Mark-to-Market

So what is a mark-to-market book? Well, that simply means the book is "marked" or re-valued to the market prices every day. That gives a pretty good sense of where the book can be liquidated on any given day. Accrual, in contrast, is an accounting thing that pretty much means you get to book it at transaction value plus cash-flows. Thus the daily price moves do not matter as much as the daily cash-flows.

Alright, great, so what's this mean in practice?

Well, a mark-to-market book will always be changing value. Usually trading books and hedge funds are marked-to-market. All liquid products and futures are marked-to-market. It usually means you have to fund the positions via some funding rate because you're probably not just putting cash up directly. You may have margin calls on the marked positions. For exchange traded securities the exchange closes are used as daily marks. For illiquid assets (i.e. those illiquid sub-prime mortgage securities that everyone's whining about), you often mark to market as well (by getting dealer prices on a daily basis, for example). While you usually have a good idea of liquidation value through this method, during a fire-sale of a portfolio the actual liquidation value may be considerably lower, especially for the less liquid stuff.

An accrual book does not need to worry about a lot of the above. The assumption is that the assets being held are not held for risky reasons, they are being held for accounting reasons. Thus it is less likely the assets will need to be quickly liquidated. Most of these types of accounts are "real money" accounts such as bank portfolios and insurance portfolios where people are likely just trying to match their liabilities (i.e. interest payments and insurance payments) with their assets (whatever they're buying in the market). These accounts tend to hold stuff longer, make bigger moves and not be as concerned about the daily PnL of the book.

Looking at a more micro perspective, what does this mean for the people who work there? A mark-to-market book must be sensitive to the daily changes in risk and PnL. The traders and portfolio managers will obsessively mark to the exact market closes and track their PnL and daily variation. On an accrual book, the long term view is the most important. Traders and portfolio managers will make sure their macro view is correct and their liabilities are hedged for the long term. The mark-to-market sensitivity can take many good trades out due to "stop-losses." Then again, mark-to-market sensitivity can make one more "in-tune" to the market as well.

The ability and necessity for different institutions to account for their securities as accrual or mark-to-market greatly effects how they trade as well as how they enter into positions. Sometimes what might be best for the institution will not be best for the accounting (and sadly, the accounting often wins). Accounting, while irrelevant to a wholly owned private company, can mean the world to public companies or hedge funds.

A Messy Market

I'm sure many of you heard of the huge fall in the equity markets yesterday. A few might have even seen (or at least anticipated) the huge rally in fixed income yesterday. We see another 97th percentile event, and one of the days that makes or breaks many trading desks. Credit spreads are out, rates rallied, stocks tanked and foreign exchange markets whipsawed. As we navigated through the mess (quite profitably, in fact) something popped out at me in a much more vivid manner than usual.

A lot of people fall into one of two camps. Either they specialize so much that the only movement they see (or care about) is the movement int heir own market, or they see correlation in everything and mistake correlation for causation. In the first camp many people don't see the economy as a whole and often miss the macro opportunities. In the second camp large generalizations such as "oh, bond markets are up because equity markets are down" add to the confusion created by big market moves.

No matter what field you are in, you should not isolate yourself from your general marketplace. It always helps to have a macro view of the world and see the big picture. For example, bankers should keep an eye on the markets so that they know why their deals might be falling through. Retail people should keep track of consumer trends and competitors. I have to say, traders generally are pretty good at keeping a pulse on everything, which is an excellent characteristics. In all other fields, it is usually the people who understand the big picture who get promoted for the big jobs. In trading, people who don't keep a pulse on everything tend to get weeded out.

Confusing correlation and causality is extremely common. Just because two things happened to move together does not mean one caused the other. Most likely there is a third thing that caused both to happen. Just as importantly, seeing two things move together once or twice does not necessarily mean they are correlated (it's called a coincidence, for any who care). Looking at the big picture, it is often easy to see why two things that are "correlated" are actually just something caused by a third party. Even more interestingly, you might be able to predict the next effect this cause will have.

Come out of your holes people. There's nothing wrong with simply not knowing why things are happening, but don't settle for some mediocre reasoning from an easy to spot coincidence.

Being Great

I find this to be a speech I give fairly frequently in one form or another, so I thought I'd post it:

What do you want to become? Are you here to make a comfortable living and live your life? Yea, there are quite of few of you aren't there? You know who you are. Most people, actually, are the type I just described. You want to do well, but you just want to be comfortable.

A great many of you probably think "pfft, that's not me. I'm destined for greatness." You think you are aggressive and ready to take the world by storm. You know what? I love it. That's exactly the attitude I want. It is, however, an unfortunate reality that a great many of you are wrong. You really fall into the former crowd, just looking to make a comfortable living. Now there's nothing wrong with that, most people are happier that way. In fact, most of you who think you're really destined for greatness would be miserable trying to be truly great.

I think of the following questions when I assess people for traits of greatness. Are you willing to put up your opinion even when everyone you work with thinks you're wrong? Are you going to push your project through, even if it's unapproved? Are you willing to be the least popular person just to prove you're right? Would you be happy being unpopular as long as you were right? If you answered yes to all of these, you're lying. If you answered no to most of these you're going to be comfortable. If you said yes to most but weren't sure about some, then you might have a chance to be great. Let me assure you, you won't be comfortable though.

Let's talk about greatness--let's talk about the people who really will be legend. These are the people who are willing to push a correct idea to it's limits. The types of people who will act on an idea if they know it to be right. You need to know that what you do matters. And every decision you make actually can resonate through the culture of the company no matter how small you think you might be. You have to be willing to take on the most senior of people if you believe your idea to be right. Those who are great face risks and take action. Taking action is what makes one great.

Yea, sometimes you'll be wrong. And you should feel like shit that you were wrong. Sometimes there'll be really shitty consequences too. You should feel like shit that you were wrong, but you still did something great. You should feel great that you did something great. You should feel like shit that you did something wrong. Don't be afraid to make mistakes because even mistakes can be a sign of greatness.

Any institution that is not willing to listen to voices of dissent will not survive, especially when those voices of dissent are correct and well formulated. Many institutions are like this. They ignore great ideas because they do not "follow protocol" or come from "senior management." These institutions will fail.

There is no such thing as a great institution. Every institution will fail without its people. It is the people who are great. Is is the leaders who inspire greatness. How do great leaders build lasting and reputable institutions? They do so by collecting people who are great. They collect those who have the conviction to act and the willingness to take risks on their beliefs. It is the conference room full of strong minded people ready to dissent about any topic they feel is incorrect that will come to the best conclusions and float the best ideas. Decisions should be built on debate, not on consensus.

So why are the majority of you not great? You are not great because you are afraid of the consequences. You would rather follow the route everyone else takes. Are you willing to step up and argue with your manager's manager? Are you willing to say "that's just dumb, I will not conform?" Most of you are not. You either wouldn't risk it, or you are uncomfortable with direct confrontation.

There's nothing wrong with taking the most accepted path. Thousands of very wealthy doctors, lawyers and bankers all did so with much success. No parent is every ashamed of their very comfortable son or daughter.

You know what, though? Those people are not great. They're comfortable.

You know who was great? Jack Welch, Reg Jones, Steve Jobs, Bill Gates, Warren Buffet, Bill Allen, Henry Ford, A.P. Giannini. Not one of these people settled for "comfortable." They pushed the envelope, took a highly criticized path and rose to the top. Not one of these people was generally popular. Not one of these people took the typical path to the top. Not one of these people had many people who thought they would succeed. But they acted even when everyone thought they were wrong.

Yes, it's risky. Yes, it's unpopular. But you know what? It's greatness. They are legends.

Do you have the conviction to get there?

Teamwork

I found this article inspiring:
http://money.cnn.com/2006/05/31/magazines/fortune/marines_greatteams_fortune/index.htm

I copied it below in the case that the site disappears (which it undoubtedly will at some point). I think every group manager should read this as the ideal form of teamwork. It may not always be possible, but everyone should strive for it. Whenever I sense myself seeming selfish at the desk, I now think to myself -- two sheets and a blanket:

From Wharton To War

While working in consulting and private equity, Jim Vesterman thought he was a good team player. Then he joined the Marine Corps.

By Jim Vesterman

June 1, 2006: 3:34 PM EDT

(FORTUNE Magazine) - Going to war wasn't a textbook career move. In 2002, Jim Vesterman, an Amherst grad who had spent several years in the business world, was scheduled to begin the MBA program at Wharton.

For some time, however, he had considered joining the military - both out of a sense duty and because he felt that it would challenge him like nothing in the civilian world could. Then 31, he wondered if this was his last shot.

Wharton let him defer admission, so Vesterman set his sights on the elite Marine Corps' Special Ops unit called Force Recon, whose members are drawn from enlisted men rather than the officer ranks. He was able to sign on for two years of active duty and two years in the Reserves, rather than the normal four to six years of active duty. The catch: If he didn't make it into Recon, he was headed for a long tour, starting as a private.

Vesterman knew that he'd learn to jump from airplanes and survive behind enemy lines. But he had no idea he'd learn so much about what it meant to be part of a team. He agreed to share his experiences--from his first day at boot camp through his tour in Iraq--with FORTUNE.

"I can't breathe! I can't breathe!" yelled a fellow Marine Corps recruit during our early boot camp training in the tear-gas chamber. The drill instructor's response: "I! I! I! What does 'I' have to do with anything?"

From the first day in boot camp, we were told we weren't allowed to use the word "I."

This was completely different from my experience in the business world, where I'd spent the past seven years. Throughout my career "I" had to do with almost everything. Though I considered myself a pretty good team player, personal success and achievement were my real benchmarks. Yet everything I thought I knew about working with other people was about to change. It started on April 22, 2002, the first day of boot camp on Parris Island - when we learned to make our beds.

It's called "two sheets and a blanket." When the drill instructor begins counting, you've got three minutes to make the bed - hospital corners and the proverbial quarter bounce. When you're done, you're told to get back in a line. The goal is to have every bed in the platoon made. So I made my bed, then I stood on the line. I was pretty proud, because when three minutes were up, there weren't more than ten men who had finished.

"Ahead of the pack," I thought. But the drill instructors weren't congratulating us. Everyone's bed had to be made. So rip off the sheets and do it again.

I ripped off the sheets, made the bed, and stood on the line. "We've got all day to get this right," the drill instructors were saying, looking at all the unfinished beds. "Two sheets and a blanket!"

I ripped off the sheets again, and again, and again. Finally one of the drill instructors looked me in the eye. "Your bunkmate isn't done. What are you doing?" I thought, "What am I doing?" Standing on line, thinking I'd accomplished something, while my bunkmate struggled.

Together my bunkmate and I made our beds about twice as fast as we did alone. Still, not everyone was finishing. Finally we realized, "Okay, when we're done, we've got to go help the bed next to us, and the bed down from that," and so on.

I went from thinking, "I'll hand my bunkmate a pillow, but I'm not going to make the bed for him" to making beds for anyone who needed help. That first lesson was an epiphany for me: You can't survive in the Marine Corps without helping the guy next to you.

Recon school

After 13 weeks of boot camp, Vesterman graduated first in his platoon of about 50 recruits. He then spent eight weeks at Infantry School, where he passed a Marine Special Ops physical qualifying test called the Recon Indoc, and was sent to RIP (Reconnaissance Indoctrination Platoon), then to Amphibious Reconnaissance School (Recon School), considered one of the most challenging schools in the U.S. military. On average, 40 percent of those who have already passed all previous screenings will quit Recon School within the first week.

In Recon School, everything gets more intense. Recon Marines are trained to conduct missions behind enemy lines in small teams, usually comprising six men. As the physical and mental challenges get more extreme, you become ever more reliant on your team - both to accomplish missions and simply to survive.

We'd go for six or seven days without sleep, and in the middle of some chaotic exercise, the instructor would say, "The guy next to you is down. You get him to that ravine." I'm 5-foot-7, and it took more than I thought I had to put some 230-pound guy on top of the pack on my back and run. Until Recon School, I don't think I ever really let anyone carry my weight. I don't think I was man enough to say, "Hey, I can't do this" or "You're stronger than I am at this. I need help." Then came the telephone pole.

Running five miles while carrying a telephone pole is a grueling task - made more so when it's a race between your six-man team and several others. The only instructions: move our telephone pole along the route, don't let it touch the ground, come in first. "It pays to be a winner," shouted the instructor, a phrase in Recon-speak that let us know there was a reward for coming in first.

The race began immediately, so we had to come up with the best technique on the fly. There was no time to discuss a strategy or organize our process. My team struggled at first, but our approach evolved quickly. We had four guys carrying the pole and two resting by jogging alongside. When we switched off, we decided, it should be the two guys hurting the most - not necessarily the two who had been carrying the longest - who got to rest.

Nobody, especially a type A Recon Marine, wants to be the person who's "not carrying his weight." But some of these guys were simply workhorses - they could run forever with this thing - and some of us could not. We were learning to put team success ahead of our own egos. That was the only way we could move the fastest as a team and win the race. This was a huge change.

Back at Wharton

Vesterman was the Honor Grad in Recon School - graduating first in his class of around 50 Marines. He went on to complete Airborne Jump School, Marine Combat Dive School, and finally SERE School (Search, Evasion, Resistance, and Escape), where Marines learn to survive as POWs. He was moved to reserve status and two weeks later, in August 2003, began his MBA courses at the Wharton School.

Back in Philadelphia, I quickly became enmeshed in Wharton's own team structure, including my first-year 60-student MBA cohort and my learning team of six peers. In your first year, the majority of projects are done in these peer groups. You're thrown together, graded together, and have to keep up with a flood of assignments, so it's an intense experience. I felt I had made a strong commitment to this new team.

At the end of my first semester, I learned that my unit, 3rd Force Reconnaissance Company, was being called up to serve in Iraq. That same week Peter Pace, vice chairman of the Joint Chiefs (and now chairman), came to Wharton and spoke to my class. When it came around to question time, I raised my hand. "Sir, it looks like I'm being called to serve in Iraq. Do you have any advice for me?"

At that point I hadn't even told my classmates yet, and I had very mixed feelings about going to combat and leaving my Wharton team midyear. General Pace, a Marine, didn't reply for three or four seconds. Then he looked at me and the first thing he said was simply, "Congratulations." Immediately, everything became clear to me. The Marine Corps' highest purpose is to serve the nation in time of war, and it was my once-in-a-lifetime opportunity to serve.

To Iraq

The Marine Corps and the Army had entered Iraq in March 2003. Once a war is over it falls to the Army to keep the peace, but when the insurgency surfaced, and then continued, the Marines were sent back in. After several weeks at Camp Pendleton, Calif., in February 2004, Vesterman and his platoon were among the first Marines to be redeployed to the Anbar province in western Iraq.

The youngest guy on our six-man team was 24; the oldest was 38. Our backgrounds ranged from a plant manager to a SWAT cop. Some of us had known each other for a few months, others for nearly a decade. Six totally different lives. But very quickly it felt like we were moving as one - instinctively.

We didn't do a lot of speaking. When you need something like binoculars from your pack, you don't stop, put the pack down, and open it, because if you're attacked, the group can't respond immediately. You just say to the guy behind you "I need binos," and you hold security for both of you while he gets them and reseals your pack. When he hits your pack, it means "ready."

There's a tremendous level of trust required between Marines. But since boot camp it's been drilled into all of us to do the right thing. Whether it's good for you or not. Whether it's easy or hard. Whether someone is watching or you're alone.

Our specialty was to enter a town unseen and set up shop there for days at a time in order to do reconnaissance and launch raids. Everyone on a Recon team has a different role, but each person needs to be able to move into any job.

I learned in the Marine Corps that the strongest teams have members who transition easily between roles. On one mission in a violent town along the border with Syria, we took up a clandestine position in an abandoned building that provided a good view of an intersection where many roadside bombs had been detonated. Our surveillance began to focus on a group of men who were meeting repeatedly on a nearby corner. The man who appeared to be the leader was wearing purple pants, so that's what we called him.

Suddenly we spotted these men retrieving objects in burlap bags from a nearby ravine and moving them in a pushcart toward the corner. They needed to move only 200 meters before they were out of our sights. While we thought the objects were bombs, we weren't sure, so we couldn't engage from our sniper position.

We had only seconds to confer. Then our team leader made the call: "Four men go and intercept." The other two would stay behind and maintain watch from an elevated and defensible position. What followed was the sort of chaotic scene our team was trained for. We exited our position and covered 500 meters at a dead sprint. A local lookout had warned the men, however, and as we turned the corner, the only thing visible was the pushcart.

We instinctively split into buddy teams - you never work alone - and my buddy and I began searching the area while the other team moved toward the pushcart. We recognized one of the men moving away from the scene and intercepted him. While I flex-cuffed the man, my partner moved to hold security.

The same coordination was happening with the other buddy team: One held security while the other opened the abandoned pushcart. As we suspected, there were two Saddam-era artillery shells inside, rigged as bombs. We immediately called this back to our team leader, who was then able to take a shot on "purple pants" when he momentarily reappeared at the original corner. "Purple pants" ended up escaping that day with only a shot to the arm, but we captured him a few weeks later.

We didn't react as six individuals that day. We were one team. Our platoon commander would often quote Kipling to describe the Marines: "The strength of the pack is the wolf, and the strength of the wolf is the pack." The Marine Corps recruits wolves. But its strength comes from training them to fight as a pack.

Home again

For his actions that day, Vesterman was awarded the Navy and Marine Corps Achievement Medal. After finishing a seven-month tour, he and his team turned in their gear. Six weeks later, in November 2004, he returned to Wharton.

Elasticity of demand. That's what they talked about in my first class back at Wharton. That culture shock was more jarring than going to Iraq. I slowly came to. In many ways there's probably no better preparation I could have had for the business world than joining the Marine Corps. The Marines teach you how to be both a leader and a follower.

I don't have to lead in every situation - but I've come to enjoy stepping up in a time of chaos. When I'm working with a group now, I can honestly say that I think about the team first. The "I first" approach has been drilled out of me.

I'm certainly not the only veteran at Wharton, and for the past several years, the veterans' club has organized a field trip to the Marine Corps Officer Candidate School in Quantico, Va. Students with no military experience are suddenly crawling through mud and under barbed wire while drill instructors shout orders. Two months before I graduated, we made the trip again.

The first drill was familiar: two sheets and a blanket.

A Trading Game

I learned a rather amusing game this last weekend, so I thought I'd try spreading it:

Take a regular deck of cards and just pull out the A-10 of a given suit, the jack and the king. Allow the A-10 to be worth 1-10 respectively, the jack to be worth -6 points and the king to be worth +12 points. Have at least three players, if not more (you may need to add more cards for more players, but I think three is pretty optimal). Each person gets dealt one card and three cards are dealt face-down in the center. The players should keep their card hidden.

There are four rounds of "trading." The first round of trading each player can only see his or her own card. In the second round of trading the first center card is flipped over. In the third round, the second center card is flipped over. In the last round of trading all three center cards are exposed. The "asset" being traded is the sum of the six (or more if you have more than three people) cards that are dealt out.

A round of trading consists of each player making a market. If someone asks you for a market, you must make them a market (both a bid and an ask) with a two point spread. So, for example, you might say "29-31." Given the bid-ask spread, the others have the option of buying at the ask price and selling at the bid (lifting the offer or hitting the bid). If one player decides to trade with the market-maker, then they write down their respective positions (for example, let's say player A asked player B for a market and player B said "29-31." Player A opts to buy at 31. He writes down his buy at 31 and player B writes that he sold at 31.). All players can be asked to make a market and all players can take others' prices.

Once trading has ceased in a given round, the next card is flipped. Once all three center cards are face-up and trading has ceased, the players reveal their cards. The sum of all the cards becomes the asset value for calculating the profit and loss of each player's open positions (it is perfectly possible that some players have profit and loss but do not have open positions at the end of the game).

As you can see the prices would move according to the others hitting or lifting the market, and you gain information about the others' cards through their actions. Furthermore you can speculate on the final value given your partial information and the expected value of the remaining cards that are face down. It's quite an interesting game.

Clearly you can edit the rules to add more cards, change the values, allow different spreads, etc. I think the game is quite fun.

Location, Location, Location

There was a comment I had not responded to for a while. I figured I should give it a proper post because I think the question lingers on many people's minds. The question was: "I am interested in your insight of New York versus London versus Asia. If given the opportunity to join a desk in any of those markets, which would you choose (and what desk)?"

There isn't really a clear distinction between NY, London and Asia markets. I assure you if you start in any of the above, you will eventually get the opportunity to go to the others if you are good. In fact, most top guys I know have traded in at least two of the three markets. While the London and Asia markets may seem particularly hot right now, these things are cyclical. In the long run it all evens out.

The desk also does not matter too much. Trading is trading, sales is sales, banking is banking. No matter what the underlying product is, the skill set learned is what is important. Be it risk management skill, sales and patience, cash flow modeling/forecasting or the art of the deal; it is that skill set that will be portable from job to job. I assure you none of the products are really all that complicated despite what people may try to tell you (and I've traded and modeled a lot of products).

Complacency

Everyone knows complacency kills, but too many people say it without really understanding what it means to have to combat complacency. Many people at the top of their game start to "play defense." Being the top dog suddenly means to them that they need to protect their methods from everyone else. Basically, they make sure others don't catch up to him. I think the modern world has shown this to be the wrong approach.

Here is the question. Let's say you sell a product that it might take the competition four years to be able to compete with. What do you do? Most companies sit on their great product for four years and make continuous upgrades to it. Sooner or later the next guy comes in with the next great thing making them obsolete. People in finance do the same thing. Some guy has a great valuation or pricing tool. They make the best prices for the street constantly. Then someone else comes up with the next great thing and they're left in the dust.

You might be reading this and saying "duh, that's how business works, through competition." I say to you, bullshit. That's not how business has to work. You can continue to innovate through your leadership. If your product is going to be the top dog for four years, make that product obsolete yourself in less than four years. One thing Steve Jobs is famous for is taking his i-pod mini and making it obsolete with his i-pod nano in 18 months. No one else would have the chops to make a product and then make it obsolete himself, but that's how you stay on top of the game.

Finance is largely the same. Do you have any clue how entrenched and complacent financial companies often are? Step in and innovate. Business leaders are innovators, and the first financial company to make a breakthrough in ways to raise capital will make a killing. Notice Goldman made their TrUE exchange? Everyone considers them to be on top of the capital raising game, but they are going to make the usual avenues of capital obsolete by producing the next new thing.

Don't sit around learning the ways of the old guard. Think about what the alternatives are. Do fixed income people really believe that spreadsheets are always going to be the way to go for pricing? Do equity guys really believe that there is no new innovation to be made in their markets? Do bankers really think that the old-school handshake and phone call will forever be the way the deal is struck? Things will change. Be the one who changes them, not the one who gets blindsided by the change.

Learn the Lingo (FX - spot)

I always found the foreign exchange market to be one of the simpler markets for guys "getting started." That being said, I've also found it to be one of the hardest to trade profitably. I'm guessing this primer will be relatively short because of the relatively straight-forward nature of foreign exchange spot trading. FX trading is a 24hour market and has both OTC and electronic markets. I'm going to go over the spot trading stuff here. I'll do FX derivatives another day.

First we should go over how these things are quoted. Let's say you're trading "dollar-yen." That means you're trading USDJPY. The quote is 123.12 or "one twenty-three spot one-two." Most people will just quote the decimal and say it's trading at "twelve." If I buy USDJPY that means I'm buying dollars and selling yen. The way I was taught to remember this is that YOU'RE ALWAYS BUYING THE LEAD CURRENCY. So buying USDCLP means you buy USD and sell CLP (Chilean Peso, if you're interested).

It is also worth noting that USDJPY is the same as USD/JPY and it means the yen per dollar (because some idiot in FX space apparently never took math or physics and never got the whole units/units thing down making it confusing for the rest of us). If you can quote the currencies properly and you understand how moves in currencies effect your net position, then you're set for the FX markets, really.

Pips - the small two marks on the fx quote. For USDJPY it's the part after the decimal, but for things like NZDUSD it is just the last two digits of the decimal (NZD is quoted at 0.7832).

Big figure - the third digit is often considered a "big figure." A big figure in yen is actually one yen. A big figure in NZD (New Zealand Dollar) is the third decimal point.

G7 - the set of most liquid developed country currencies: USD, JPY, EUR, GBP, CHF, CAD, AUD.

EM - emerging markets. Prime example is ZAR (Sourth African Rand). EM currencies tend to have higher interest rates than non-EM currencies, but they are also more volatile.

Cable - A catchy name for GBPUSD. Named for the cable that connects the US to Great Britain under the Atlantic.

Kiwi - A catchy name for NZD (yes, New Zealanders are often called Kiwis).

cross - a cross currency is a pair of currencies that is not so commonly quoted. Most things in the US market are quoted against USD. Thus something like AUDNZD ("Aussie-Kiwi") would be considered a cross or a cross-currency rate.

basket - a basket of currencies just refers to a set of currencies that people might look at together.

Vol - volatility. How much stuff moves around, measured in standard deviations. Vol is either looked at via historical standard deviation or implied from foreign exchange option.

Central Bank - Central banks are one of the main reasons currencies move. If a central bank intervenes in how a currency is trading, it can mean serious repercussions for the price. Central banks are the governing powers over rates and fx in a country.

Appreciation - a currency appreciates when it is worth more. Note that yen appreciates when USDJPY goes down. So if USDJPY goes from 123 to 122, the yen has appreciated. For NZDUSD, however, the NZD appreciates when the number goes from .7833 to .7892, an upward move.

Depreciation - the opposite of appreciation. If yen is appreciating when USDJPY goes from 123 to 122, then the dollar is depreciating. It's worth noting here that the dollar could be appreciating against a "basket" of currencies, but still depreciating with respect to a particular currency. For example, dollar could appreciate against everything except yen if yen just appreciates even more.

Carry - the concept of carry in all trading is the same: you make money when nothing happens. In currencies, carry trading refers to trading long a high interest rate currency and short a low interest rate currency. The popular carry trade as of this writing is JPYNZD. Japan has 0% interest rate and New Zealand has 8%. Thus, by selling JPYNZD, one is long New Zealand dollars and short Japanese yen. One borrows at approximately 0% and receives 8% interest (you receive and pay interest in all currency trades and in every currency trade you are effectively borrowing in one currency and investing in another). This makes money as long as there isn't volatility in the currency in the wrong direction.

Peg - some currencies are pegged. Being pegged means the central bank buys and sells its currency to keep the exchange rate the same. Most pegs are against the dollar, but very few currencies are still pegged. It is mostly used to minimize volatility of the currency and to ensure the currency does not appreciate, which promotes exporter businesses.

Managed - managed currencies are like pegged currencies, but the central bank only intervenes when certain things happen. Some are managed to stay within a band, some are managed to not move more than a certain percentage in a day, etc.

Guess that's all I have off the top of my head. As always, feel free to comment, ask questions, add something, etc.

Make It Look Easy

Some people complain about being in the office all the time as a way to boast how much they work. You see bankers doing this all the time "I worked 100 hours last week!" You see new traders doing this "my boss goes home at 5pm, but I stay till 8pm clearing the books." Middle office "I was in till midnight cleaning up the trades for that idiot trader." And Tech "I had to pull an all-nighter to get that new build in for the desk." Some of the idiots will think you're a hard worker and will reward you for the hours, but I assure you this is not the best path. Plus only an idiot brags about all the free labor he's giving away.

People often call me lucky (or a genius, depending on who you ask) because they perceive me as not working all that much but reaping the benefits of "lucky moves," connections, etc. I assure you I probably work as hard as anyone I know. I just don't let anyone know. When people say "you make everything look easy" the key is making it "look" easy. There's hours of research, reading and work that go into every "lucky" thing that happens. Things don't just line up for those who look lucky, chances are they've set themselves up for it when you weren't looking.

Go and count the number of people you know who get up at 4:30am every morning. Now go count the number of people you know who got up at 6am every day in college. How many do you know? I bet I could bet zero for most of you. I go home at night at the same time or before everyone I know. I get in at the same time. People perceive me as knowing more and getting more done than can be imaginable. Now you know why. Guess what, they don't.

Clearly I'm biased, but I think this is really the way to go for a shot at the top. Perception is everything, and the guy who makes his job look easy trounces the guy who seems overburdened by the job he already has.

Now the bankers are going to be whining at me about the requisite "face time." By now you probably know my opinion on the "old boy's club" of banking where you need to put in face time. Well, the industry's starting to wake up. It's the rainmakers who get their comp. You can put in face time, but it will only get you so far. If you're content with being the mediocre but well comped guy, then that's fine. If you want to be the next rock-star private equity guru, well, you can't just do what everyone else is doing. Do the Blackstone guys and KKR's Kravis make it look easy? You bet they do.

Success comes in many forms, but in the end you have to get things right more often than your competition or be perceived to get more things right than your competition. You can't do it forever on luck alone. Maybe you've been blessed with true genius, but then you wouldn't need my blog. Most people have to work for it. As long as you have to work for it though, you might as well make it look easy.

Connect the Dots

I think a lot of people would find it surprising how much people you barely know would be willing to help you. A lot of people you work with or know vaguely are probably great contacts for finding you a new job. Anyone you have a vaguely good impression upon probably would be willing to forward your resume to their friends. I know this might seem intrusive, but I've found a lot of people are willing to vouch for near strangers. It makes people feel good about themselves to help others in this way. Take advantage of this part of human nature to land that job.

People also will find it surprising how much that one phone call can help. People get interviews for the smallest of reasons (if you're an idiot in the interview, you still won't get the job, but getting the interview is the hard part). Usually one reference or one phone call is more than enough to get that foot in the door. From there, it's up to you.

Don't be afraid to seem a bit intrusive. You never know what will land you that next big gig.

Ask Questions!!!!

I was reading one of my favorite blogs today, and he mentioned something that seemed so very relevant to my own blog that I figured I would link to it here:
http://www.informationarbitrage.com/2007/07/another-of-the-.html

I kinda glossed over this with the "be proactive" part of my "how-to-stand-out" post, but it's definitely worth revisiting. Mr Ehrenberg not only writes better than I, but he also has far more wisdom. In effect, we all have the same message "Ask all the questions you need to! You're better off and better respected for doing so!" I would add the following two observations.

First, if the young people tell you they knew everything when they came in (which one of our interns recently informed me happened), they're full of shit. I don't know what it is about young people in the bank, but a whole lot of them seem to think a lot more of themselves than they deserve. In truth no one knows shit until they actually work for a while. You pick things up on the job. That's just how things go in finance. There are too many details for schools to be able to teach you everything relevant to your job (they'd have to go through far too much stuff that wouldn't be relevant to your particular job). Ask questions, anyone with half a brain will assure you that it's better that way.

Second, it is a dominant strategy to ask questions. All of you who studied game theory will appreciate this. If you don't ask questions, you will find that you won't be too effective at your job and chances are you won't get an offer or promotion or what have you. If you do ask questions you'll be more effective at your job. Let's assume that asking questions makes you look dumb and prevents you from advancing. Well now whether you ask the questions or not, you won't advance. In this case you're better off asking all the questions and learning more. Then you've got a better shot at landing a job outside. Your choices basically drill down to just know everything (which is something you can't help) or ask questions for the future job prospects. It's shouldn't really even be a decision.

A Sad Moment

Sorry for the sparse postings last week. I took a bit of a vacation and couldn't peel myself away long enough to blog.

Anyway, it's worth your time to get an update of the news in the morning. This sort of thing used to be almost required of every intern and new associate out there. Nowadays, it seems, the ubiquity of easy media (i.e. the internet) seems to be making people lazy. The tone of the morning news sets the tone of the markets for the day. It's a good way to not only get the opinion of the masses, but every once in a while it keys you into something that you might have otherwise missed. You should find some way to get your news. RSS feeds, podcasts, newspapers, anything will do, but do be sure to get your morning dose of news. It really does help.

This morning I had a sad moment on my way to work. I listen to the WSJ and NYT podcasts on the way to work in the morning. I find it to be a great way to catch up with a lot of the news that I may miss during the day or overnight (I walk to work, so I can't really read the paper on the way in). The NYT Tech Talk podcast had a special on the iPhone. They claimed that the iPhone release was our generation's lunar landing. That somehow the ubiquity of the release paralleled the ubiquity of people watching the lunar landing. . . that's just sad. I disagree completely that those are even vaguely comparable. The lunar landing was a huge step in human discovery and exploration. The iPhone is a toy. It's like saying beanie babies were a huge turning point in American history. How depressing.

Merits of "corpfin" and M&A

I feel like I've not taken enough time to elaborate on the merits of corporate finance and M&A (i-banking proper). Most of my posts have been about sales and trading (clearly because of my love of trading). There are significant reasons to enter corporate finance, though. I considered it for a while and decided I wasn't ready to make the necessary sacrifices, but there is a good reason to give it a shot.

Corporate finance and M&A are the best way to understand the workings of corporate america. Nowhere else will you learn more about how companies are structured, financed and operated. Once you've seen how a company keeps its books and understand what every line means, you can go operate your own company with a good bit of confidence that you know what you're doing. You may not know a thing about the daily operations, but you will know what makes a company tick. You will know how profits are built up, and you will know how to fund the company.

Why is all this that cool? Well, corporate finance folks can pretty much jump to any company and be useful (not true at all for traders, and moderately true for sales people). With the corporate finance background and a little bit of experience "on the ground" running a company, you make the perfect private equity person (you know a good bit of finance and a good bit of how to run the company. I, personally, think being in private equity would be a blast (hell, where else can you be the chairman of multiple companies?). Of course, you'd have to be one of the top guys in a private equity firm. I think being one of the analysts in a PE firm would be about as interesting as being in i-banking.

For all those of you who have decided i-banking is for you and you are willing to put in the hours, congratulations. You're in for a rough ride, but if you come out the other end still loving it I'm sure I'll see you at the top of the food chain.

Getting a Foot in the Door

One of the most common e-mail questions I get is of the following type:
"Hi my name is XXXXX. I go to a no name college, so I find it difficult to make my way into a bulge bracket firm. How would you suggest I approach my job search to maximize my chances of landing a job at a bulge bracket?"

I figured I'd address this question because it is, indeed, a difficult one. Bulge brackets recruit heavily at top schools. The banking and s&t analyst/associate programs are like a who's who in the Ivies. So how do others make it on the street? A lot of big shots on the street are from (forgive my wording) "lesser" schools.

Unfortunately I can't help on the i-banking side too much. One good thought is going to a boutique firm first. A lot of boutique firms pay more than bulge brackets anyway (Jeffries comes to mind). In addition, a lot of boutique guys end up in bulge brackets (that move is what we call a buy-out). There is a good reason as to why i-banking is much harder to get into for people who did not go to an Ivy league school. A big part of i-banking is relationships, and it's just fact that people at Ivy league schools are better connected. Better connected people eventually bring in the bigger deals (if you go to Harvard, how many CEOs do you think you'll know in 25 years as opposed to the guy who went to podunk university?).

On the s&t side it's more about your risk taking skill and intelligence. Granted it's still heavily Ivy league weighted, but there's more of an "equal-opportunity" ground here. As a few of my bosses have said, "the market is the great equalizer. You can think whatever you want, but your PnL tells all. The markets are very humbling."

A whole lot of people who are top sales/trading folks are not from Ivies. I think it's because they are often hungrier. They've got something to prove. The hungriest, I've found, are those who come from humble beginning and fought their way into an Ivy and onto the Street. Those guys are fierce. But anyway, I diverge. How do these guys get onto the desk? A whole lot of them started in middle office or risk, actually. That's where you learn how the guys take risk or make sales. It's where you learn the ropes, get a "street" education and figure out how to work the system.

Don't be afraid to take a middle office or risk position for a few years if you're interested in sales and trading. It's a great breeding ground, and the best always make it onto a desk. You just need to want it that much, have the patience necessary of a good front office guy and be aggressive in your climb to the top.

Vacations

Too many young people think it's not okay to take vacation. Those who do think it's okay to take vacation often take vacations that are too long. Let's think through the vacation conundrum. The firm will give 2-3 weeks vacation to a junior person. I'd say you probably should not use all of it, but using about two thirds of it is perfectly normal.

Those who take no vacation their first year I just think are being silly (hint: Nobody really cares and it just makes you look like a tool). Some firms will have people one level above you who think it's a right of passage to not take any vacation your first year. Again, that's silly. The real decision-makers don't really care. If the person directly above you is that petty, you should probably consider another area or another firm.

Every once in a while I do hear a new person take two weeks straight off to go on a trip to Europe or something. I'm afraid that makes you look like you don't care much for your job. Two weeks is a lot in this industry. A lot of the S&T side's VPs and up need to take a straight two weeks off for regulatory reasons, but there's little reason for a first year analyst/associate to be doing so. There may be some exceptions for people with family in Asia working in the US.


Another problem with young people is often not using the vacation as vacation. Always doing work doing vacation does not make you look cool, despite what you might think. Some of the senior people might have to check-in frequently to make sure everything is going smoothly, but junior people just waste time doing so. Unless the deal is absolutely contingent on your being there (which it's not if you're able to take vacation) or you run your own trading book, you probably don't need to check in much.

Take for vacations, enjoy them. Spend a couple of long weekends spending some of your exorbitant pay. You will look more mature for doing so.

The Big Picture - part 2

So I had a post about the big picture and how you should be looking around at all the available areas of finance as opposed to being small minded about only going into banking, trading or sales. There's another step to keeping the big picture in mind.

After a couple of years on the job a lot of people think about moving on. This is good if they're doing it for the right reasons. For some people the lifestyle just isn't for them (this happens most in banking). A lot of people realize they just can't do this for the rest of their lives. That's cool. You should do what you love. If you do what you love, you'll be good at it. Eventually, if you pursue what you enjoy you will be well compensated for what you do.

The problem is people who start job hopping for more money. At 2 years of experience, people start becoming very marketable. They're still considered "cheap" by the industry standards, but they know enough to get by. These people can usually get pocketed for a small 30-60k (2007 dollars) increase in pay. This is HUGE percentage-wise. What people need to keep in mind, though, is that your pay will increase exponentially even if yo don't move.

Yes, you will make a little bit more money a little bit faster if you keep hopping jobs. In fact, it's not hard to be making 300k/year before you're 30 by opportunistically hopping. You'll find, however, the you will get stopped out right around there pretty fast. There's nothing wrong with making 300k/year. In fact, most of the world would die for the opportunity. But this is Wall Street. 300k/year is nice, but it's not the end-all and be-all. The only way to make "real money" in banking terms is to be heading up your own desk or being a deal manager. At that point you're probably making millions. Nothing really matters until you get to that point. Yea, you can get an extra 30 or 60 thousand if you hop, but the end-game is the million-dollar plus paychecks. You get those by showing product expertise and loyalty.

Every desk head or product head I've seen has been with some company for at least 10 years, usually 15. They probably had foregone some good opportunities to boost their income marginally, but their patience (and love for the industry) paid off by getting that position as the head of a desk.

Keep in mind, do you want to live comfortably for the next 5 years or so and make more money in the short run? Or are you in it for the big bucks and mansion in the Hamptons? It's fine if you answer that you just want to make as much money as you can right now before you leave the industry. For those of you that are in it for the end-game mansion, millions and luxury, keep the big picture in mind. Don't get swayed by that short-term cash.