So I noticed a rather sudden and significant drop in my readership this week. At first I thought it was just noise, but it persisted for a few days. I then realized my facebook account had been disabled, and I assume a fair number of you found this site through facebook. It seemed to be the perfect place to advertise since it's mostly college students (and college students then look for jobs). Anyway, it would be nice if I could gain back some of that readership, so if you guys could help spread the word of this blog, that'd be helpful. Readership numbers keep me engaged (and much like other things in life, I like seeing the little numbers tick up).
Cheers,
QT
Friday, June 29, 2007
Thursday, June 28, 2007
A bear of a Bear?
Figured I ought to write something about the Bear Stearns mess that just unfolded in the past week. I'm not sure whether I should be making my posts more timely as things are occurring or only after the fact. I had figured that I ought to write everything after the fact in order to avoid putting anything out there that might still be sensitive or incorrect information. Let me know if you have an opinion either way.
Well, it seems the players have made their entries and exits. A Bear Stearns' hedge fund backed largely by subprime mortgage backed securities got into some trouble last week and nearly faced liquidation. At one point people were talking about Merril the funds' assets to cover their margins. There was talk of help from Goldman, Bank of America, Credit Suisse, JP Morgan, etc. None of it came together. Then, finally, Bear decided to save its own hedge fund. That's cool. Then there was talk of Bear's other hedge fund and whether it would save that one too. They decided not to.
So what's it all mean? It had all sorts of implications on the credit/structured markets. ABX (the asset-backed securities index) was tanking from the subprime woes. A lot of that money went into treasuries, making a flight to quality type rally for a while in rates markets. Overall though, it didn't make that big a splash in the markets as far as I'm concerned. People are making a big deal out of something that really didn't change much.
There's talk now about whether Bear Stearns is in trouble too. Well, that's just bunk. Bear might show a PnL hit, but I doubt this would put them in jeopardy. Others talk about this making Bear Stearns prone to a buy-out / acquisition. I think that , while more likely than Bear Stearns going bust, is still crap.
Where I have heard the subprime mess and the Bear Stearns mess having effects is in origination. Apparently the appetite for these sorts of loans has significantly declined both on the originators side and on the buyers side. That means people are more stringent about their loan characteristics before they are willing to loan the money and buyers are less likely to buy the securitizations. Double whammy for the capital seekers there.
Well, it seems the players have made their entries and exits. A Bear Stearns' hedge fund backed largely by subprime mortgage backed securities got into some trouble last week and nearly faced liquidation. At one point people were talking about Merril the funds' assets to cover their margins. There was talk of help from Goldman, Bank of America, Credit Suisse, JP Morgan, etc. None of it came together. Then, finally, Bear decided to save its own hedge fund. That's cool. Then there was talk of Bear's other hedge fund and whether it would save that one too. They decided not to.
So what's it all mean? It had all sorts of implications on the credit/structured markets. ABX (the asset-backed securities index) was tanking from the subprime woes. A lot of that money went into treasuries, making a flight to quality type rally for a while in rates markets. Overall though, it didn't make that big a splash in the markets as far as I'm concerned. People are making a big deal out of something that really didn't change much.
There's talk now about whether Bear Stearns is in trouble too. Well, that's just bunk. Bear might show a PnL hit, but I doubt this would put them in jeopardy. Others talk about this making Bear Stearns prone to a buy-out / acquisition. I think that , while more likely than Bear Stearns going bust, is still crap.
Where I have heard the subprime mess and the Bear Stearns mess having effects is in origination. Apparently the appetite for these sorts of loans has significantly declined both on the originators side and on the buyers side. That means people are more stringent about their loan characteristics before they are willing to loan the money and buyers are less likely to buy the securitizations. Double whammy for the capital seekers there.
Wednesday, June 27, 2007
Learn the Lingo (Mortgages)
So with the whole subprime market going bust and the Bear Stearns fund nearly going belly-up, I figured there might be some people who would like a mortgage markets primer. In case you're wondering, I did a good bit of prepayment modeling for a mortgage book. Here we go!
MBS - mortgage backed security. This is the fundamental building block. Basically a pool of mortgages are put together into one entity and then the entity pays off a coupon every month based on those mortgage payments. If you own an MBS you have effectively lent to this entity which has lent the money out to all the people who took out mortgages. If the people pay their mortgage off early then you get your money back early (this can be good or bad, depending). If they default on their mortgages you may have to take that loss as well.
Securitization - the act of creating a security from a set of assets. In the case we are talking about today, it is the act of pooling mortgages, enhancing the credit and selling it off.
FNMA - Fannie Mae, often refers to MBS backed by Fannie Mae. Fannie Mae guarantees the mortgages it packages. All FNMA securities have a set coupon and high credit ratings. These are all securitized with credit enhancement so they are AAA rated by credit agencies. Basically FNMA securities are considered default free and backed by the government (note that I said "basically." They aren't technically backed by the government).
GNMA - Ginnie Mae, much like Gannie Mae backs MBS. If you want the details between FNMA, GNMA and other quasi-government agencies that back MBS, I suggest you google around a bit (or e-mail me).
Credit Rating - Credit agencies (Standard and Poors, Fitch, etc) give credit ratings according to the likelihood of an entity's default. AAA is good, AA is a little worse, and it goes all the way down to B, C and technical default.
FICO - Fair Isaac's COrporation score refers to a commonly used method of rating a customer/individual's credit (likelihood to default).
Pool - a pool is a set of mortgages that go into a given security. Pools are often characterized by average size of loan, average FICO of borrower, average mortgage rate, etc.
Coupon - the % of notional that a given security pays off. A 5% FNMA security pays an annual 5% in monthly buckets.
Sub-Prime - Subprime mortgages refer to mortgages made to customers of "sub-prime" FICO score. Prime FICO scores generally are considerd those over 660. It is important to know that FNMA and other major agencies do not securitize sub-prime mortgages (remember, they make all their stuff AAA rated), so a lot of these are securitized directly by banks.
CMBS - Commercial Mortgage Backed Security. These are much like MBS, but they are backed by commercial mortgage loans (think: the loan taken out to fund the local mall or the grocery store).
Prepayment - refers to a mortgage holder's right to pay off the mortgage early to pay off part of the balance of the mortgage and thus reduce the life of the loan. This is often called the "prepayment option" embedded in the mortgage, which is the equivalent of an embedded put option.
ARM - Adjustable Rate Mortgage refers to mortgages that have an interest rate reset over time. These are often seen as "X-N ARMs," which means the rate is fixed for the first X years and then resets on an N year interval. Commonly you'll see things like 5-1 ARMs and 7-1 ARMs.
FRM - Fixed Rate Mortgage. These are mortgages where the rate is fixed from the beginning and never changes.
IO - Interest Only. These mortgages are like ARMs, but you only pay interest payments for the first X years. Kinda scary if you think about it. IOs can also refer to IO securities, which are the interest only portion of a loan. In mortgage space this means you can get the interest portion of a mortgage pool's payments. That means in the event of prepayment, you get basically nothing because they mortgage owner decided to pay off the entire balance before interest kicked in.
PO - Principal Only. You can't take out a principal only mortgage. I don't even know how you could make something of the sort. POs refer to the principal only securities. Clearly if you're securitizing IOs, you're going to have a PO portion left. The POs are the opposite of IOs in that if there is a prepayment, suddenly all the money you were expecting comes to you a lot early than expected (bonus!) and you can earn returns off of it some other way.
CMO - Collateralized Mortgage Obligation. These are a type of MBS (specifically called a "pass-through" MBS). These are special because they have a payment hierarchy, so you can get protection from prepayment (and default) through the structure. Thus AAA CMOs are protected more than A CMOs. These slices of hierarchy are called tranches.
CDO - Collateralized Debt Obligation. These usually refer to something that looks the same as CMOs except in non-mortgage space. They also can refer to a collection of CMO tranches collected into one item. So, for example, if I create an entity backed by a bunch of different CMO BBB tranches, I have effectively created a derivative off of the mortgage derivative (risk management for these are a bitch because they involve all sorts of weird correlations). Sometimes the CDOs of CDOs or CDOs of CMOs are called CDO-squares.
CPR - Conditional Prepayment Rate. This is how expected prepayment is measured in mortgage space. For example, a 10% CPR means 10% of the remaining balance is expected to be paid off in that period.
PSA - Public Securities Association prepayment model. This model is also used to measure prepayment rate (although not as commons as CPR). It assumes some constant prepayment rate and gives the forecasted rate according to that reference rate. See: http://en.wikipedia.org/wiki/PSA_prepayment_model for the details.
SMM - Single Monthly Mortality rate. This is directly related to CPR by the equation: SMM = 1-(1-CPR)^(1/12).
MSR - Mortgage Servicing Right. These are a residual security to compensate companies that service mortgages. When a mortgage is created, someone actually has to do the collection of the payments, process the payments and divvy it up among the holders of the MBS. The MSR is this form of payment, it gets .25 bps off of every payment. As you can imagine, these value much like IO securities --if prepayment occurs it's worth a lot less than if it drags on for a long time.
Mortgage Servicer - People will often talk about big players in the markets. Mortgage servicers are one of the big players. They are one of the whale accounts that often smash the market with billion dollar trades. The reason they do such ridiculous size is because they tend to be out there hedging their loads of MSRs. As it turns out mortgage servicing is an economies of scale business, so people who hold MSRs tend to have a lot of them. Hedging them is a rather complicated endeavor, but it's often done with a combination of swaps, swaptions, treasuries and MBS.
Mortgage Hedger - Another type of big player in the market. Mortgage hedgers are a superset of mortgage servicers. A lot of big mortgage originators hold a lot of those mortgages on their balance sheet instead of structuring them and selling them off. These people also need to hedge their balance sheet exposure via the capital markets and tend to do so in big size.
I'm sure I'm missing a whole bunch of stuff, but that's what rolls off my head at the moment. As always, feel free to e-mail me with questions.
MBS - mortgage backed security. This is the fundamental building block. Basically a pool of mortgages are put together into one entity and then the entity pays off a coupon every month based on those mortgage payments. If you own an MBS you have effectively lent to this entity which has lent the money out to all the people who took out mortgages. If the people pay their mortgage off early then you get your money back early (this can be good or bad, depending). If they default on their mortgages you may have to take that loss as well.
Securitization - the act of creating a security from a set of assets. In the case we are talking about today, it is the act of pooling mortgages, enhancing the credit and selling it off.
FNMA - Fannie Mae, often refers to MBS backed by Fannie Mae. Fannie Mae guarantees the mortgages it packages. All FNMA securities have a set coupon and high credit ratings. These are all securitized with credit enhancement so they are AAA rated by credit agencies. Basically FNMA securities are considered default free and backed by the government (note that I said "basically." They aren't technically backed by the government).
GNMA - Ginnie Mae, much like Gannie Mae backs MBS. If you want the details between FNMA, GNMA and other quasi-government agencies that back MBS, I suggest you google around a bit (or e-mail me).
Credit Rating - Credit agencies (Standard and Poors, Fitch, etc) give credit ratings according to the likelihood of an entity's default. AAA is good, AA is a little worse, and it goes all the way down to B, C and technical default.
FICO - Fair Isaac's COrporation score refers to a commonly used method of rating a customer/individual's credit (likelihood to default).
Pool - a pool is a set of mortgages that go into a given security. Pools are often characterized by average size of loan, average FICO of borrower, average mortgage rate, etc.
Coupon - the % of notional that a given security pays off. A 5% FNMA security pays an annual 5% in monthly buckets.
Sub-Prime - Subprime mortgages refer to mortgages made to customers of "sub-prime" FICO score. Prime FICO scores generally are considerd those over 660. It is important to know that FNMA and other major agencies do not securitize sub-prime mortgages (remember, they make all their stuff AAA rated), so a lot of these are securitized directly by banks.
CMBS - Commercial Mortgage Backed Security. These are much like MBS, but they are backed by commercial mortgage loans (think: the loan taken out to fund the local mall or the grocery store).
Prepayment - refers to a mortgage holder's right to pay off the mortgage early to pay off part of the balance of the mortgage and thus reduce the life of the loan. This is often called the "prepayment option" embedded in the mortgage, which is the equivalent of an embedded put option.
ARM - Adjustable Rate Mortgage refers to mortgages that have an interest rate reset over time. These are often seen as "X-N ARMs," which means the rate is fixed for the first X years and then resets on an N year interval. Commonly you'll see things like 5-1 ARMs and 7-1 ARMs.
FRM - Fixed Rate Mortgage. These are mortgages where the rate is fixed from the beginning and never changes.
IO - Interest Only. These mortgages are like ARMs, but you only pay interest payments for the first X years. Kinda scary if you think about it. IOs can also refer to IO securities, which are the interest only portion of a loan. In mortgage space this means you can get the interest portion of a mortgage pool's payments. That means in the event of prepayment, you get basically nothing because they mortgage owner decided to pay off the entire balance before interest kicked in.
PO - Principal Only. You can't take out a principal only mortgage. I don't even know how you could make something of the sort. POs refer to the principal only securities. Clearly if you're securitizing IOs, you're going to have a PO portion left. The POs are the opposite of IOs in that if there is a prepayment, suddenly all the money you were expecting comes to you a lot early than expected (bonus!) and you can earn returns off of it some other way.
CMO - Collateralized Mortgage Obligation. These are a type of MBS (specifically called a "pass-through" MBS). These are special because they have a payment hierarchy, so you can get protection from prepayment (and default) through the structure. Thus AAA CMOs are protected more than A CMOs. These slices of hierarchy are called tranches.
CDO - Collateralized Debt Obligation. These usually refer to something that looks the same as CMOs except in non-mortgage space. They also can refer to a collection of CMO tranches collected into one item. So, for example, if I create an entity backed by a bunch of different CMO BBB tranches, I have effectively created a derivative off of the mortgage derivative (risk management for these are a bitch because they involve all sorts of weird correlations). Sometimes the CDOs of CDOs or CDOs of CMOs are called CDO-squares.
CPR - Conditional Prepayment Rate. This is how expected prepayment is measured in mortgage space. For example, a 10% CPR means 10% of the remaining balance is expected to be paid off in that period.
PSA - Public Securities Association prepayment model. This model is also used to measure prepayment rate (although not as commons as CPR). It assumes some constant prepayment rate and gives the forecasted rate according to that reference rate. See: http://en.wikipedia.org/wiki/PSA_prepayment_model for the details.
SMM - Single Monthly Mortality rate. This is directly related to CPR by the equation: SMM = 1-(1-CPR)^(1/12).
MSR - Mortgage Servicing Right. These are a residual security to compensate companies that service mortgages. When a mortgage is created, someone actually has to do the collection of the payments, process the payments and divvy it up among the holders of the MBS. The MSR is this form of payment, it gets .25 bps off of every payment. As you can imagine, these value much like IO securities --if prepayment occurs it's worth a lot less than if it drags on for a long time.
Mortgage Servicer - People will often talk about big players in the markets. Mortgage servicers are one of the big players. They are one of the whale accounts that often smash the market with billion dollar trades. The reason they do such ridiculous size is because they tend to be out there hedging their loads of MSRs. As it turns out mortgage servicing is an economies of scale business, so people who hold MSRs tend to have a lot of them. Hedging them is a rather complicated endeavor, but it's often done with a combination of swaps, swaptions, treasuries and MBS.
Mortgage Hedger - Another type of big player in the market. Mortgage hedgers are a superset of mortgage servicers. A lot of big mortgage originators hold a lot of those mortgages on their balance sheet instead of structuring them and selling them off. These people also need to hedge their balance sheet exposure via the capital markets and tend to do so in big size.
I'm sure I'm missing a whole bunch of stuff, but that's what rolls off my head at the moment. As always, feel free to e-mail me with questions.
Tuesday, June 26, 2007
Attrition
It's no secret that investment banks have ridiculously high attrition. Apparently this hits some new folks pretty hard, as I've seen a fair bit of fright and sadness in the new guys from time to time. It's simply something with which you learn to deal. I've had my fair share of friends and mentors move on to other places both on their own accord and not. It can be a sad occasion or a joyous occasion, but there's not doubt that the people you know at the bank constantly shift. The "go-to" guy one moment could quickly become non-existent. You learn to deal with this shifts both personally and professionally.
Personally, I don' t think I can help much. Everyone deals with their friends leaving their firm in a different way. I had one kid crying one day when a big downsizing was announced for a bunch of people he knew. Life goes on, people find jobs in or outside the industry. It happens all the time in this industry, so you'll shed a lot of tears (in fact at around the same time every year) if you don't get used to it. A boss of mine once lamented that all the traders he used to know were gone although the salespeople always seem to be around. It's even worse on the i-banking side, as I know precious few people who stuck around longer than a few years.
Professionally, I recommend you seek out multiple sources for all your help and information. Sure it's convenient to always go to the same guy, but what happens when that guy is gone? Suddenly you're a fish out of water. If you're going to a tech guy all the time, get to know his co-workers and consult with them from time to time too. If you always talk to one trader for market color, try talking to others on his desk from time to time. Same goes for brokers, salespeople, operations, etc. It's always good to have someone else you can go to (helps when your guy is on vacation too).
Turnover at hedge funds (other than Citadel) is apparently not as high as an investment bank, which surprised me. Then again, most hedge funds consist of some 20 guys in a room, so it's more like a tight knit family. Large institutions bent on making money will always churn their staff for cheaper alternatives. Experience is useful, but only for certain jobs (and if someone cheaper and better comes along, then so long).
You learn to deal with the turnover on the job, and you learn to defend yourself from turnover too. Most banks are pretty good about allowing all but the most senior and most junior people to look around for another position. The same can not be said for hedge funds. It's good to be in contact with a good headhunter at all times for good measure as well. These people will help you find a job, and if you're more senior they will help you hire for new positions as well (an often underestimated task to the inexperienced). It's also important to gain marketable skills. A good market maker can always find a job at a bank. A good salesperson will always have his contacts and thus find a job. A bad prop guy will never find another job (one of the dangers of going to a prop desk or a hedge fund too early is that you don't have that market making skill to fall back on if you fail as a position trader).
Keep your options in mind and proceed carefully, but if you work hard (and your friends work hard) you should be alright.
Personally, I don' t think I can help much. Everyone deals with their friends leaving their firm in a different way. I had one kid crying one day when a big downsizing was announced for a bunch of people he knew. Life goes on, people find jobs in or outside the industry. It happens all the time in this industry, so you'll shed a lot of tears (in fact at around the same time every year) if you don't get used to it. A boss of mine once lamented that all the traders he used to know were gone although the salespeople always seem to be around. It's even worse on the i-banking side, as I know precious few people who stuck around longer than a few years.
Professionally, I recommend you seek out multiple sources for all your help and information. Sure it's convenient to always go to the same guy, but what happens when that guy is gone? Suddenly you're a fish out of water. If you're going to a tech guy all the time, get to know his co-workers and consult with them from time to time too. If you always talk to one trader for market color, try talking to others on his desk from time to time. Same goes for brokers, salespeople, operations, etc. It's always good to have someone else you can go to (helps when your guy is on vacation too).
Turnover at hedge funds (other than Citadel) is apparently not as high as an investment bank, which surprised me. Then again, most hedge funds consist of some 20 guys in a room, so it's more like a tight knit family. Large institutions bent on making money will always churn their staff for cheaper alternatives. Experience is useful, but only for certain jobs (and if someone cheaper and better comes along, then so long).
You learn to deal with the turnover on the job, and you learn to defend yourself from turnover too. Most banks are pretty good about allowing all but the most senior and most junior people to look around for another position. The same can not be said for hedge funds. It's good to be in contact with a good headhunter at all times for good measure as well. These people will help you find a job, and if you're more senior they will help you hire for new positions as well (an often underestimated task to the inexperienced). It's also important to gain marketable skills. A good market maker can always find a job at a bank. A good salesperson will always have his contacts and thus find a job. A bad prop guy will never find another job (one of the dangers of going to a prop desk or a hedge fund too early is that you don't have that market making skill to fall back on if you fail as a position trader).
Keep your options in mind and proceed carefully, but if you work hard (and your friends work hard) you should be alright.
Monday, June 25, 2007
Risk vs Reward
I was reminded today that everything should be looked at in a risk-reward trade-off. As soon as you forget this basic rule, you start taking on unnecessary risk. In reality, your mind should subtley be judging every word you speak and every action you take in terms of the risks you take and the rewards offered. I had forgotten this simple fact and taken on some unnecessary risks that a friend kindly reminded me to avoid.
Risks come in all flavours. There is, of course, the simple financial risk taken by people every day in the markets, but there are many other forms. Operational risk effects the ability of an entity to perform it's daily routines. Reputation risk effects how people will view you in the future. Career risk effects how you might be viewed in the office. Personal risks effect your personal life (perhaps whether or not you score that hot date). Risks come in all forms, and throughout life you should be analyzing the risks involved in your life. I know when I take the time to think about it, I take on a lot more risk every day than I normally realize.
The NYC subways now have an ad campaign that states something along the lines of "find the upside of risk." You should never be afraid to take risk, for with no risk comes no reward, but take constant calculated risks and make sure you're never blindsided.
Risks come in all flavours. There is, of course, the simple financial risk taken by people every day in the markets, but there are many other forms. Operational risk effects the ability of an entity to perform it's daily routines. Reputation risk effects how people will view you in the future. Career risk effects how you might be viewed in the office. Personal risks effect your personal life (perhaps whether or not you score that hot date). Risks come in all forms, and throughout life you should be analyzing the risks involved in your life. I know when I take the time to think about it, I take on a lot more risk every day than I normally realize.
The NYC subways now have an ad campaign that states something along the lines of "find the upside of risk." You should never be afraid to take risk, for with no risk comes no reward, but take constant calculated risks and make sure you're never blindsided.
Friday, June 22, 2007
Taking Heat
Let's face it, Wall Street is not for the faint of heart. Tensions often run high and there's a lot of yelling and cussing. This is especially true when something gets fucked up. To be honest, if you're the type to get easily offended, this is not the place for you. You've got to be able to separate your interactions with people each day as if you were starting anew.
Grace under fire becomes key when you screw something up. The first thing to be done is to admit to your mistake. "Sorry, I screwed that up. I'll take full responsibility." Putting it straight out there when you realized the mistake is your best bet. If you know you can fix your mistake you can fix the mistake before you tell people, but even after you fix it you should tell your boss. "I screwed that up, but I minimized losses by. . . "
If your boss continues to reprimand you for the mistake after taking responsibility, that is fairly normal. Just listen and take in everything being said. Hidden among the curses is usually a suggestion on how the situation should have been handled. Don't say too much to your defense unless you are absolutely sure you're right and your boss is willing to listen. If your boss isn't going to listen anyway then saying anything might be like pouring water on an electrical fire (for those of you who don't know, pouring water on an electrical fire will only make matters worse).
Chances are you'll be a bit upset. Screwing up, losing money and getting yelled at are not easy things to deal with. Even the most stoic can get a little bit phased by the combination of the three. Trust me, I thought I was pretty emotionless in the face of adversity, but my first big loss definitley left me a bit shaken. Deciding to take a brief walk around the block is an excellent choice. Taking time to cool off before re-engaging is always admirable.
It's good not to screw up, but even the best of us do sometimes. Deal with it gracefully and your superiors will notice.
Grace under fire becomes key when you screw something up. The first thing to be done is to admit to your mistake. "Sorry, I screwed that up. I'll take full responsibility." Putting it straight out there when you realized the mistake is your best bet. If you know you can fix your mistake you can fix the mistake before you tell people, but even after you fix it you should tell your boss. "I screwed that up, but I minimized losses by. . . "
If your boss continues to reprimand you for the mistake after taking responsibility, that is fairly normal. Just listen and take in everything being said. Hidden among the curses is usually a suggestion on how the situation should have been handled. Don't say too much to your defense unless you are absolutely sure you're right and your boss is willing to listen. If your boss isn't going to listen anyway then saying anything might be like pouring water on an electrical fire (for those of you who don't know, pouring water on an electrical fire will only make matters worse).
Chances are you'll be a bit upset. Screwing up, losing money and getting yelled at are not easy things to deal with. Even the most stoic can get a little bit phased by the combination of the three. Trust me, I thought I was pretty emotionless in the face of adversity, but my first big loss definitley left me a bit shaken. Deciding to take a brief walk around the block is an excellent choice. Taking time to cool off before re-engaging is always admirable.
It's good not to screw up, but even the best of us do sometimes. Deal with it gracefully and your superiors will notice.
Thursday, June 21, 2007
Separating from the Pack
Intern season is in full bloom, and I've been working with my share of interns this summer. Here are some thoughts thus far on what has separated the wheat from the chaffe.
1) We have this one kid who isn't even working for our desk (yet) asking for work. He knows he's rotating to our desk in the second half of the summer, so he's getting a head start on what we trade and what projects we might have him work on. By doing this he has shown an excellent work ethic, ability to gather information (who knows how he found out where his next rotation is) and some interesting time management. He says his current group is often too busy to give him work, so he can start looking at stuff we do. He has, at once, demonstrated that he goes looking for work and that he has the ability to see when not to bother people too much. Good stuff, kid. I would advise, however, to be careful with pulling moves like this too much because if the group he's currently working for hears too much of this, that could be bad news.
2) Another kid, not on my desk, has been known to take a walk on the job. He has, unfortunately, been placed in a seat that is across the room from his group (bad seating arrangement, but you have to make do when seats are in precious demand). Taking advantage of his situation, he has decided to spend a lot of time away from the desk, running errands, eating lunch, going for strolls, meeting with friends, etc. He thinks nobody knows because his group sits so far from him. Dumb kid shouldn't be surprised when he doesn't get an offer. People talk.
3) There's a girl who asks a lot of questions. That's generally very commendable. Less commendable when she hovers a lot during busy times. I think I've mentioned this in a different post, but I heard a couple market makers getting pretty annoyed by her.
4) One guy actually tried to correct a market maker in his price. That's pretty stupid. Needless to say, he was wrong. In fact, this guy is generally overly cocky and pisses people off by trying to tell them what they should do. Not a good idea. Even though cockyness is pretty common on the floor, correcting people who've been doing this stuff for years is a bad idea. Also a great way not to get a job.
That's all for now. Lots of negatives, only one good. Well, as I keep quoting, "the internship is yours to screw up."
1) We have this one kid who isn't even working for our desk (yet) asking for work. He knows he's rotating to our desk in the second half of the summer, so he's getting a head start on what we trade and what projects we might have him work on. By doing this he has shown an excellent work ethic, ability to gather information (who knows how he found out where his next rotation is) and some interesting time management. He says his current group is often too busy to give him work, so he can start looking at stuff we do. He has, at once, demonstrated that he goes looking for work and that he has the ability to see when not to bother people too much. Good stuff, kid. I would advise, however, to be careful with pulling moves like this too much because if the group he's currently working for hears too much of this, that could be bad news.
2) Another kid, not on my desk, has been known to take a walk on the job. He has, unfortunately, been placed in a seat that is across the room from his group (bad seating arrangement, but you have to make do when seats are in precious demand). Taking advantage of his situation, he has decided to spend a lot of time away from the desk, running errands, eating lunch, going for strolls, meeting with friends, etc. He thinks nobody knows because his group sits so far from him. Dumb kid shouldn't be surprised when he doesn't get an offer. People talk.
3) There's a girl who asks a lot of questions. That's generally very commendable. Less commendable when she hovers a lot during busy times. I think I've mentioned this in a different post, but I heard a couple market makers getting pretty annoyed by her.
4) One guy actually tried to correct a market maker in his price. That's pretty stupid. Needless to say, he was wrong. In fact, this guy is generally overly cocky and pisses people off by trying to tell them what they should do. Not a good idea. Even though cockyness is pretty common on the floor, correcting people who've been doing this stuff for years is a bad idea. Also a great way not to get a job.
That's all for now. Lots of negatives, only one good. Well, as I keep quoting, "the internship is yours to screw up."
This made me smile
A rather observant private equity guy just started a blog. I know I'll be reading it.
http://strikershank.blogspot.com/
Wednesday, June 20, 2007
The Economics of Dating
So I was at the bar with a couple of friends this weekend and had a rather amusing discussion. And by interesting I mean filled with machismo and vulgarity (you have been warned). Also, if you are a lady reading this, I think it's worth reading all the way through it to see the big picture (this actually advocates that men should be spending a lot of money on women). Look, this is meant to be for entertainment. It's also known to be VERY politically incorrect, but try to view this as a way of trying to measure things from an economic angle. It's hard to put a price on some things, so I use the only proxies for prices possible. No it's not tasteful, it's Wall Street.
The discussion at hand was how much a man spends on a girlfriend (or a prospective girlfriend or a prospective one-night stand) over time. What's a fair way to gauge how much a guy "should" spend on a girl? Well, here's how I think an economist would look at it:
What are the positive things you get out of it? Well, men obviously value sex. There's something about emotional support (although no girlfriend of mine has ever really been much emotional support. . . kidding. . .sorta. . .). Finally, there is the companionship (who really wants to go see a movie alone?). Let's value each of these.
First off, the sex. Market price for sex can be found on craigslist. I assume a "full service" massage is sex. If I'm wrong, please let me know (but don't let me know why you know) . I'm seeing it at about $200/hour. That sounds reasonable. Let's say sex goes at about $200/hr.
Second, the emotional support. Psychiatrists can give you all the emotional support you need for $130/hour (I actually called a therapist to ask for his fee just now, that was awkward).
Last, the companionship I'm actually going to mark-to-market as free. While it does have a dollar value, you can usually find some sort of companion for your movies, dinners, etc unless you're really a loser.
So if you have a full fledged girlfriend with whom you have sex for, say, four hours a week and divulge your emotional distress for two hours a week, you should be willing to pay $1060 per week. Wow, that's a lot. If we price it for a one night stand, we can just price the sex at $200/hr. Let's say it's a short one night stand, and a man should be willing to drop at least $200 fair value on drinks or whatever date expenditures.
The girl we were with protested that the sex was being priced at prostitution levels. Well, that's just dumb. I'm sitting here advocating that men ought to be willing to spend some $1060/week on a girl (that's a LOT higher than average wages in the US), and this girl is telling me that she finds that offensive. I bet you anything she doesn't complain when her boyfriend buys her gifts, dinner and drinks. In any case, the prostitution charges being offensive thing is a weak argument (she later went and slept with my friend that night).
The best argument, in my opinion, is that women get a lot out of it too. Well, an attractive woman has no trouble getting sex (hell, an unattractive woman has no trouble getting sex. . .). That' s for certain. So even if there is a market for male prostitution, it's a redundant market. Let's look at the therapy part. First off, there are a lot of men who are willing to be personal therapists for free (or for the enjoyment of being seen with an attractive woman, or for the glimmer of hope that the woman may some day actually become his girlfriend). So I'd argue that the mark-to-market of therapy for a woman is relatively low as well.
For argument's sake, let's let the woman's therapy be the same price--$130/hr. Now I'm going to argue for gender equality, I'm all for that. Well, even if we go for gender equality, let's face it, women require more emotional support than men. If you disagrees, please feel free to comment (rationally). So let's try to make for gender equality. That means the amount per week spent by men at fair value ($1060) should be equal to the fair value of what the men bring to the "relationship." So if that's to be monetized as therapy, we can price it at 8.15 hours. So a relationship with four hours of sex and two hours of the man whining per week should also have eight hours of the woman whining per week. Does that sound reasonable?
Now I've been pricing off of an attractive women. Of course an attractive woman is going to be able to more readily get free sex and therapy from men, so they can either whine more or demand more money be spent on them. In addition attractive women would be able to charge more if they were to prostitute themselves (hypothetical, please), again this means she can whine more or demand more money. So it is not surprising if attractive women cost more to date or just happen to be higher maintenance emotionally.
If we assume an unattractive woman, then the price moves the other way. She can not demand as much in dating costs and she can not be as high maintenance emotionally.
Now I haven't taken into account what happens when you have an ugly guy. I'm not sure if prostitutes or therapists can charge more for services with an ugly guy, but maybe they can. The prostitutes aren't technically working legally anyway, so I guess they wouldn't be effected by discrimination laws, at the very least.
Clearly, this is not how actual relationships work. Not only am I missing a lot of the value that comes out of a relationship, but I am simplifying everything for argument's sake. Men and women do not court on a monetary fair-value basis, but it's interesting. If you ever observe that really attractive women tend to be higher maintenance, well, there may well be a good economic reason for it.
I hope you enjoyed this economic analysis of dating. Remember, it was a line of thought that was fleshed out from two very drunk traders and one female banker (who gave very little input). It does not reflect in any way how I think of dating in general, but I enjoy thinking through these sorts of things from a "purely rational" perspective.
The discussion at hand was how much a man spends on a girlfriend (or a prospective girlfriend or a prospective one-night stand) over time. What's a fair way to gauge how much a guy "should" spend on a girl? Well, here's how I think an economist would look at it:
What are the positive things you get out of it? Well, men obviously value sex. There's something about emotional support (although no girlfriend of mine has ever really been much emotional support. . . kidding. . .sorta. . .). Finally, there is the companionship (who really wants to go see a movie alone?). Let's value each of these.
First off, the sex. Market price for sex can be found on craigslist. I assume a "full service" massage is sex. If I'm wrong, please let me know (but don't let me know why you know) . I'm seeing it at about $200/hour. That sounds reasonable. Let's say sex goes at about $200/hr.
Second, the emotional support. Psychiatrists can give you all the emotional support you need for $130/hour (I actually called a therapist to ask for his fee just now, that was awkward).
Last, the companionship I'm actually going to mark-to-market as free. While it does have a dollar value, you can usually find some sort of companion for your movies, dinners, etc unless you're really a loser.
So if you have a full fledged girlfriend with whom you have sex for, say, four hours a week and divulge your emotional distress for two hours a week, you should be willing to pay $1060 per week. Wow, that's a lot. If we price it for a one night stand, we can just price the sex at $200/hr. Let's say it's a short one night stand, and a man should be willing to drop at least $200 fair value on drinks or whatever date expenditures.
The girl we were with protested that the sex was being priced at prostitution levels. Well, that's just dumb. I'm sitting here advocating that men ought to be willing to spend some $1060/week on a girl (that's a LOT higher than average wages in the US), and this girl is telling me that she finds that offensive. I bet you anything she doesn't complain when her boyfriend buys her gifts, dinner and drinks. In any case, the prostitution charges being offensive thing is a weak argument (she later went and slept with my friend that night).
The best argument, in my opinion, is that women get a lot out of it too. Well, an attractive woman has no trouble getting sex (hell, an unattractive woman has no trouble getting sex. . .). That' s for certain. So even if there is a market for male prostitution, it's a redundant market. Let's look at the therapy part. First off, there are a lot of men who are willing to be personal therapists for free (or for the enjoyment of being seen with an attractive woman, or for the glimmer of hope that the woman may some day actually become his girlfriend). So I'd argue that the mark-to-market of therapy for a woman is relatively low as well.
For argument's sake, let's let the woman's therapy be the same price--$130/hr. Now I'm going to argue for gender equality, I'm all for that. Well, even if we go for gender equality, let's face it, women require more emotional support than men. If you disagrees, please feel free to comment (rationally). So let's try to make for gender equality. That means the amount per week spent by men at fair value ($1060) should be equal to the fair value of what the men bring to the "relationship." So if that's to be monetized as therapy, we can price it at 8.15 hours. So a relationship with four hours of sex and two hours of the man whining per week should also have eight hours of the woman whining per week. Does that sound reasonable?
Now I've been pricing off of an attractive women. Of course an attractive woman is going to be able to more readily get free sex and therapy from men, so they can either whine more or demand more money be spent on them. In addition attractive women would be able to charge more if they were to prostitute themselves (hypothetical, please), again this means she can whine more or demand more money. So it is not surprising if attractive women cost more to date or just happen to be higher maintenance emotionally.
If we assume an unattractive woman, then the price moves the other way. She can not demand as much in dating costs and she can not be as high maintenance emotionally.
Now I haven't taken into account what happens when you have an ugly guy. I'm not sure if prostitutes or therapists can charge more for services with an ugly guy, but maybe they can. The prostitutes aren't technically working legally anyway, so I guess they wouldn't be effected by discrimination laws, at the very least.
Clearly, this is not how actual relationships work. Not only am I missing a lot of the value that comes out of a relationship, but I am simplifying everything for argument's sake. Men and women do not court on a monetary fair-value basis, but it's interesting. If you ever observe that really attractive women tend to be higher maintenance, well, there may well be a good economic reason for it.
I hope you enjoyed this economic analysis of dating. Remember, it was a line of thought that was fleshed out from two very drunk traders and one female banker (who gave very little input). It does not reflect in any way how I think of dating in general, but I enjoy thinking through these sorts of things from a "purely rational" perspective.
Tuesday, June 19, 2007
The Big Picture
Everyone makes a big deal about investment banking vs sales & trading, but many people seem to miss the many other opportunities in a bank. There are a LOT of interesting opportunities in every bank not restricted to those two "headline" areas. Places like Private Wealth Management (as a note, my first internship was in Private Wealth Management. . . admittedly it wasn't quite my style) are a huge cash-cow to investment banks, but they tend not to receive the same limelight the other two areas do. There is also risk management, which people sometimes shun but can actually be quite interesting. Commercial banks have what are known as "portfolios," which manage HUGE sums of money and move markets regularly. Insurance is a pretty interesting area related to banking these days too.
To relate this to a story, one of my good friends (and poker rival) actually started out in risk management. He was in risk management for almost 10 years before he switched over to be a swaps trader. The swaps guys are some of the most well respected (not to mention well paid) guys on the floor, and he came right into a senior trader position. I'd say he did perfectly well for himself. There are lots of folks who go into the analyst of associate trader programs, be a TA for a few years and never make it to being a trader. Fact of the matter is a bunch of things have to line up: you have to have the right temperament and knowledge, the desk has to have an open position, and there has to be no guy better suited for the position already in line. Life's a long game, look for the long term best expected value.
As my boss often says "get your head out of your ass." I see a lot of kids running around being adamant about wanting to be i-bankers or traders (even one kid I consider to be a complete MORON who is adamant about being a prop trader). Trust me, get your head out of your ass and look around. There are lots of other interesting functions in and around finance. There's nothing wrong with exploring opportunities. You never know what will get your foot in the door.
To relate this to a story, one of my good friends (and poker rival) actually started out in risk management. He was in risk management for almost 10 years before he switched over to be a swaps trader. The swaps guys are some of the most well respected (not to mention well paid) guys on the floor, and he came right into a senior trader position. I'd say he did perfectly well for himself. There are lots of folks who go into the analyst of associate trader programs, be a TA for a few years and never make it to being a trader. Fact of the matter is a bunch of things have to line up: you have to have the right temperament and knowledge, the desk has to have an open position, and there has to be no guy better suited for the position already in line. Life's a long game, look for the long term best expected value.
As my boss often says "get your head out of your ass." I see a lot of kids running around being adamant about wanting to be i-bankers or traders (even one kid I consider to be a complete MORON who is adamant about being a prop trader). Trust me, get your head out of your ass and look around. There are lots of other interesting functions in and around finance. There's nothing wrong with exploring opportunities. You never know what will get your foot in the door.
Saturday, June 16, 2007
Learn the Lingo (Rates)
It seems the "Learn the Lingo" series has been quite popular, so I figured I'd add to it in various product spaces. Today we do "rates," which usually refers to swaps. Swaps are extremely interesting, extremely versatile and surprisingly confusing.
As always, if you have any questions feel free to e-mail me (or check Wikipedia). It might be worth reading the "Learn the Lingo (Sales & Trading)" post before you read this one if you haven't already. Use the archives, it was one of my first posts.
Here's a primer that would cover what you might learn your first week on the "rates" desk:
Libor - London InterBank Offer Rate. This is the rate banks charge each other for inter-bank deposits in London. This is used as a benchmark floating rate for a lot of stuff. Permutations include "Euribor," which is the Euro interbank offer rate.
Eurodollars - Dollar denominated deposits at banks not regulated by the Fed (so outside the US). The eurodollar rate is the interest rate on these deposits. The eurodollar rate is important as it signifies the dollar interest rate free of Fed regulation. Don't confuse Eurodollar with anything having to do with Europe. It doesn't have that much to do with Europe. Permutations include "Euroyen," which is the deposit rate for yen denominated stuff outside Japan.
Eurodollar Futures - These are important enough that I figured they deserve their own post. These are futures on the Eurodollar rate. They are priced as 100-Rate. So if the Eurodollar rate is 5.25% on the future's maturity date then the price of a Eurodollar future is 95.75 at maturity. Of course, futures for future dates include a good bit of speculation. These are a fairly good proxy for the risk-free rate expected starting a given date (as libor is a good proxy for risk-free rate and Eurodollar trades with a slight adjustment to libor).
IMM Date - These are the days on which Eurodollar futures expire. There are monthly expiries, but the important ones are March (H), June (M), September (U) and December (Z).
Packs - packs refer to sets of four representing one year. The front pack, consisting of the first four eurodollar futures is called the "white pack." The next four are called the "red pack." Then green and blue after that. The rest have colors too (purple, pink, silver, copper etc), but the first four packs are really the only liquid eurodollars.
Bundles - bundles refer to all the eurodollars up to the given pack. So the green bundle would be the green, red and white packs all together ("bundled" up).
counterparty - the guy on the other end of a trade.
bp - pronounced "bip" refers to basis points. A basis point is one hundreth of a percent. So 5.7525% interest rate is 575.25bps or 575 and 1/4 bps. Most rate instruments are quoted in bps.
tenor - the length of a swap. A 5 year swap lasts for 5 years and is considered to have a 5 year tenor. The payments will occur as schedule for 5years until the swap matures.
settlement - most things in the fixed income world trade on one day and "settle" two days later. So all the maturities and coupons are priced off the "settle" date instead of the trade date.
maturity - maturity is when the last payment is scheduled.
Fixed-Float swap - also known as just "swaps" or "vanilla swaps." These are the basic building block of the rates world. One side pays a fixed rate and the counterparty pays a floating rate (usually libor). These are quoted by the fixed rate, the amount is either in notional or pv01 (present value of a 1bp move in rates, sometimes called duration in practice) and buyer pays fixed. So, "67 1/4 bid 100 5year rates" means "I want to pay fixed on a 5year fixed-float swap at 5.6725 for 100 thousand dollars per basis point." Note that the big figure (5) in the rate was omitted when quoted because it's assumed that everyone knows the big figure rate. In the US the convention for these is 3month semi-bond, which means the fixed payments happen "semi-bond" style (semi-annually, like a bond) and the float payments occur on 3month libor resets.
payer swap - refers to a swap in which I pay the fixed rate. Note, the convention is that buyer pays fixed.
receiver swap - refers to a swap in which I receive the fixed rate. I refer to these as "I" pay fixed because my payer swap is my counterparty's receiver swap and visa-versa. People also refer to receiving fixed on a swap as "giving" the swap, which means to "sell" the swap. Again, remember that buyer pays fixed.
MMS - matched maturity swap. Just like it sounds, it is a swap who's maturity matches something else. This often happens when you are trying to synthetically hedge a bond (CT5 MMS refers to a swap that matches the maturity of the on-the-run 5year treasury note).
Basis swap - these are a float-float swap. They usually refer to some basis vs libor. It can be the fed funds rate to libor basis, the basis of a treasury future, or what have you. These are mostly flow oriented, and I have yet to see a really good pricing algorithm for these. They seem like they ought to have some good "fair value" pricing algorithm though.
Swap spread - the swap spread is the spread of the swap rate over the treasury rates. So if 10yr treasury is trading at 5.1725 and 10yr swap is at 5.8225, then the spread is 65bps. People do trade the swap spread frequently.
Yield curve - the curve made by plotting swap tenors against rates. The treasury yield curve shows treasury rates over the different tenors (2yr, 3yr, 5yr, 10yr, 30yr and some interpolation in between). The "yield curve" generally refers to the swap rates curve though. Usually the short end is plugged by eurodollar rates.
Forward curve - a yield curve built in "forward space." So if I was to price today all the swaps starting in 1year (i.e. 5yr 1yr forward refers to a 5years swap that begins payments in 1 year, so effectively I'm locking in a rate for something that doesn't start for a year), then I would have the swap curve I expect to see one year from now.
curve trade - curve trades are trades that bet on the slope of the yield curve. In swaps, for example, a 5s10s curve trade would involve a receiver 5yr swap and a payer10year swap (which, if you think about it is a "steepener" -- a trade that bets on the slope getting steeper). You can also do curve trades in treasuries, eurodollars, MBS, etc. Curve trades are usually (but not always) done duration or dv01 neutral.
Rate switch - refers to a swaps curve trade. In curve trades, buyer puts on the steepener, so "50 offer 14 and a half 5s-10s rate switch" or alternately "my flattener 50k/bp at 14 and a half" means "I want to put on the flattener (sell the curve) at 50 thousand dollars per basis point at 14.5 bps differential between the 10s rate and the 5s rate."
Butterfly - butterfly trades are three legged trades where the two "wings" go one way and the "belly" goes the other. A typical rates butterfly is the 2s-5s-10s fly. So if I were "buying" this fly, then I would be paying the 5year fixed rate and receiving the 2s and the 10s fixed rates. There are various weightings for this, which I will not get into here.
There are an infinite number of details to go through in swaps land, but this is probably enough to sound intelligent your first few days.
As always, if you have any questions feel free to e-mail me (or check Wikipedia). It might be worth reading the "Learn the Lingo (Sales & Trading)" post before you read this one if you haven't already. Use the archives, it was one of my first posts.
Here's a primer that would cover what you might learn your first week on the "rates" desk:
Libor - London InterBank Offer Rate. This is the rate banks charge each other for inter-bank deposits in London. This is used as a benchmark floating rate for a lot of stuff. Permutations include "Euribor," which is the Euro interbank offer rate.
Eurodollars - Dollar denominated deposits at banks not regulated by the Fed (so outside the US). The eurodollar rate is the interest rate on these deposits. The eurodollar rate is important as it signifies the dollar interest rate free of Fed regulation. Don't confuse Eurodollar with anything having to do with Europe. It doesn't have that much to do with Europe. Permutations include "Euroyen," which is the deposit rate for yen denominated stuff outside Japan.
Eurodollar Futures - These are important enough that I figured they deserve their own post. These are futures on the Eurodollar rate. They are priced as 100-Rate. So if the Eurodollar rate is 5.25% on the future's maturity date then the price of a Eurodollar future is 95.75 at maturity. Of course, futures for future dates include a good bit of speculation. These are a fairly good proxy for the risk-free rate expected starting a given date (as libor is a good proxy for risk-free rate and Eurodollar trades with a slight adjustment to libor).
IMM Date - These are the days on which Eurodollar futures expire. There are monthly expiries, but the important ones are March (H), June (M), September (U) and December (Z).
Packs - packs refer to sets of four representing one year. The front pack, consisting of the first four eurodollar futures is called the "white pack." The next four are called the "red pack." Then green and blue after that. The rest have colors too (purple, pink, silver, copper etc), but the first four packs are really the only liquid eurodollars.
Bundles - bundles refer to all the eurodollars up to the given pack. So the green bundle would be the green, red and white packs all together ("bundled" up).
counterparty - the guy on the other end of a trade.
bp - pronounced "bip" refers to basis points. A basis point is one hundreth of a percent. So 5.7525% interest rate is 575.25bps or 575 and 1/4 bps. Most rate instruments are quoted in bps.
tenor - the length of a swap. A 5 year swap lasts for 5 years and is considered to have a 5 year tenor. The payments will occur as schedule for 5years until the swap matures.
settlement - most things in the fixed income world trade on one day and "settle" two days later. So all the maturities and coupons are priced off the "settle" date instead of the trade date.
maturity - maturity is when the last payment is scheduled.
Fixed-Float swap - also known as just "swaps" or "vanilla swaps." These are the basic building block of the rates world. One side pays a fixed rate and the counterparty pays a floating rate (usually libor). These are quoted by the fixed rate, the amount is either in notional or pv01 (present value of a 1bp move in rates, sometimes called duration in practice) and buyer pays fixed. So, "67 1/4 bid 100 5year rates" means "I want to pay fixed on a 5year fixed-float swap at 5.6725 for 100 thousand dollars per basis point." Note that the big figure (5) in the rate was omitted when quoted because it's assumed that everyone knows the big figure rate. In the US the convention for these is 3month semi-bond, which means the fixed payments happen "semi-bond" style (semi-annually, like a bond) and the float payments occur on 3month libor resets.
payer swap - refers to a swap in which I pay the fixed rate. Note, the convention is that buyer pays fixed.
receiver swap - refers to a swap in which I receive the fixed rate. I refer to these as "I" pay fixed because my payer swap is my counterparty's receiver swap and visa-versa. People also refer to receiving fixed on a swap as "giving" the swap, which means to "sell" the swap. Again, remember that buyer pays fixed.
MMS - matched maturity swap. Just like it sounds, it is a swap who's maturity matches something else. This often happens when you are trying to synthetically hedge a bond (CT5 MMS refers to a swap that matches the maturity of the on-the-run 5year treasury note).
Basis swap - these are a float-float swap. They usually refer to some basis vs libor. It can be the fed funds rate to libor basis, the basis of a treasury future, or what have you. These are mostly flow oriented, and I have yet to see a really good pricing algorithm for these. They seem like they ought to have some good "fair value" pricing algorithm though.
Swap spread - the swap spread is the spread of the swap rate over the treasury rates. So if 10yr treasury is trading at 5.1725 and 10yr swap is at 5.8225, then the spread is 65bps. People do trade the swap spread frequently.
Yield curve - the curve made by plotting swap tenors against rates. The treasury yield curve shows treasury rates over the different tenors (2yr, 3yr, 5yr, 10yr, 30yr and some interpolation in between). The "yield curve" generally refers to the swap rates curve though. Usually the short end is plugged by eurodollar rates.
Forward curve - a yield curve built in "forward space." So if I was to price today all the swaps starting in 1year (i.e. 5yr 1yr forward refers to a 5years swap that begins payments in 1 year, so effectively I'm locking in a rate for something that doesn't start for a year), then I would have the swap curve I expect to see one year from now.
curve trade - curve trades are trades that bet on the slope of the yield curve. In swaps, for example, a 5s10s curve trade would involve a receiver 5yr swap and a payer10year swap (which, if you think about it is a "steepener" -- a trade that bets on the slope getting steeper). You can also do curve trades in treasuries, eurodollars, MBS, etc. Curve trades are usually (but not always) done duration or dv01 neutral.
Rate switch - refers to a swaps curve trade. In curve trades, buyer puts on the steepener, so "50 offer 14 and a half 5s-10s rate switch" or alternately "my flattener 50k/bp at 14 and a half" means "I want to put on the flattener (sell the curve) at 50 thousand dollars per basis point at 14.5 bps differential between the 10s rate and the 5s rate."
Butterfly - butterfly trades are three legged trades where the two "wings" go one way and the "belly" goes the other. A typical rates butterfly is the 2s-5s-10s fly. So if I were "buying" this fly, then I would be paying the 5year fixed rate and receiving the 2s and the 10s fixed rates. There are various weightings for this, which I will not get into here.
There are an infinite number of details to go through in swaps land, but this is probably enough to sound intelligent your first few days.
Thursday, June 14, 2007
Holy Volatility Clustering!
So I'm sure some of you have read the comment about vol clustering by an astute reader of my kurtosis post. I figured I'd explain the idea of vol clustering a bit because, well, volatility continued just as the reader predicted.
Volatility clustering, just like it sounds, refers to the "clustering" of volatility. That is, large moves often come in packs. So when we saw our 2 standard deviation day, we expected more days with relatively large moves (and we continued to have 2 standard deviation intra-day moves every day since for four or five days now). Given volatility clustering, however, we would say that we have entered a new regime of higher vol, so these shifts aren't "that" big in stdev terms.
Volatility clustering is modeled by the ARCH and GARCH models. GARCH being the more advance and more used/known of the two. GARCH stands for generalized auto-regressive with conditional heteroskedasticity. A mouthful, eh? This is a type of time-series model. For those of you who would like to study time-series modeling/econometrics, the standard text is the Hamilton - "Time Series Analysis." Excellent book. You should have pretty strong math to go through it though.
Auto-regressive models are models that look back on previous periods' error terms (known as AR(n) models). The regression equation looks like [alright, I had to get rid of the equation b/c it was fucking up my formatting. E-mail me if you really want it, or look up an AR(2) model].
Heteroskedasticity is the state of having different volatility (standard deviation) describing the regression error. One of the primary assumptions of linear regression is homoskedasticity (the state of having constant standard deviation describing the regression error). Without homoskedasticity, linear regression is no longer efficient.
A regression is efficient if given any other estimate of the regression parameter, the efficient regression parameter converges to the real parameter faster. Actually, that's not really the definition, but it's close enough for those of you who don't know what it is. You should actually look up the proper definition, but it's a bit technical for me to write in a text blog (unless I post a LATEX document).
Anyway, now that we've defined the terms, what the hell does the GARCH model do? It allows us to say, "given that I just saw a shit-load of volatility, where do I expect my volatility to be going forward?" This is a rather helpful trait for modeling expected movements and even pricing options.
A lot of empirical papers have shown the existence of the volatility clustering phenomenon, and these last few days have also exhibited this behavior. It's interesting, to say the least. Might be worth someone's time to look at the effects of vol clustering and swaption implied vol. I've been meaning to because the swaption implied vol seems to be lagging the high vol effects. Then again, implied vol has historically been way to high in options pricing to begin with.
Volatility clustering, just like it sounds, refers to the "clustering" of volatility. That is, large moves often come in packs. So when we saw our 2 standard deviation day, we expected more days with relatively large moves (and we continued to have 2 standard deviation intra-day moves every day since for four or five days now). Given volatility clustering, however, we would say that we have entered a new regime of higher vol, so these shifts aren't "that" big in stdev terms.
Volatility clustering is modeled by the ARCH and GARCH models. GARCH being the more advance and more used/known of the two. GARCH stands for generalized auto-regressive with conditional heteroskedasticity. A mouthful, eh? This is a type of time-series model. For those of you who would like to study time-series modeling/econometrics, the standard text is the Hamilton - "Time Series Analysis." Excellent book. You should have pretty strong math to go through it though.
Auto-regressive models are models that look back on previous periods' error terms (known as AR(n) models). The regression equation looks like [alright, I had to get rid of the equation b/c it was fucking up my formatting. E-mail me if you really want it, or look up an AR(2) model].
Heteroskedasticity is the state of having different volatility (standard deviation) describing the regression error. One of the primary assumptions of linear regression is homoskedasticity (the state of having constant standard deviation describing the regression error). Without homoskedasticity, linear regression is no longer efficient.
A regression is efficient if given any other estimate of the regression parameter, the efficient regression parameter converges to the real parameter faster. Actually, that's not really the definition, but it's close enough for those of you who don't know what it is. You should actually look up the proper definition, but it's a bit technical for me to write in a text blog (unless I post a LATEX document).
Anyway, now that we've defined the terms, what the hell does the GARCH model do? It allows us to say, "given that I just saw a shit-load of volatility, where do I expect my volatility to be going forward?" This is a rather helpful trait for modeling expected movements and even pricing options.
A lot of empirical papers have shown the existence of the volatility clustering phenomenon, and these last few days have also exhibited this behavior. It's interesting, to say the least. Might be worth someone's time to look at the effects of vol clustering and swaption implied vol. I've been meaning to because the swaption implied vol seems to be lagging the high vol effects. Then again, implied vol has historically been way to high in options pricing to begin with.
Tuesday, June 12, 2007
Sales & Trading vs Banking
A friend and I were chatting about this again yesterday, and I thought I'd post some observations about the types of people I think flourish in each area. I'm stereotyping and generalizing, so clearly anything I say is just something I tend to see frequently. It's not "necessarily" true (so maybe I'm being irresponsible posting it, but I hope my blurb here keeps me out of trouble), but it's like saying "Asians are better at math." Well, there are plenty of Asians who suck at math. Demographically, however, Asians do tend to be better at math. If you don't believe me, take a walk on MIT's campus.
I'm a statistician, so everything I say just reflects that I think the characteristics I see are "more likely" to fit in each area. The best bankers, salespeople and traders are probably just really bloody smart. I believe often that the best of each world could often be a pretty good player in the other two worlds too. I don't believe they would be as happy.
So here goes my stereotyping of bankers vs traders. This is largely for entertainment purposes.
Bankers love money. The amount of money they make fuels their pride. Bankers tend to be the flashy type who loves to show off, albeit in a subtle and intelligent way, that they make a lot of dough. Traders love money too. But for them the money is really a scoreboard. It shows that I trade that much better than the next guy. Bankers are also competitive in this way, but not nearly as cut-throat. Bankers are happy with making a whole lot of money. Traders have to make more than the next guy, regardless of whether it's a lot or a little total cash.
Most junior bankers think of their roles as temporary. I-banking is a feeder industry. They train and pump out analysts for other industries. Most of the people in banking look at it as a stepping stone. Many don't even care to get promoted after 2 years. Junior traders tend to want to be in it for good. They want the high-octane life and swings in wealth. Bankers would rather receive the steady and high cashflow as they work. Traders want that one monster year.
Traders are gamblers. They see odds in everything and calculate on the fly. Bankers don't care as much about such minutiae. They would rather lock in their high pay and not take excessive risk. Traders see the potential upside in every risk and will take the risk if they like the upside. Even the job itself is a large risk.
Firms get rid of mediocre traders as fast as they can because mediocre traders can lose a lot of money. Firms don't get rid of bankers, even if they're mediocre, because they can still produce a baseline amount of money with their time. That being said, banks get rid of bankers who's pay is rising too quickly because the newbie can do the job almost as well. Seasoned traders are paid a premium because they have somehow survived the trial of time in the markets.
Bankers work hard when they need to, but frequently they don't want to think about work when they are off the job. Traders make everything about trading. They "lift offers" when they see a good discount at a store, they see the effect of commodity prices in everything they buy, and you are "done" when you propose anything they agree with. Most people find this annoying, especially bankers who often want nothing to do with their jobs outside of the office.
Bankers are naturally better looking. In my experience, however, bankers don't look as attractive after a few years in the industry. Sales and trading people tend not to deteriorate as quickly.
Bankers often have the motto "work hard, party hard." Traders often tell newbies to "work smart, not hard."
Bankers love to boast about how many hours they worked. "I worked 100 hours last week!" "Yea, well, I worked 110!" "I worked 120!" They like to show that they are that much more dedicated to their job than the next guy. Implicit in the dialog is "I worked more, so I will get paid more." Sales and trading folk like to boast about the guy they fucked on their last trade.
Bankers have longer attention spans and can work for a long time at a goal. The big deal is won over hundreds of hours and weeks of hard work. Traders are only as good as their last trade.
Bankers build relationships. They value their colleagues as their "team" build a lot of camaraderie in the office. Office politics plays a key role in everything. It is very much a relationship based business, both as a whole and within each office. Sales and trading people can love you one moment and hate you the next moment. You can have a guy yelling at you for fucking up, and the next moment ask you out to lunch. You always start with a clean slate the next day with your fellow salesperson/trader. How you treat each other at work seldom effects whether or not you really like each other.
I did not comment much about sales people. I feel like there is a lot more diversity in personality in sales. What I do see as a common thread is the ability to act nice no matter what. They have the ability, should they choose to use it, to be always friendly and jovial. Some of them are wicked smart, some of them are dumb as rocks. What really matters is that they can get people to like them in a very short period of time. They are also greedy, but they are perhaps not as cut-throat as bankers. They get paid a lot, which annoys traders. If you want to climb the ranks of a company quickly, sales is probably the way to go.
Hopefully this didn't seem too biased one way or another. Just my observations, hopefully somewhat amusing. Another amusing Traders vs Bankers vs Sales discussion is here:
http://www.informationarbitrage.com/2007/01/the_wall_street_1.html
For those of you who don't already read www.informationarbitrage.com, it's definitely worth your time. This guy's smarter than me, more experienced than me, and funnier than me. He's writes a very opinionated and intelligent blog. I'm claiming I'm not in competition because he comments on the markets, economy and society. I'm just helping people get onto Wall Street.
I'm a statistician, so everything I say just reflects that I think the characteristics I see are "more likely" to fit in each area. The best bankers, salespeople and traders are probably just really bloody smart. I believe often that the best of each world could often be a pretty good player in the other two worlds too. I don't believe they would be as happy.
So here goes my stereotyping of bankers vs traders. This is largely for entertainment purposes.
Bankers love money. The amount of money they make fuels their pride. Bankers tend to be the flashy type who loves to show off, albeit in a subtle and intelligent way, that they make a lot of dough. Traders love money too. But for them the money is really a scoreboard. It shows that I trade that much better than the next guy. Bankers are also competitive in this way, but not nearly as cut-throat. Bankers are happy with making a whole lot of money. Traders have to make more than the next guy, regardless of whether it's a lot or a little total cash.
Most junior bankers think of their roles as temporary. I-banking is a feeder industry. They train and pump out analysts for other industries. Most of the people in banking look at it as a stepping stone. Many don't even care to get promoted after 2 years. Junior traders tend to want to be in it for good. They want the high-octane life and swings in wealth. Bankers would rather receive the steady and high cashflow as they work. Traders want that one monster year.
Traders are gamblers. They see odds in everything and calculate on the fly. Bankers don't care as much about such minutiae. They would rather lock in their high pay and not take excessive risk. Traders see the potential upside in every risk and will take the risk if they like the upside. Even the job itself is a large risk.
Firms get rid of mediocre traders as fast as they can because mediocre traders can lose a lot of money. Firms don't get rid of bankers, even if they're mediocre, because they can still produce a baseline amount of money with their time. That being said, banks get rid of bankers who's pay is rising too quickly because the newbie can do the job almost as well. Seasoned traders are paid a premium because they have somehow survived the trial of time in the markets.
Bankers work hard when they need to, but frequently they don't want to think about work when they are off the job. Traders make everything about trading. They "lift offers" when they see a good discount at a store, they see the effect of commodity prices in everything they buy, and you are "done" when you propose anything they agree with. Most people find this annoying, especially bankers who often want nothing to do with their jobs outside of the office.
Bankers are naturally better looking. In my experience, however, bankers don't look as attractive after a few years in the industry. Sales and trading people tend not to deteriorate as quickly.
Bankers often have the motto "work hard, party hard." Traders often tell newbies to "work smart, not hard."
Bankers love to boast about how many hours they worked. "I worked 100 hours last week!" "Yea, well, I worked 110!" "I worked 120!" They like to show that they are that much more dedicated to their job than the next guy. Implicit in the dialog is "I worked more, so I will get paid more." Sales and trading folk like to boast about the guy they fucked on their last trade.
Bankers have longer attention spans and can work for a long time at a goal. The big deal is won over hundreds of hours and weeks of hard work. Traders are only as good as their last trade.
Bankers build relationships. They value their colleagues as their "team" build a lot of camaraderie in the office. Office politics plays a key role in everything. It is very much a relationship based business, both as a whole and within each office. Sales and trading people can love you one moment and hate you the next moment. You can have a guy yelling at you for fucking up, and the next moment ask you out to lunch. You always start with a clean slate the next day with your fellow salesperson/trader. How you treat each other at work seldom effects whether or not you really like each other.
I did not comment much about sales people. I feel like there is a lot more diversity in personality in sales. What I do see as a common thread is the ability to act nice no matter what. They have the ability, should they choose to use it, to be always friendly and jovial. Some of them are wicked smart, some of them are dumb as rocks. What really matters is that they can get people to like them in a very short period of time. They are also greedy, but they are perhaps not as cut-throat as bankers. They get paid a lot, which annoys traders. If you want to climb the ranks of a company quickly, sales is probably the way to go.
Hopefully this didn't seem too biased one way or another. Just my observations, hopefully somewhat amusing. Another amusing Traders vs Bankers vs Sales discussion is here:
http://www.informationarbitrage.com/2007/01/the_wall_street_1.html
For those of you who don't already read www.informationarbitrage.com, it's definitely worth your time. This guy's smarter than me, more experienced than me, and funnier than me. He's writes a very opinionated and intelligent blog. I'm claiming I'm not in competition because he comments on the markets, economy and society. I'm just helping people get onto Wall Street.
Thursday, June 7, 2007
Kurtosis baby
Whoa baby, 2+ standard deviation move in the bond markets today! For those of you who are looking to get on the street but don't keep track of markets, you probably should start doing so. Big move, no good explanation, it seems? Rates market up 20bps today (10yr swap)! That's a huge move. S&P down some 1.75%. Prize to whoever can give me an explanation that I'll actually believe for the rates fallout today.
By the way, kurtosis is what statisticians call what market practitioners often call "fat tails." A lot of theory involves assuming that market returns are normally distributed (follow a normal distribution). In practice, we often see the distributions have a lot higher probability of a big move than a normal distribution would explain. Thus they say the distribution has "fat tails" or higher kurtosis compared to a normal distribution. Basically, days like today should not happen as frequently as they do if markets were normally distributed. But because of the high kurtosis, we actually expect days like today about three times a year.
For many of you, you will never view the markets like this. Most of the desks/traders today said "HUGE sell-off in rates markets." Only the quantitative types (only me, as far as I can tell) looked at it relative to the expected distribution. I'm a nerd, but I warn those less quantitative that we nerds are proliferating quite quickly on the street.
Ask for volatility and you shall receive. . .
By the way, kurtosis is what statisticians call what market practitioners often call "fat tails." A lot of theory involves assuming that market returns are normally distributed (follow a normal distribution). In practice, we often see the distributions have a lot higher probability of a big move than a normal distribution would explain. Thus they say the distribution has "fat tails" or higher kurtosis compared to a normal distribution. Basically, days like today should not happen as frequently as they do if markets were normally distributed. But because of the high kurtosis, we actually expect days like today about three times a year.
For many of you, you will never view the markets like this. Most of the desks/traders today said "HUGE sell-off in rates markets." Only the quantitative types (only me, as far as I can tell) looked at it relative to the expected distribution. I'm a nerd, but I warn those less quantitative that we nerds are proliferating quite quickly on the street.
Ask for volatility and you shall receive. . .
Tuesday, June 5, 2007
Intern to Offer
I received an e-mail about internships and what to do to stand out. Given that internship season is about to start, it does seem like a timely question (and thus a timely post). I do try to respond to most e-mails. Some, if they're timely or intelligent (or both), might even receive its own post.
I was once told "the internship is yours to screw up," and I still largely believe it to be true. For the most part you really need to impress them to land that internship, but once they've invested the money to train you during that internship they would like to keep you if they can.
Having an intern is actually a significant investment on the bank's part. Your pay is actually the least of the drains on their resources. They need to arrange some sort of training, some intern activities, and they need to make sure the desks pay attention to you and train you up. That last part is the biggest drain on resources because in 5 weeks you really learn a lot and give very little back to the desk. Once they've given you that training, they want to keep you if you seem at all worth it (hell, that's 5 weeks of training they don't have to give the new guy come the fall!). Luckily, the summer season tends to be relatively slow, so there is (more) time to train the new guy.
That advice, however, is largely useless to you (you already knew not to screw up), so I'll try to give some useful advice:
1) Be proactive. Don't wait for projects to come to you, always go out and bug people for things to do if you don't have something. Some desks are really good at making sure you have work and guidance, others are not. Ask for work. Ask for guidance. Ask questions about anything you don't understand. You will feel like you are intruding and being annoying, but the benefits far outweigh the risks. You are savvy in risk-reward trade-offs, right? Plus if you don't get the job, look how much more you learned to be used at your new job!
2) Mind the details. If your goal is not to screw up, it is important to take time to check all your stuff. Make sure you're not making careless errors, especially if they are the type that would have easily been found with a quick sanity check. In commodities, for example, if you see a price for crude futures in the 30s range you know you've got something wrong (crude futures trade in the 60s range). It will seem like time is always of the essence, but being correct is usually more important than being quick.
3) Be social. Part of the internship is making connections in the industry. Take the time to meet desks other than your own. You will be applauded for being proactive in this, and you might even be able to lever one of your connections to help you with a project you have for your desk. Of course talking to other desks should never be done during busy times or when you're expected to be at your desk, but you'll find those random connections to be really helpful at some point. For example if you're doing FX, it will definitely be good to know some fixed income guys so you can consult with them if you have questions on the interest rates of a given country. Also, part of being social, the social events do matter. People (coworkers, HR, junior analysts who are forced to go to the social events) get impressions of you from those intern events, so don't be retarded but do be sociable.
4) Be persistent. Yea, people will blow you off from time to time. You need to make sure you go back and get your question/concern answered. If they're busy, then you have to come back--but always come back. Don't be really annoying and hover. Just leave if they're too busy to address you and come back when things seem quieter. Try to get the feel for how busy things are (hint: if the market's crashing and people are yelling all over the floor, it's not a good time).
5) Have fun. The internship is not the end-all be-all of your financial career. Enjoy your time as an intern. If you love the markets, you will get a job in the markets. If you and the bank you are interning have the right "jive," then they will give you an offer. It's actually true that each bank has its own culture. I, personally, really don't get along with most of the people at one bank in particular So be it, I'll never work there. I do get along with most other banks' people though. Chances are if you really enjoyed the desk you interned at, then they really enjoyed you too. On the flip side, if you felt like there was a constant disconnect, there probably was. Often these things are just a matter of fit. Hopefully you'll find the right fit for yourself. Making connections outside your group will help too because sometimes interns are cross-hired into other groups due to those relationships.
Welcome summer interns. Hope I see the best of you on my floor and eventually on my desk (hope you go work for my competitors if you suck).
I was once told "the internship is yours to screw up," and I still largely believe it to be true. For the most part you really need to impress them to land that internship, but once they've invested the money to train you during that internship they would like to keep you if they can.
Having an intern is actually a significant investment on the bank's part. Your pay is actually the least of the drains on their resources. They need to arrange some sort of training, some intern activities, and they need to make sure the desks pay attention to you and train you up. That last part is the biggest drain on resources because in 5 weeks you really learn a lot and give very little back to the desk. Once they've given you that training, they want to keep you if you seem at all worth it (hell, that's 5 weeks of training they don't have to give the new guy come the fall!). Luckily, the summer season tends to be relatively slow, so there is (more) time to train the new guy.
That advice, however, is largely useless to you (you already knew not to screw up), so I'll try to give some useful advice:
1) Be proactive. Don't wait for projects to come to you, always go out and bug people for things to do if you don't have something. Some desks are really good at making sure you have work and guidance, others are not. Ask for work. Ask for guidance. Ask questions about anything you don't understand. You will feel like you are intruding and being annoying, but the benefits far outweigh the risks. You are savvy in risk-reward trade-offs, right? Plus if you don't get the job, look how much more you learned to be used at your new job!
2) Mind the details. If your goal is not to screw up, it is important to take time to check all your stuff. Make sure you're not making careless errors, especially if they are the type that would have easily been found with a quick sanity check. In commodities, for example, if you see a price for crude futures in the 30s range you know you've got something wrong (crude futures trade in the 60s range). It will seem like time is always of the essence, but being correct is usually more important than being quick.
3) Be social. Part of the internship is making connections in the industry. Take the time to meet desks other than your own. You will be applauded for being proactive in this, and you might even be able to lever one of your connections to help you with a project you have for your desk. Of course talking to other desks should never be done during busy times or when you're expected to be at your desk, but you'll find those random connections to be really helpful at some point. For example if you're doing FX, it will definitely be good to know some fixed income guys so you can consult with them if you have questions on the interest rates of a given country. Also, part of being social, the social events do matter. People (coworkers, HR, junior analysts who are forced to go to the social events) get impressions of you from those intern events, so don't be retarded but do be sociable.
4) Be persistent. Yea, people will blow you off from time to time. You need to make sure you go back and get your question/concern answered. If they're busy, then you have to come back--but always come back. Don't be really annoying and hover. Just leave if they're too busy to address you and come back when things seem quieter. Try to get the feel for how busy things are (hint: if the market's crashing and people are yelling all over the floor, it's not a good time).
5) Have fun. The internship is not the end-all be-all of your financial career. Enjoy your time as an intern. If you love the markets, you will get a job in the markets. If you and the bank you are interning have the right "jive," then they will give you an offer. It's actually true that each bank has its own culture. I, personally, really don't get along with most of the people at one bank in particular So be it, I'll never work there. I do get along with most other banks' people though. Chances are if you really enjoyed the desk you interned at, then they really enjoyed you too. On the flip side, if you felt like there was a constant disconnect, there probably was. Often these things are just a matter of fit. Hopefully you'll find the right fit for yourself. Making connections outside your group will help too because sometimes interns are cross-hired into other groups due to those relationships.
Welcome summer interns. Hope I see the best of you on my floor and eventually on my desk (hope you go work for my competitors if you suck).
Monday, June 4, 2007
My bad. . .
So my readership just passed 200 unique viewers this weekend, so I decided to read through my posts again for good measure to make sure I am not spreading rubbish to all of you.
I had spelling errors everywhere! Please point these out in an e-mail to me if you catch one. Also point out grammatical errors (they irk me even more).
Thanks to all of you who are reading. Hopefully you find it helpful.
Cheers,
QT
I had spelling errors everywhere! Please point these out in an e-mail to me if you catch one. Also point out grammatical errors (they irk me even more).
Thanks to all of you who are reading. Hopefully you find it helpful.
Cheers,
QT
You and Pay
I had a rather interesting conversation with a co-worker of mine this week. He told me that at a previous job he found himself unhappy with his management and wanted to quit. He decided that a good way to do so would be to claim he felt he was underpaid. When he brought up to his manager that he felt this way and was going to resign, the manager asked how much would be enough. He picked a random number out of the air that seemed absurd to him (about three times his pay), and the manager said, "Done. It's your fault you didn't bring this up earlier."
He still quit shortly after that conversation, and he's quite happy right now.
The lesson here is that money comes easy on the street. I, myself, was offered a good 50% raise to move to another firm not long ago. I stayed. 50% when you're relatively junior looks like a lot, but it will look like a lot more when you are senior. Would you rather move for a 50k raise or a 250k raise later on? Yes, that assumes that the 250k raise does not come later on anyway. Well, something interesting you see in the investment banks is that the most senior people have spent some 20years at one firm or another. Yes, 20. That's a lot. You will see that a lot of the big-time senior hires (the ones poached for $1M+) spent some 20 years at another firm. You'll find your pay catches up to your market offers very quickly.
That being said, the other quality you find in senior people is that they live and breathe whatever it is they do. The senior i-bankers love the deal. They want to be talking about that new issue ALL THE TIME. The senior traders love the markets. They always talk about their market, and when they're not they're using market terms anyway ("They're willing to pay what for your house!? Oh, you have to hit that bid!"). I've said it before, and I'll probably say it many more times: You need to love what you do to advance in this industry. Otherwise it will just wear on you.
Love what you do, and the pay will come. It doesn't matter whether you choose to trade, do sales, i-banking, tech, quants, it doesn't really matter. There's upside everywhere if you're good at what you do. Trust me.
He still quit shortly after that conversation, and he's quite happy right now.
The lesson here is that money comes easy on the street. I, myself, was offered a good 50% raise to move to another firm not long ago. I stayed. 50% when you're relatively junior looks like a lot, but it will look like a lot more when you are senior. Would you rather move for a 50k raise or a 250k raise later on? Yes, that assumes that the 250k raise does not come later on anyway. Well, something interesting you see in the investment banks is that the most senior people have spent some 20years at one firm or another. Yes, 20. That's a lot. You will see that a lot of the big-time senior hires (the ones poached for $1M+) spent some 20 years at another firm. You'll find your pay catches up to your market offers very quickly.
That being said, the other quality you find in senior people is that they live and breathe whatever it is they do. The senior i-bankers love the deal. They want to be talking about that new issue ALL THE TIME. The senior traders love the markets. They always talk about their market, and when they're not they're using market terms anyway ("They're willing to pay what for your house!? Oh, you have to hit that bid!"). I've said it before, and I'll probably say it many more times: You need to love what you do to advance in this industry. Otherwise it will just wear on you.
Love what you do, and the pay will come. It doesn't matter whether you choose to trade, do sales, i-banking, tech, quants, it doesn't really matter. There's upside everywhere if you're good at what you do. Trust me.
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