bonds, not surprisingly the old issues are called "off the run.") and short $100M 10year off-the-runs. Well, we can't add the risk off the long position (say it has a DEaR of $129M) and the short position (say it has a DEaR of $152M). Clearly the combined position will off-set a lot of the risk involved, namely duration risk. If rates go up or down, you should be quite well hedged. This is an example of a spread trade.
For those of you who are interested, this is exactly the sort of spread trade that got LTCM (Long Term Capital Management) in trouble. They were a huge hedge fund founded by Meriwether and included Merton and Scholes (yes, from the Black-Scholes-Merton model of options pricing). These spread trades tend to be low risk and fairly low reward, but when shit hits the fan you can lose a lot of money. If you're curious about LTCM you should read "When Genius Failed."
So what happens when you bust your DEaR limit? The risk guys get all over you and require a reduction of position. This can really suck if your positions aren't going your way since you have to unwind at a loss. It gets even worse if your position is so big that the whole street knows you're unwinding and starts trading against you (this happened to LTCM, the late Amaranth, and probably a lot of others big funds that no longer exist). So most desks try to keep a good bit of gap between their DEaR limit and actual DEaR. You'll see prop desks skimming really close to their DEaR limits when they think something is so astronomically mispriced in the markets that they have to take a huge position in it due to the risk-reward tradeoff.
As long as we're discussing DEaR, we should look at some of it's shortcomings. For one, DEaR often missed the real "catastrophe" events. Things like Russia defaulting, 9/11, etc usually fall in the 99th percentile or worse. These are the times when a lot of these big risk takers lose liquidity. The most common answer to this shortfall is to use a new measure called CVAR (as opposed to VAR).
VAR and DEaR are really identical. VAR stands for Value At Risk and is calculated the same way as DEaR. CVAR stands for Conditional Value At Risk. This measure is sometimes also known as Expected Shortfall, a name I tend to use because it describes the measure better. Expected Shortfall is the expected value of a loss beyond a certain threshold. So let's say we take 95% CVAR. That means we calculate the expected value (read: average loss) of all the scenarios past the 95th percentile. This method of risk calculation has become rather common in credit markets (since default scenarios are fairly rare, and correlated default scenarios even more rare). As such, some idiots think CVAR stands for Credit Value at Risk. Make sure to let them know that they are idiots if you meet any of them, especially if one them starts talking about CVAR like they know what they are talking about.
Well, that ends my discussion of DEaR, VAR and CVAR risk limits. Let me know if there are questions.
Thursday, May 31, 2007
Wednesday, May 30, 2007
Learn EVERYTHING
One of my pet-peeves is people who refuse to learn something that they view as "out of their realm" or "too hard for them." I have never understood why people would short themselves so much. While it is important to know your limits, learning should never be outside your limits. If you aren't smart enough to learn, then wall street is probably not a great place for you. People who don't learn and adapt go extinct faster than life on Mars.
What should you learn? In this day and age, there is no reason any new trader on a trading floor should not know how to do some basic programming. The markets have gotten far too fast and analytic to allow you to survive w/o some good applications. Sure you have tech people working for/with you, but why wait for them? Do you have any clue how far ahead of the curve you can get by being able to do your job and the tech guy's job at the same exact time?
Also, if you're an investment banker, you should definitely learn programming. There is A LOT of data entry that could be automated with the right comp-sci background. Oh yea, you'll be doing A LOT of data entry as an investment banking analyst. Granted, since you're doing your data entry for 15+hrs a day, there probably is no time for this "innovative" programming. . . well, that's a problem the investment banking industry is going to have to figure out for itself. I assure you, there is far too much manual everything in the industry.
What else to learn? Well, there's certainly no harm in learning products other than your own. It will make the eventual job switch (yes, you will eventually take a different role) that much easier and give you more options for it. You should thoroughly learn your back/middle office processes. Why? If you know their processes you can tap their resources when you need them, and you will know how to expedite things you need to get through them.
I think the majority of the people I see "failing" out of the industry do so because they are not willing to learn and adapt quickly. That being said, the majority of the people I see leaving the industry in general do so because they don't like the work. You really do have to love what you do in this industry, otherwise the hours just wear on you too quickly.
What should you learn? In this day and age, there is no reason any new trader on a trading floor should not know how to do some basic programming. The markets have gotten far too fast and analytic to allow you to survive w/o some good applications. Sure you have tech people working for/with you, but why wait for them? Do you have any clue how far ahead of the curve you can get by being able to do your job and the tech guy's job at the same exact time?
Also, if you're an investment banker, you should definitely learn programming. There is A LOT of data entry that could be automated with the right comp-sci background. Oh yea, you'll be doing A LOT of data entry as an investment banking analyst. Granted, since you're doing your data entry for 15+hrs a day, there probably is no time for this "innovative" programming. . . well, that's a problem the investment banking industry is going to have to figure out for itself. I assure you, there is far too much manual everything in the industry.
What else to learn? Well, there's certainly no harm in learning products other than your own. It will make the eventual job switch (yes, you will eventually take a different role) that much easier and give you more options for it. You should thoroughly learn your back/middle office processes. Why? If you know their processes you can tap their resources when you need them, and you will know how to expedite things you need to get through them.
I think the majority of the people I see "failing" out of the industry do so because they are not willing to learn and adapt quickly. That being said, the majority of the people I see leaving the industry in general do so because they don't like the work. You really do have to love what you do in this industry, otherwise the hours just wear on you too quickly.
Navigating the maze
I have been surprised time and time again by the lack of company knowledge shown by many senior people in the bank. Simple questions like "to whom does the tech guy report?" should be everyday knowledge, yet it seems people know little about how the company operates. Why is this important, you might ask. Well, as long as you're in a company, it pays dividends to invest in a little bit of knowledge of your surroundings. It's those people who will be able to help you in a bind, and it's that structure you will have to work with to get your stuff done.
The tech guy example illustrates the point nicely. Let's say you need to get some new tool developed for the desk. Does the guy report directly to you? Well, then you can just ask him to do it with immediate results. (Yes, there are instances where managers do not know whether the tech guy works for him or not.) Does the tech guy report up the tech heirarchy? Well, now you have to go talk to the tech manager. Does the tech guy actually report to the head of the other desk? Then you might be screwed. To add another layer, do you know the procedure required to get around any of these issues? There is a saying, "a wise man knows all the rules so that he can break them wisely." I'm never a huge fan of following the rules, but I can assure you I know them as well as anybody. I also know the practical consequences of breaking protocol. It's important that you figure out the consequences too, because sometimes it's just worth breaking the rules to get shit done.
On a similar note, I think people need to learn to really appreciate their tech and support people. The top names know this well. Goldman and Citadel are known for how important they consider their tech and quant people. The chief technology officer of Citadel one said, "We are primarily a technology company. We just happen to also trade securities." Every bank and most hedge funds ought to think of themselves in this way. The competitive advantage is in superior technology and superior people. In fact, superior technology can often make up for a lot of mediocre people. Invest in your tech support, and you will find your operations working much more smoothly. I am so much an advocate of this that I actually am fighting put my tech developers on my trading desk and pay them on the trader payscale in order to keep my competitive edge. That being said, I know exactly how I would use my programmers. A major problem at many desks/banks is that the people in charge are still scared of technology (or at the very least, don't understand it very well). It is hard to manage technology wisely if you don't understand the details or have someone very good at relaying the pros and cons of competing technologies.
Mind the details of your organization. It helps a lot. Maybe not at first, but after a couple of years you'll see how much more productive you can be with the "ins-and-outs" you have learned.
Tuesday, May 29, 2007
Quality of Life
Over the past week, I've had about eight people talk to me about their jobs in I-banking. Investment banking in it's pure form is quite a beast. At every level of the I-banking ladder, your life is pretty much consumed by your job. Every job has its downsides, but I think future I-bankers in particular should carefully consider the leap.
I've seen a few very successful people who went into I-banking and a lot of burn-outs. People simply do not appreciate how much of a toll it takes on your body to work 80-120 hours a week. Hell, even 60 hours a week can take a toll on you. My advice would be never to go into i-banking unless you've done an internship and enjoyed it, but that's not practicable for everyone. On a more practical note, I would say everyone I know who has been successful in I-banking can be characterized as obsessive. They are the type of people who can drive themselves to live for what they do. For example, former football players who just did nothing but football related things in college. These successful people can put aside all else to focus on the task at hand (in i-banking the task is making money). They, in fact, derive their self-worth from that particular task. You have to understand that you will not be in shape after a year in i-banking. You will, in fact, only eat and work. They will often fool you with the "work hard play hard" thing. Well, fact of the matter is they really don't play that hard. Traders and brokers play hard (just ask the brokers on thursday night). The i-bankers I can't even grab dinner with on a friday because they're "too busy working."
Think hard before you go into the abyss of I-banking. You will be in the office as soon as you wake up until you are ready for bed almost every day. Weekends will no longer exist, you will work both Saturdays and Sundays. It's a rough life, but some people love it.
I've seen a few very successful people who went into I-banking and a lot of burn-outs. People simply do not appreciate how much of a toll it takes on your body to work 80-120 hours a week. Hell, even 60 hours a week can take a toll on you. My advice would be never to go into i-banking unless you've done an internship and enjoyed it, but that's not practicable for everyone. On a more practical note, I would say everyone I know who has been successful in I-banking can be characterized as obsessive. They are the type of people who can drive themselves to live for what they do. For example, former football players who just did nothing but football related things in college. These successful people can put aside all else to focus on the task at hand (in i-banking the task is making money). They, in fact, derive their self-worth from that particular task. You have to understand that you will not be in shape after a year in i-banking. You will, in fact, only eat and work. They will often fool you with the "work hard play hard" thing. Well, fact of the matter is they really don't play that hard. Traders and brokers play hard (just ask the brokers on thursday night). The i-bankers I can't even grab dinner with on a friday because they're "too busy working."
Think hard before you go into the abyss of I-banking. You will be in the office as soon as you wake up until you are ready for bed almost every day. Weekends will no longer exist, you will work both Saturdays and Sundays. It's a rough life, but some people love it.
Thursday, May 24, 2007
Spreadsheet monkey, that funky monkey
So for all you future sprea. . . I mean, investment bankers out there, I provide to you an example "model." This link should let you download the Goldman model for Dillard's Inc. I removed the last names of the analysts and their phone numbers so that you eager folk can't e-mail or call them to harass them about a job. Let me know if this is helpful and if there are other things you would like to see posted.
Click on the link. After it redirects you, there should be a button near the bottom of the screen to download the spreadsheet.
http://www.savefile.com/files/750148
Click on the link. After it redirects you, there should be a button near the bottom of the screen to download the spreadsheet.
http://www.savefile.com/files/750148
How to be annoying at the desk
Most wall street types are pretty cool. You've got people from all walks of life, all sorts of backgrounds and generally they tend to be smart. You'll find geeks like me, former Olympians, the ex-marine guy, the ex-model, everything. Somehow, here they all get along (this isn't high school any more, folks). Then again, there are some annoying shits out there too. Here are some things you should not do:
- Tapping your pen repeated on your desk. This shows you're not doing anything at the exact same time you're being annoying. That's two strikes for the price of one! More annoying is throwing your pen in the air and having it land on your desk repeatedly (yes, I've had a guy do that next to me before).
- Singing. I don't care whether or not you're a good singer. Don't sing next to me when I'm trying to calculate a hedge ratio. Same goes for whistling and any other noise you make that doesn't convey something meaningful.
- Asking for specific instructions every single time you do something. Now don't get me wrong, you should ALWAYS ask for clarification if there is something you don't understand. What you should not do is ask for step by step instructions in place of general directions. For example if I say "search for the portfolio GH1" a question like "how do I do that?" after I've helped you pull up the search functionality and there is a drop down window for search type shows that you're just an idiot who isn't thinking while looking at the screen.
- Leaving exactly 4 minutes after your boss leaves every day. Yea, this might seem like you're being all clever, but people catch on and realize you're just a facetime guy. There's nothing wrong with leaving early once in a while and staying late once in a while (or even staying late all the time). Leaving as soon as the boss leaves perfectly consistently, however, is just irritating.
- Surfing the internet at work all the time. This one's just stupid. Especially if you're on a trading desk or sharing a cubicle.
- Talking on the phone in a foreign language. Clearly you're not working if you're doing this (unless you're a sales person who covers foreign accounts). It shows that you're not working quite vividly, and it's annoying to those around you.
- Banging incessantly on the keyboard. Banging on the keyboard fixes nothing and makes a lot of distracting noise. Don't be surprised if someone like me throws something at you for doing this.
- Swearing a lot for no reason. Yes, people do swear a lot in banking. Nothing wrong with that because it's usually because something annoying or bad has happened. Just swearing for stupid shit makes you look like a tool though.
Monday, May 21, 2007
How not to get hired
So we're very much in the beginning of internship season now. Here are some stories on how not to get hired:
1) Hot chick resume: So the other day we got a resume of a hot Russian girl. Why do I know this? Because there was a picture of the girl front and center on the resume. Granted this might be a great way to get hired by the sleazy desk manager who needs to get laid, it may not be the best strategy on a place that requires you to generate PnL. It also won't get you on a sales desk because, while many sales people may be very attractive (I know ours are), they also need to show some tact and self-restraint. The photo alone, however, is not what killed this resume. Some quotes from the last section of the resume include
"I will do anything you tell me to do"
"I am open to new things"
"I am healthy and love to do physical things"
I assure you I did not take these grossly out of context. This was a laugh riot at our desk.
2) The meet and greet: The cocktail meet and greet is relatively important. Really, it is. I mock it too, but people do remember you from it. Don't miss it. I know I remember a couple names and faces from it, and will make some of my recommendations according to what I learned there. Little things matter when you're in competition. If you're wicked smart, it doesn't matter as much, but if you're borderline we're more likely to take you over the next guy if you made good impressions at the parties. One guy was just wandering around drinking and making fun of other interns. Definitely not the way to land a job.
3) The desk visit: Sometimes you'll get the opportunity to visit a desk for a short period of time. Don't ask generic questions, they make you sound like a moron. Actually focus on what is going on at the desk and ask questions that are relevant at the moment. Show that you're engaged, not some stupid ass-kissing schmuck who just got out of business school.
1) Hot chick resume: So the other day we got a resume of a hot Russian girl. Why do I know this? Because there was a picture of the girl front and center on the resume. Granted this might be a great way to get hired by the sleazy desk manager who needs to get laid, it may not be the best strategy on a place that requires you to generate PnL. It also won't get you on a sales desk because, while many sales people may be very attractive (I know ours are), they also need to show some tact and self-restraint. The photo alone, however, is not what killed this resume. Some quotes from the last section of the resume include
"I will do anything you tell me to do"
"I am open to new things"
"I am healthy and love to do physical things"
I assure you I did not take these grossly out of context. This was a laugh riot at our desk.
2) The meet and greet: The cocktail meet and greet is relatively important. Really, it is. I mock it too, but people do remember you from it. Don't miss it. I know I remember a couple names and faces from it, and will make some of my recommendations according to what I learned there. Little things matter when you're in competition. If you're wicked smart, it doesn't matter as much, but if you're borderline we're more likely to take you over the next guy if you made good impressions at the parties. One guy was just wandering around drinking and making fun of other interns. Definitely not the way to land a job.
3) The desk visit: Sometimes you'll get the opportunity to visit a desk for a short period of time. Don't ask generic questions, they make you sound like a moron. Actually focus on what is going on at the desk and ask questions that are relevant at the moment. Show that you're engaged, not some stupid ass-kissing schmuck who just got out of business school.
Sunday, May 13, 2007
Learn the Lingo (Sales & Trading)
I expect this to be long. It may include some stuff from the banking one, but with a different spin (as in they'll be viewed from the point of view of a trader instead of a banker):
Stock: Common stock traded on one of the exchanges (NYSE, Nasdaq, etc).
Bonds: Debt instruments traded OTC. Govies: Government bonds, usually issued by the US treasury. Treasuries are usually viewed as risk-free bonds (if the US Government defaults, the financial world is going to hell anyway).
Munis: Municipal bonds, these bonds from cities/states/government agencies. They are often linked to revenues from something like a tollway or parking meters.
ABS: Asset backed security. These are securities that pay out according to how some other assets pays out. For example, a student loan ABS is a security that pays out according to the loan payments on student loans. If students pay off their loans properly, you get your interest payments. If the students default, you're fucked.
MBS: Mortgage backed security. A type of ABS, but backed by mortgages. These are interesting because mortgage owners have the right to prepay, that is pay early. That being said, these are often covered from default by some government agency.
Fannies/Ginnies: MBS backed by Fannie May or Ginnie May, two government agencies that cover default on these. Other MBS include Jumbos, and other derivatives that we won't get into like IOs, POs, etc.
CMBS: Commercial mortgage backed security. A type of ABS backed by, surprise: commercial mortgages! Think, loan taken out to open a supermarket.Agencies: Often a basket term referring to bonds issued by government agencies.
Corporates: Corporate Bonds. These trade OTC and usually as a spread over treasuries. This spread is called the credit spread, and it is often used as a proxy to the default probability of the company issuing the bond.
Derivatives: A security that derives it's value from another security. It's worth noting that people will refer to trading derivatives vs "trading cash." That just refers to the fact that you can often buy/sell derivatives for very little up front; whereas, if you trade the underlying security then you have to pay cash up front. I'll go over a lot of the major ones here, but there are infinite permutations of derivatives. They are often categorized as equity derivatives, credit derivatives, fixed income derivatives and FX derivatives.
FX/Forex: Refers to the foreign exchange market.
Repo: Repurchase agreement. Essentially an investment bank / dealer owns a security and sells the security to another party and buy them back later at a higher price. The return rate between the original price and the higher price at which the security is bought back is called the "repo rate." As you might imagine, a "reverse repo" goes the other direction.
Future: A futures agreement is a contract that locks in a price for some underlying in the future. For example, if I buy a July gold future at $680, it means I just paid $680 for 12oz of gold to be delivered to me in July. Similarly a future on MSFT stock at $30 expiring in July would mean I just paid $30 to have some MSFT stock delivered to me in July.
Swap: A swap agreement usually involves agreeing to enter into a contract where one party pays some fixed amount regularly and the other part agrees to pay some floating (changing) amount regularly. The fixed payment is usually a fixed sum, and the floating rate can be pegged to anything (stocks, libor rates, etc).
CDS: Credit default swap. These are a credit derivative (a white hot market right now). A CDS buyer pays a fixed amount every quarter, but in the event of a default of the underlying the seller needs to pay the full amount for the defaulted bond. Basically it's default insurance.
CDO: Collateralized debt obligation. These are credit derivatives where lots of loans are packaged as one, so you get a piece of a lot of loans. These can be tranched, repackaged, synthetically created and all sort of other jazz. Won't get into the details here.
Converts: Convertible bonds. These are bonds that trade both with a credit spread and an embedded call option on the equity. There is a default risk, but you also get a call option in the bond so that if the equity does really well you can convert into stock instead of holding the bond. Basically you get the credit spread on the bond, but the spread is reduced because when you buy the bond you also buy the call option (and pay the premium for the call option in the form of reduced spread).
Libor rate: London inter-bank offer rate - used as a proxy in the fixed income markets for short term risk free interest rates.
Options: A contract that gives the buyer the right to buy or sell an underlying at a given price. This is in contrast to futures where the price is locked in and the sale is final. For example, if I buy a call option (the option to buy) MSFT at a strike of $30 by July for $2, it means I just paid $2 for the right to buy MSFT at $30 anytime between now and July. I still will have to pony up $30 if I want to buy MSFT between now and July. Options come in many forms, the most common being the "call" and "put" options. These can be combined in straddles, butterflies, spreads, etc.
Black-Scholes: Refers to the Black-Scholes-Merton model for option pricing. This has become so entrenched that options are often quoted in "vol" terms (the main input to the BS pricing formula).
Long: If you're long something, then you own something. If you bought a security, you are long that security.
Short: If you're short something it means you sold something without really owning it (thus you're going to need to buy it at some point). It's like being in debt.
Bid: The price at which someone wants to buy something. Commonly used as 16 bid 100 (translation, I'm willing to pay 16 for 100 of that thing).
Ask: The price at which someone wants to sell something. Offer: Same as ask, but can also be used as a verb. Commonly used as 100 offer 16 (translation, I'm willing to sell 100 of this thing for 16).
Bid-Ask spread: Just as it sounds, the difference between the bid and the ask.Desk: On the trading floor it refers to the group and focus of the group you work for.Mid: the average between the Bid and the Ask prices.
Lifted: People refer to your order or price being "lifted" it means someone traded with you at the price listed. Usually refers to when the offer gets taken.
Hit: People refer to the bid being taken as opposed to lifted.
Liquid market: Means there are lots of transactions in the market and an actively traded price. This is in comparison to illiquid markets where transactions barely ever occur (one needs to pay a "liquidity premium" to illiquid products with a bank, usually in the form of a large bid-ask spread). One refers to liquidity "drying up" when suddenly for some reason no one wants to trade (or no one wants to trade one side).
Hedge: A way to minimize risk on a trade by going into another trade that tends to move in the opposite direction. For example, if I am long a corporate bond, instead of selling it I could hedge it with a treasury. I'm still exposed to the credit spread, but I've hedged out my interest rate risk. You could also buy CDS to hedge out the credit spread (but if you're not taking any risk what's the point of being a trader?).
DEaR: Daily Earnings at Risk, also known as VAR (Value at Risk). This is often how the risk limits are set for a trading desk. It is a percentile for the losses incurred in a day over the course of a year. For example, if your DEaR limit is $1million, then you have a 5% chance of losing more than $1million on a given day. Note this means you should be exceeding a $1million loss about 2.5 times a year.
Balance Sheet: This is the other limitations, more important for places like hedge funds where capital is limited. It is the amount of capital you are using in your trade. If you have a balance sheet limitation, then it's important for you to trade derivatives over cash products.
PnL: Profit and Loss, enough said.
OTC: Over-the-counter. It means there is no physical exchange to trade the security. You actually have to call an investment bank or broker to trade them, and the people you call have to either have them, want them or get a hold of them.
Dealer Desk: It's worth noting that working on a trading desk, you're most likely on what'd known as a "dealer desk." It means you quote bids and asks all day long for people to buy/sell. You get to harvest the bid ask spread from everyone, but it's your job to give a price for anyone who shows up asking for a price. It's synonymous with "market maker." You are the market for your given security.
Sales/Trader: I don't think anyone really knows what this means. It often refers to people in the brokerage business that receive calls for orders and then passes them directly onto the market.
Sales Person: These people cover sets of clients. The clients call in with orders and the sales person either gives a quote or asks the traders for a quote. The sales people can often nudge the price up according to how well he/she knows the client to try to eek out a bit more off of them. They also often argue with traders to lower the price. Sales people entertain clients (read: free dinner at nice restaurants with clients).
Product specialist: A rather interestimg role for someone with a bit of experience. Product specialists often have some experience in structuring or trading, but are sales people who are especially knowledgeable in their product. They go on sales pitches with sales people, but are brought along specifically to talk about a product or a special deal/transaction. There are rumors of product specialists in Tokyo who are also allowed to trade.
TA: Trading assistant. This is probably what you'll be if you just joined a trading desk. They tend to book orders in the company systems, help program utilities (if you're capable in that area), get lunch/coffee, deal with middle office, risk and P&L. If you're capable they'll have you trade when the main trader is out or extremely busy. It's worth noting that not all TAs become traders.
Sales Assistant: I don't think anyone calls these people "SAs." A sales assistant is a salesperson in training. They do tasks and analyses for their sales person, go on client meetings with them, answer the phone, etc. From what I've seen almost all sales assistants become full sales people, an interesting contrast from TAs and traders.
Prop trading: Prop stands for proprietary. Prop trading refers to trading with the bank's money on the bank's behalf (as opposed to being market maker). It means you can actively enter into risk positions, but you are paying the bid-ask spread to enter into positions (as opposed to harvesting bid-ask on every transaction as a market maker). Prop books make money by placing directional and relative value bets. It's worth note that a lot of dealer desks keep prop books as well.
Structuring: A large part of the derivatives market is structuring products specifically for customers. For example, if a customer is averse to upward movements in the price of cotton and is a firm based in the UK that sells mostly to US clients, then you can create a specific security for them that hedges out the FX and commodity risk (which would be cheaper than the individual pieces due to correlation effects). Structuring happens most actively in the ABS markets where the yield of every ABS can be specifically created to be what the market is willing to pay for at the moment.
Arbitrage: An arbitrage is an opportunity to get a risk-free profit. Market economics says this should be impossible, but it's not. The simple example is if BP is listed on the NYSE for 66.60, but listed on the European exchanges for 66.62. Buy one, sell the other and pat yourself on the back for making 2 cents for every transaction you got through.
Stat Arb: Statistical arbitrage isn't really arbitrage at all, but it's taking advantage of statistical patterns at a high frequency level to eek out profits some 52% of the time.
That looks like enough for now. Feel free to message me with questions on any of my posts. It might be worth noting that there is an infinite world of derivatives to be explored here. Options can include options on bonds as opposed to equity (callable and puttable bonds). There are exotic options like Asian, knock-in/out, and Bermudan varieties. There are cross product derivatives like quantos (fx and equity derivative). If there is interest I can post a derivatives lingo primer.
Stock: Common stock traded on one of the exchanges (NYSE, Nasdaq, etc).
Bonds: Debt instruments traded OTC. Govies: Government bonds, usually issued by the US treasury. Treasuries are usually viewed as risk-free bonds (if the US Government defaults, the financial world is going to hell anyway).
Munis: Municipal bonds, these bonds from cities/states/government agencies. They are often linked to revenues from something like a tollway or parking meters.
ABS: Asset backed security. These are securities that pay out according to how some other assets pays out. For example, a student loan ABS is a security that pays out according to the loan payments on student loans. If students pay off their loans properly, you get your interest payments. If the students default, you're fucked.
MBS: Mortgage backed security. A type of ABS, but backed by mortgages. These are interesting because mortgage owners have the right to prepay, that is pay early. That being said, these are often covered from default by some government agency.
Fannies/Ginnies: MBS backed by Fannie May or Ginnie May, two government agencies that cover default on these. Other MBS include Jumbos, and other derivatives that we won't get into like IOs, POs, etc.
CMBS: Commercial mortgage backed security. A type of ABS backed by, surprise: commercial mortgages! Think, loan taken out to open a supermarket.Agencies: Often a basket term referring to bonds issued by government agencies.
Corporates: Corporate Bonds. These trade OTC and usually as a spread over treasuries. This spread is called the credit spread, and it is often used as a proxy to the default probability of the company issuing the bond.
Derivatives: A security that derives it's value from another security. It's worth noting that people will refer to trading derivatives vs "trading cash." That just refers to the fact that you can often buy/sell derivatives for very little up front; whereas, if you trade the underlying security then you have to pay cash up front. I'll go over a lot of the major ones here, but there are infinite permutations of derivatives. They are often categorized as equity derivatives, credit derivatives, fixed income derivatives and FX derivatives.
FX/Forex: Refers to the foreign exchange market.
Repo: Repurchase agreement. Essentially an investment bank / dealer owns a security and sells the security to another party and buy them back later at a higher price. The return rate between the original price and the higher price at which the security is bought back is called the "repo rate." As you might imagine, a "reverse repo" goes the other direction.
Future: A futures agreement is a contract that locks in a price for some underlying in the future. For example, if I buy a July gold future at $680, it means I just paid $680 for 12oz of gold to be delivered to me in July. Similarly a future on MSFT stock at $30 expiring in July would mean I just paid $30 to have some MSFT stock delivered to me in July.
Swap: A swap agreement usually involves agreeing to enter into a contract where one party pays some fixed amount regularly and the other part agrees to pay some floating (changing) amount regularly. The fixed payment is usually a fixed sum, and the floating rate can be pegged to anything (stocks, libor rates, etc).
CDS: Credit default swap. These are a credit derivative (a white hot market right now). A CDS buyer pays a fixed amount every quarter, but in the event of a default of the underlying the seller needs to pay the full amount for the defaulted bond. Basically it's default insurance.
CDO: Collateralized debt obligation. These are credit derivatives where lots of loans are packaged as one, so you get a piece of a lot of loans. These can be tranched, repackaged, synthetically created and all sort of other jazz. Won't get into the details here.
Converts: Convertible bonds. These are bonds that trade both with a credit spread and an embedded call option on the equity. There is a default risk, but you also get a call option in the bond so that if the equity does really well you can convert into stock instead of holding the bond. Basically you get the credit spread on the bond, but the spread is reduced because when you buy the bond you also buy the call option (and pay the premium for the call option in the form of reduced spread).
Libor rate: London inter-bank offer rate - used as a proxy in the fixed income markets for short term risk free interest rates.
Options: A contract that gives the buyer the right to buy or sell an underlying at a given price. This is in contrast to futures where the price is locked in and the sale is final. For example, if I buy a call option (the option to buy) MSFT at a strike of $30 by July for $2, it means I just paid $2 for the right to buy MSFT at $30 anytime between now and July. I still will have to pony up $30 if I want to buy MSFT between now and July. Options come in many forms, the most common being the "call" and "put" options. These can be combined in straddles, butterflies, spreads, etc.
Black-Scholes: Refers to the Black-Scholes-Merton model for option pricing. This has become so entrenched that options are often quoted in "vol" terms (the main input to the BS pricing formula).
Long: If you're long something, then you own something. If you bought a security, you are long that security.
Short: If you're short something it means you sold something without really owning it (thus you're going to need to buy it at some point). It's like being in debt.
Bid: The price at which someone wants to buy something. Commonly used as 16 bid 100 (translation, I'm willing to pay 16 for 100 of that thing).
Ask: The price at which someone wants to sell something. Offer: Same as ask, but can also be used as a verb. Commonly used as 100 offer 16 (translation, I'm willing to sell 100 of this thing for 16).
Bid-Ask spread: Just as it sounds, the difference between the bid and the ask.Desk: On the trading floor it refers to the group and focus of the group you work for.Mid: the average between the Bid and the Ask prices.
Lifted: People refer to your order or price being "lifted" it means someone traded with you at the price listed. Usually refers to when the offer gets taken.
Hit: People refer to the bid being taken as opposed to lifted.
Liquid market: Means there are lots of transactions in the market and an actively traded price. This is in comparison to illiquid markets where transactions barely ever occur (one needs to pay a "liquidity premium" to illiquid products with a bank, usually in the form of a large bid-ask spread). One refers to liquidity "drying up" when suddenly for some reason no one wants to trade (or no one wants to trade one side).
Hedge: A way to minimize risk on a trade by going into another trade that tends to move in the opposite direction. For example, if I am long a corporate bond, instead of selling it I could hedge it with a treasury. I'm still exposed to the credit spread, but I've hedged out my interest rate risk. You could also buy CDS to hedge out the credit spread (but if you're not taking any risk what's the point of being a trader?).
DEaR: Daily Earnings at Risk, also known as VAR (Value at Risk). This is often how the risk limits are set for a trading desk. It is a percentile for the losses incurred in a day over the course of a year. For example, if your DEaR limit is $1million, then you have a 5% chance of losing more than $1million on a given day. Note this means you should be exceeding a $1million loss about 2.5 times a year.
Balance Sheet: This is the other limitations, more important for places like hedge funds where capital is limited. It is the amount of capital you are using in your trade. If you have a balance sheet limitation, then it's important for you to trade derivatives over cash products.
PnL: Profit and Loss, enough said.
OTC: Over-the-counter. It means there is no physical exchange to trade the security. You actually have to call an investment bank or broker to trade them, and the people you call have to either have them, want them or get a hold of them.
Dealer Desk: It's worth noting that working on a trading desk, you're most likely on what'd known as a "dealer desk." It means you quote bids and asks all day long for people to buy/sell. You get to harvest the bid ask spread from everyone, but it's your job to give a price for anyone who shows up asking for a price. It's synonymous with "market maker." You are the market for your given security.
Sales/Trader: I don't think anyone really knows what this means. It often refers to people in the brokerage business that receive calls for orders and then passes them directly onto the market.
Sales Person: These people cover sets of clients. The clients call in with orders and the sales person either gives a quote or asks the traders for a quote. The sales people can often nudge the price up according to how well he/she knows the client to try to eek out a bit more off of them. They also often argue with traders to lower the price. Sales people entertain clients (read: free dinner at nice restaurants with clients).
Product specialist: A rather interestimg role for someone with a bit of experience. Product specialists often have some experience in structuring or trading, but are sales people who are especially knowledgeable in their product. They go on sales pitches with sales people, but are brought along specifically to talk about a product or a special deal/transaction. There are rumors of product specialists in Tokyo who are also allowed to trade.
TA: Trading assistant. This is probably what you'll be if you just joined a trading desk. They tend to book orders in the company systems, help program utilities (if you're capable in that area), get lunch/coffee, deal with middle office, risk and P&L. If you're capable they'll have you trade when the main trader is out or extremely busy. It's worth noting that not all TAs become traders.
Sales Assistant: I don't think anyone calls these people "SAs." A sales assistant is a salesperson in training. They do tasks and analyses for their sales person, go on client meetings with them, answer the phone, etc. From what I've seen almost all sales assistants become full sales people, an interesting contrast from TAs and traders.
Prop trading: Prop stands for proprietary. Prop trading refers to trading with the bank's money on the bank's behalf (as opposed to being market maker). It means you can actively enter into risk positions, but you are paying the bid-ask spread to enter into positions (as opposed to harvesting bid-ask on every transaction as a market maker). Prop books make money by placing directional and relative value bets. It's worth note that a lot of dealer desks keep prop books as well.
Structuring: A large part of the derivatives market is structuring products specifically for customers. For example, if a customer is averse to upward movements in the price of cotton and is a firm based in the UK that sells mostly to US clients, then you can create a specific security for them that hedges out the FX and commodity risk (which would be cheaper than the individual pieces due to correlation effects). Structuring happens most actively in the ABS markets where the yield of every ABS can be specifically created to be what the market is willing to pay for at the moment.
Arbitrage: An arbitrage is an opportunity to get a risk-free profit. Market economics says this should be impossible, but it's not. The simple example is if BP is listed on the NYSE for 66.60, but listed on the European exchanges for 66.62. Buy one, sell the other and pat yourself on the back for making 2 cents for every transaction you got through.
Stat Arb: Statistical arbitrage isn't really arbitrage at all, but it's taking advantage of statistical patterns at a high frequency level to eek out profits some 52% of the time.
That looks like enough for now. Feel free to message me with questions on any of my posts. It might be worth noting that there is an infinite world of derivatives to be explored here. Options can include options on bonds as opposed to equity (callable and puttable bonds). There are exotic options like Asian, knock-in/out, and Bermudan varieties. There are cross product derivatives like quantos (fx and equity derivative). If there is interest I can post a derivatives lingo primer.
Learn the Lingo (I-Banking)
Due to my limited view of i-banking, a lot of this will be general accounting stuff, and I'm going to stick to financial accounting (there's another type called managerial accounting that I'm sure MBAs can tell you all about, but you tend to use financial accounting in banking). I think you will find that a lot of what i-bankers do is accounting related (it's about tearing apart companies, after all). I guess research analyst types will often be in this realm too:
Double entry book-keeping: A type of accounting where all costs and income are listed twice. This is the norm.
Balance sheet: One of the three main accounting statements. The balance sheet is a snapshot of the company's financial state. In accrual accounting it lists assets and liabilities separately, and they should balance: assets = liabilities + stockholder's equity (for some reason stockholder's equity is always listed with liabilities, I don't know why. I guess just so the two columns can balance).
Income Statement: One of the three main accounting statements. The income statement summarizes the revenues and expenses over a period of time. This is sometimes mixed with what they call a statement of retained earnings. Basically the income statement shows revenues and expenses to find the net income. Then the dividends are taken out to get the retained earnings.
Cash Flow Statement: One of the three main accounting statements. Where the other two statements focus on the profitability of the company, this one focuses on the company's liquidity. It shows the in/out flows of cash for a company for a period of time.
Liquidity: The ability of assets to be turned into cash (or already in the state of cash). As they say "cash is king." Without cash you can not pay off debts (the bank won't accept, for example, your inventory of condoms to pay off your loan.
Common Stock: In terms of accounting, this refers to the "owners" investments in the company. This could be the owners plowing their savings into the company or money generated by an IPO.
Stockholders Equity: I see this as the value generated by the company. As far as I can tell it's just a number made up so that assets = liabilities + equity. I can't imagine coming up with this number any other way than accounting for assets and liabilities then subtracting.
Net Income: see income statement
Retained earnings: see income statement
GAAP: Generally Accepted Accounting Principles. Basically, this is how you need to do your accounting. They're written out.
IPO: Initial public offering. This is what a lot of people think i-banking is all about. It's really not. It is, however, a bit part (and very profitable). An IPO is where a company first "goes public," that is it sells shares in the company for cash. Shares represent ownership. If you own all the stock, you own the company.
Debt offering: Companies can also take out loans from the general public by selling bonds. This is actually a larger part of the finance world than equity.
Road Show: Analysts love these, senior people often find them a pain in the ass. Basically it's a traveling salesman type thing where the bankers go to a bunch of cities to make presentations about a given IPO or debt offering.
Beauty Contest: I forget what the official name for these is. Basically when a company decides it wants to raise capital (read: cash), it can have a bunch of investment banks come in and pitch their ideas on how the capital should be raised. There are some pretty interesting ideas that often go into these, actually. It's not just plain vanilla debt and equity, you can really mix it up with some interesting instruments.
M&A: Mergers and acquisitions. When a company wants to buy another company or merge with another company, they talk to the M&A guys. M&A guys tend to work more than anyone else on the street (except maybe Private Equity?), think 120hrs a week. If you think that's impossible, you've got another thing coming to you.
NPV: Net present value. Money in the future is worth less than money now (I'd rather have my Ferrari now than in 10 years, wouldn't you?). So we discount back future cashflows by some "discount factor." Usually an interest rate or a "hurdle rate."
DCF model: Discounted Cash Flow model. This is the bread and butter of i-banker types (and equity/credit research analysts for that matter). These things usually manifest themselves as giant excel sheets in which analysts predict the revenues/sales and costs a company will have in the future. They then choose a "discount rate" with which to discount their cashflows back.
Multiples method: This one's awesome. Basically you value a company by looking at how comparable companies are being valued. Oh you're a search company? Google's being valued at 200 times expected revenue in the market, so you must also be worth that much! WOW! Usually they look at the multiples (Price/earnings, EBITDA to Enterprise value, etc) and try to value a company by comparison.
EBITDA: Earnings before interest, taxes, depreciation and amortization. Just as it sounds, it's the earnings before you factor in all that crap.
Enterprise Value: Some measure of the value of a firm, often they just take the market capitalization + debt + minority interest + preferred shares - cash. This represents how much you'd have to pay to buy the firm outright.
Depreciation: The value lost by an asset over time. Like your car used be worth 20k, but now it's worth 10k just be using it normally.
Amortization: Sort of related to depreciation, but it can go up or down. It's most commonly used in terms of intellectual property. For some reason intellectual property amortizes instead of depreciates over time. Go figure.
CAPM: Capital Assets Pricing Model. This is used in both asset management and in company valuation. It most commonly is used to find the discount rate of a company's cashflows in i-banking. It's crap, but everyone uses it. Basically it finds how the company is valued in the stock market in terms of the rate of return expected. That rate then becomes your discount rate.Default: When a company or person decides not to pay / can not pay their debts. Like when you quit your job and can't pay off your student loans.
Goodwill: Something you will not come accross often in banking. Just kidding, you'll come across it all the time in accounting statements where they have a value to something intangible (like "brand name"). Companies sometimes pay dearly for "goodwill" in mergers/acquisitions. Market Cap: Market capitalization, the total value of a company in the stock market.
Dividend: Companies sometimes pay out some cash to stockholders from the earnings of a company. This cash is called a dividend.
Preferred stock: These are strange. They have a set dividend (as opposed to a dividend that can change like for normal stock) that gets paid before normal stocks are paid (but doesn't "have" to be paid like interest on debt). Sometimes it can be converted into normal stock.
Convertible bonds: These are bonds, but they have a clause that lets them turn into stocks at a certain ratio. Basically it's a way for a company to get lower interest rates with the caveat that if the company does really well, the ownership gets diluted by convert holders.
Munis: Municipal bonds. Lots of states/cities/government entities sell bonds. These are called munis. Might be worth noting that a lot of municipals are now also leasing off assets in whole, the equivalent of an LBO or IPO on government property/companies --cool, eh? The big example is the Chicago skyway (it's a toll road that's now privately owned, for the most part).
LBO: Leveraged Buy-Out. Really it's just an acquisition that involves taking out a lot of debt to be able to buy the company. It's like when you buy a house with only 5% down. Then you're really doing a leveraged buy-out of that house =P.
A note: to be considered proficient in accounting, you should be able to build any of the three main accounting statements from the other two. This is the quick and dirty acid test CPAs often ask me to see if I actually know accounting despite never working with financial statements.
I will post an example of a DCF sheet by Goldman or something at some point, assuming blogger allows this sort of thing.
Double entry book-keeping: A type of accounting where all costs and income are listed twice. This is the norm.
Balance sheet: One of the three main accounting statements. The balance sheet is a snapshot of the company's financial state. In accrual accounting it lists assets and liabilities separately, and they should balance: assets = liabilities + stockholder's equity (for some reason stockholder's equity is always listed with liabilities, I don't know why. I guess just so the two columns can balance).
Income Statement: One of the three main accounting statements. The income statement summarizes the revenues and expenses over a period of time. This is sometimes mixed with what they call a statement of retained earnings. Basically the income statement shows revenues and expenses to find the net income. Then the dividends are taken out to get the retained earnings.
Cash Flow Statement: One of the three main accounting statements. Where the other two statements focus on the profitability of the company, this one focuses on the company's liquidity. It shows the in/out flows of cash for a company for a period of time.
Liquidity: The ability of assets to be turned into cash (or already in the state of cash). As they say "cash is king." Without cash you can not pay off debts (the bank won't accept, for example, your inventory of condoms to pay off your loan.
Common Stock: In terms of accounting, this refers to the "owners" investments in the company. This could be the owners plowing their savings into the company or money generated by an IPO.
Stockholders Equity: I see this as the value generated by the company. As far as I can tell it's just a number made up so that assets = liabilities + equity. I can't imagine coming up with this number any other way than accounting for assets and liabilities then subtracting.
Net Income: see income statement
Retained earnings: see income statement
GAAP: Generally Accepted Accounting Principles. Basically, this is how you need to do your accounting. They're written out.
IPO: Initial public offering. This is what a lot of people think i-banking is all about. It's really not. It is, however, a bit part (and very profitable). An IPO is where a company first "goes public," that is it sells shares in the company for cash. Shares represent ownership. If you own all the stock, you own the company.
Debt offering: Companies can also take out loans from the general public by selling bonds. This is actually a larger part of the finance world than equity.
Road Show: Analysts love these, senior people often find them a pain in the ass. Basically it's a traveling salesman type thing where the bankers go to a bunch of cities to make presentations about a given IPO or debt offering.
Beauty Contest: I forget what the official name for these is. Basically when a company decides it wants to raise capital (read: cash), it can have a bunch of investment banks come in and pitch their ideas on how the capital should be raised. There are some pretty interesting ideas that often go into these, actually. It's not just plain vanilla debt and equity, you can really mix it up with some interesting instruments.
M&A: Mergers and acquisitions. When a company wants to buy another company or merge with another company, they talk to the M&A guys. M&A guys tend to work more than anyone else on the street (except maybe Private Equity?), think 120hrs a week. If you think that's impossible, you've got another thing coming to you.
NPV: Net present value. Money in the future is worth less than money now (I'd rather have my Ferrari now than in 10 years, wouldn't you?). So we discount back future cashflows by some "discount factor." Usually an interest rate or a "hurdle rate."
DCF model: Discounted Cash Flow model. This is the bread and butter of i-banker types (and equity/credit research analysts for that matter). These things usually manifest themselves as giant excel sheets in which analysts predict the revenues/sales and costs a company will have in the future. They then choose a "discount rate" with which to discount their cashflows back.
Multiples method: This one's awesome. Basically you value a company by looking at how comparable companies are being valued. Oh you're a search company? Google's being valued at 200 times expected revenue in the market, so you must also be worth that much! WOW! Usually they look at the multiples (Price/earnings, EBITDA to Enterprise value, etc) and try to value a company by comparison.
EBITDA: Earnings before interest, taxes, depreciation and amortization. Just as it sounds, it's the earnings before you factor in all that crap.
Enterprise Value: Some measure of the value of a firm, often they just take the market capitalization + debt + minority interest + preferred shares - cash. This represents how much you'd have to pay to buy the firm outright.
Depreciation: The value lost by an asset over time. Like your car used be worth 20k, but now it's worth 10k just be using it normally.
Amortization: Sort of related to depreciation, but it can go up or down. It's most commonly used in terms of intellectual property. For some reason intellectual property amortizes instead of depreciates over time. Go figure.
CAPM: Capital Assets Pricing Model. This is used in both asset management and in company valuation. It most commonly is used to find the discount rate of a company's cashflows in i-banking. It's crap, but everyone uses it. Basically it finds how the company is valued in the stock market in terms of the rate of return expected. That rate then becomes your discount rate.Default: When a company or person decides not to pay / can not pay their debts. Like when you quit your job and can't pay off your student loans.
Goodwill: Something you will not come accross often in banking. Just kidding, you'll come across it all the time in accounting statements where they have a value to something intangible (like "brand name"). Companies sometimes pay dearly for "goodwill" in mergers/acquisitions. Market Cap: Market capitalization, the total value of a company in the stock market.
Dividend: Companies sometimes pay out some cash to stockholders from the earnings of a company. This cash is called a dividend.
Preferred stock: These are strange. They have a set dividend (as opposed to a dividend that can change like for normal stock) that gets paid before normal stocks are paid (but doesn't "have" to be paid like interest on debt). Sometimes it can be converted into normal stock.
Convertible bonds: These are bonds, but they have a clause that lets them turn into stocks at a certain ratio. Basically it's a way for a company to get lower interest rates with the caveat that if the company does really well, the ownership gets diluted by convert holders.
Munis: Municipal bonds. Lots of states/cities/government entities sell bonds. These are called munis. Might be worth noting that a lot of municipals are now also leasing off assets in whole, the equivalent of an LBO or IPO on government property/companies --cool, eh? The big example is the Chicago skyway (it's a toll road that's now privately owned, for the most part).
LBO: Leveraged Buy-Out. Really it's just an acquisition that involves taking out a lot of debt to be able to buy the company. It's like when you buy a house with only 5% down. Then you're really doing a leveraged buy-out of that house =P.
A note: to be considered proficient in accounting, you should be able to build any of the three main accounting statements from the other two. This is the quick and dirty acid test CPAs often ask me to see if I actually know accounting despite never working with financial statements.
I will post an example of a DCF sheet by Goldman or something at some point, assuming blogger allows this sort of thing.
Learn the Lingo (General Finance)
I know at least some people out there are going into finance. You're going to get there and not understand half the things people say. Maybe this will help a little. I'll do three of these. One for general finance, one for banking, one for sales/trading. The general finance one will focus on the terms used to describe the players in the finance industry and terms used ubiquitously. The banking/trading specific ones will focus on terms used in each business. If anyone in the industry wants to correct anything, feel free:
Security: some sort of financial instrument, be it a stock, bond, option, etc. . .
Derivative: type of security that "derives" it's value from another security
Banker: someone in the investment banking side of things, someone who has access to private information about companies' intentions and spends ridiculous hours working. These people deal with the legal and financial implications of transactions a company needs to make to produce funding, acquire companies, merge companies, etc.
M&A: Mergers and Acquisitions, a special part of investment banking that deals specifically with the merger of companies or acquisitions of companies (other banking involves producing funding options for companies like loans, debt offerings and stock offerings).
Trader: someone who trades securities for the firm
Market maker: a special type of trader who's job it is to "make a market." It is his job to quote a price for anything (within his mandate) someone might want to trade with him and trade it at that price regardless of whether he wants to do the trade or not.
Salesperson: someone who talks to clients, usually to generate trading business
Structurer: Structurers are special kinds of traders and/or bankers. They either put together "structures" of securities to fit clients needs, or they put together deals that turn into special structured securities to fit clients needs.
Originator: These people are essentially sales people on the debt side who produce deals (usually loans) for the structurers to securitize (turn into a security) and the traders to sell off.
Broker: someone who acts as a pass-through agent for trading.
Specialist: someone who is actually in the trading pit (i.e. at the NYSE) and takes orders and matches up the buys and sells. Obviously this only applies to physical exchanges, electronic exchanges dont' have specialists.
Flow: can refer to deal flow or trading flow, basically the volume of business passing through a given desk.
Private Wealth / Wealth Management: Basically an asset management area specifically for wealthy people. Clients of a wealth management arm of a bank usually have excess of a million (in some banks over 10 million) dollars.
Back/middle/front office: these are value terms. Back office usually refers to operations (technology, data entry, etc), front office usually refers to revenue generating people (traders, salespeople, bankers, structurers), middle office is anything in between (programmers, P&L reporters, etc).
Quants: the geeks of the realm. These guys know their math/stat and are usually used to find the correct price of things on the market.
Private/Public side: Private side of the bank knows stuff that the outside world is not allowed to know (bankers, structurers, originators, etc). The public side is not allowed to know stuff the private side knows about because they can take advantage of it (traders, brokers, etc).
Compliance: there are a TON of legal hassles to make sure the private side of the bank and the public side of the bank do not interact and allow for illegal trading. Compliance is the verb for staying in the legal bounds and the noun for the people who make sure you do.
Buy/Sell side: Buy side refers to asset managers, proprietary traders, private equity and the like, people who buy things for their own portfolios. Sell side refers to people in the investment bank who have to bend over backwards to fulfill their sell side clients' needs. Institutional Investor - usually refers to large clients that transact in large volume. Most commonly these are mutual funds, pension funds, insurance companies, etc.
Comp: compensation, usually refers to the year end bonus. This is why people are in this game, for the most part.
Headhunter: people who specialize in matching qualified candidates with open jobs.
That's all I can think of for now. Unfortunately it looks like I'm heavily weighted on the trading side. I don't know if that's because I'm on the trading side or because the banking side just doesn't involve as many titles (plus who needs to define to whom "legal" refers?).
Security: some sort of financial instrument, be it a stock, bond, option, etc. . .
Derivative: type of security that "derives" it's value from another security
Banker: someone in the investment banking side of things, someone who has access to private information about companies' intentions and spends ridiculous hours working. These people deal with the legal and financial implications of transactions a company needs to make to produce funding, acquire companies, merge companies, etc.
M&A: Mergers and Acquisitions, a special part of investment banking that deals specifically with the merger of companies or acquisitions of companies (other banking involves producing funding options for companies like loans, debt offerings and stock offerings).
Trader: someone who trades securities for the firm
Market maker: a special type of trader who's job it is to "make a market." It is his job to quote a price for anything (within his mandate) someone might want to trade with him and trade it at that price regardless of whether he wants to do the trade or not.
Salesperson: someone who talks to clients, usually to generate trading business
Structurer: Structurers are special kinds of traders and/or bankers. They either put together "structures" of securities to fit clients needs, or they put together deals that turn into special structured securities to fit clients needs.
Originator: These people are essentially sales people on the debt side who produce deals (usually loans) for the structurers to securitize (turn into a security) and the traders to sell off.
Broker: someone who acts as a pass-through agent for trading.
Specialist: someone who is actually in the trading pit (i.e. at the NYSE) and takes orders and matches up the buys and sells. Obviously this only applies to physical exchanges, electronic exchanges dont' have specialists.
Flow: can refer to deal flow or trading flow, basically the volume of business passing through a given desk.
Private Wealth / Wealth Management: Basically an asset management area specifically for wealthy people. Clients of a wealth management arm of a bank usually have excess of a million (in some banks over 10 million) dollars.
Back/middle/front office: these are value terms. Back office usually refers to operations (technology, data entry, etc), front office usually refers to revenue generating people (traders, salespeople, bankers, structurers), middle office is anything in between (programmers, P&L reporters, etc).
Quants: the geeks of the realm. These guys know their math/stat and are usually used to find the correct price of things on the market.
Private/Public side: Private side of the bank knows stuff that the outside world is not allowed to know (bankers, structurers, originators, etc). The public side is not allowed to know stuff the private side knows about because they can take advantage of it (traders, brokers, etc).
Compliance: there are a TON of legal hassles to make sure the private side of the bank and the public side of the bank do not interact and allow for illegal trading. Compliance is the verb for staying in the legal bounds and the noun for the people who make sure you do.
Buy/Sell side: Buy side refers to asset managers, proprietary traders, private equity and the like, people who buy things for their own portfolios. Sell side refers to people in the investment bank who have to bend over backwards to fulfill their sell side clients' needs. Institutional Investor - usually refers to large clients that transact in large volume. Most commonly these are mutual funds, pension funds, insurance companies, etc.
Comp: compensation, usually refers to the year end bonus. This is why people are in this game, for the most part.
Headhunter: people who specialize in matching qualified candidates with open jobs.
That's all I can think of for now. Unfortunately it looks like I'm heavily weighted on the trading side. I don't know if that's because I'm on the trading side or because the banking side just doesn't involve as many titles (plus who needs to define to whom "legal" refers?).
In the Begining
So I've been pressured into building a blog. Hopefully this will be a mix of entertaining and helpful for those on the street and trying to get onto the street. If you're on the street, congratulations, you're in for a ride. If you're trying to get onto the street, I think you've come to the right place, but I may be a bit biased. . .
In the begining, you're a student. Peering into the confines of wall street through internships, books, movies and other media. Trust me, it's different when you get there. I'm equally interested in turning those who won't quite fit at all wall street firm away as I am in encouraging those who would thrive in these environments. I think I see the most miserable people I've ever seen working for investment banks as well as the happpiest people. Those who are happy here, though, are a different breed. Watch out.
If you're coming from another industry, this is a hard place to break into with experience from a different industry. Students are welcomed as fresh, unprocessed meat, but those who have been touched by other industries are often hard pressed to get by on the street. Exceptions are seasoned securities lawyers, welcomed into M&A areas, and CFO types.
Well, on to the meat, good luck and hope to hear from you.
In the begining, you're a student. Peering into the confines of wall street through internships, books, movies and other media. Trust me, it's different when you get there. I'm equally interested in turning those who won't quite fit at all wall street firm away as I am in encouraging those who would thrive in these environments. I think I see the most miserable people I've ever seen working for investment banks as well as the happpiest people. Those who are happy here, though, are a different breed. Watch out.
If you're coming from another industry, this is a hard place to break into with experience from a different industry. Students are welcomed as fresh, unprocessed meat, but those who have been touched by other industries are often hard pressed to get by on the street. Exceptions are seasoned securities lawyers, welcomed into M&A areas, and CFO types.
Well, on to the meat, good luck and hope to hear from you.
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