The Woman's Dilemma

I've talked to a ridiculous number of young women lately who are wanting to get into trading. Many of them are in analyst classes in "sales and trading" and are finding that they aren't being given a chance to try trading. Some of them are in rotational programs, others are assigned to a desk but not necessarily on the sales or trading side of that desk. In both cases young women complain that they are only given a chance to see the sales side and nobody will take them seriously on the trading side.

First of all, it is a mistake to think that anybody will ever "GIVE" you anything. You're not given a chance to be a trader, you have to take it. Whining about how your desk or HR won't give you a chance to be on the trading desk is exactly why you aren't on the trading desk. Generally it is perceived that those who will excel at trading are the types who will aggressively pursue goals.

I won't argue that there isn't some bias against women in trading. A lot of trading desks still adhere to the "old boy's club." That can be a hard game to break into. That being said, I have been looking for a well qualified woman to join my desk for a while, but none have risen to the task.

There is a natural bias against women in trading. Now obviously this isn't true of all women (and I know some damn good woman traders), but the majority of women simply aren't cut out for trading. Women tend to be more emotional, more talkative and less aggressive than men. More emotional and less aggressive are minuses for traders and more talkative makes them happier as sales people. Yes, that is sexist, but it's also statistically true. If you're offended by this statement, you shouldn't be a trader--you'll here a lot worse and less founded sexism on the floor.

I don't know a single trader who wouldn't like to work next to an attractive trader woman. In fact, I know many who envy those who do. Women who have gotten into trading tend to be few and far between. They fought to take those positions and have shown themselves to be able to not only weather the markets but also weather the machism that tends to dominate the trading desks.

End of the Internship

For those of you who may be interns, congratulations to the end of your internship. I think most programs are finished by now (if not they're certainly finishing up).

Some comments on how the end of the internship process is/was handled.

Hopefully you will keep in touch with many/most of your fellow interns. They are the beginning of your Wall Street peer network.

If you got an offer, be careful about telling others--they may or may not have gotten theirs--but don't lie about it. I'll leave it up to you to find a clever way around that problem. Certainly don't boast about it.

Some firms tell the interns on their last day whether or not they get an offer. If you don't get the offer, that's not an invitation to leave immediately. The people you met there can still provide valuable advice and references in the future. Leaving early makes you seem like a cop-out and/or a sell-out (even if you already are a sell out by going into finance).

Collect business cards, if you hadn't already. You may want to contact these people later in your career. I had contacted people from my first internship two years later. They not only still remembered me, but they provided advice I could not have received elsewhere.

Even if you didn't get an offer, smile--you still went through a Wall Street internship, which puts you one step ahead of half the people who will be applying for a full-time job in the fall.

Go have some fun. You just made a good chunk of money in your internship. You should get your intern friends together and go out for a night. Celebrate your success!

Look forward to seeing a bunch of you around next summer.

Ah For Good Advice

Love this guy's blog. He gives some good advice here:

http://www.informationarbitrage.com/2007/08/making-your-mar.html

I'd write more about this on my own, but markets are crazy these days. All in due time.

Mix and Match

So rumors abound these days about various companies (e.g. Countrywide) nearing default. Suddenly it came to mind for me to use some of my past training as a credit quant. I'm sure you know by now, I trade primarily fixed income and currencies with some dabbling in commodities. Why am I looking at credit? Well, the credit problem is clearly driving all markets right now, but there's more to it than that. I was looking at specific credits (specifically an old model I once looked at on ABCP default rates). Stuff I can't trade at all.

So why spend time on this? Well, when it comes down to it more information helps everyone. As part of the team, if I can help anyone in the company, that's money in the bank (quite literally. . .unfortunately not money in my pocket though). Eventually I wouldn't be surprised to find myself trading a bit of credit as well. You can never foresee your career path, so there's no reason to limit your view at any time. If you're working in one area but you've found something interesting somewhere else, take some time to pursue it. Even if it's on your own time (as if often will be), that knowledge and that curiosity will serve you well in some role in the future. Who knows, it might even let you make a cross-division connection, which is how these large institutions justify their existence. People who can mix and match information and resources from across an organization are the ones who become leaders of organizations.

"Big picture, mate."

I, Quant

Goldman's Global Alpha fund reported it was down some 26% ytd today. Everyone's making a big deal these days that quant funds are losing lots of money in the current environment because of the inherent instability of the time (quants would say we are having a regime shift). I'm going to give you two competing takes on this chatter.

Some quants would say that this is an opportunity for these quant funds. They will trust their model and return ridiculous amounts when the world returns to normal--when the panic is over the quant funds will prevail. Models can't make money every single day, and there will be statistical anomaly days here and there. The strength of a quant model is that they can avoid the fear inherent in humans and trade into these days to come out victorious on the other end when efficient markets rule.

Others will say that every quant model must have a trader with good market sense there to override the model. When tumulus times like this come around, it is the prerogative of the trader to stop the model and trade the fundamentals. Quant models are meant for calm times to tick away the market discrepancies, but when thing are really moving is when the experienced trader prevails.

I was brought into this world as a quant. I tend to adhere to the "stick to the model" school of thought, but I tend to also make models that have resilience to market shifts like the one we are experiencing now (a couple of my models have been extremely profitable as of late and are covering the losses in some other models easily). I believe Goldman's fund will have a banner year next year or even come roaring back later this year. I do, however, also keep an account for pure macro-economic bets. That also has been very profitable lately. It's all a matter of scaling the right things at the right time. My main indicator in my trades is actually a model that tells me how to weight my risk between tactics.

The age-old adage goes: "Bulls get rich, bears get rich, pigs get slaughtered." Perhaps in this new world we can say "Quants get rich, fundamentalists get rich, pigs get slaughtered." Okay, so you don't get the animal theme, but you get the idea.

Short Wings

Short wings will not get you far. Long wings will fly you when the winds pick up.

Vol traders are well aware of the volatility skew. Prices on far out-of-the-money options are often "over-priced" according to the traditional Black-Scholes model. The B-S model assumes constant volatility, so the idea of a vol surface is kinda backwards anyway. Assuming market prices, you can back out the B-S vol. B-S vol is usually higher on far out-of-the-money stuff.

The good academic might say these are over-priced and ought to be sold. Then kurtosis comes into play. Fat-tails make selling the wings quite dangerous. But a good simulation model that takes into account the fat-tails might still tell you the options are over-priced. Do you sell them?

Here's the trader's perspective. Being long the wings means once in a very long while you'll make a shit-load of money. Being short the wings means once in a very long while you'll be out of a job. Even if most of the time you're making a little bit of money by selling the wings, is it really worth betting your career? Sorta. . . not really. That being said, selling options is not necessarily a bad thing. In fact, selling options is quite profitable. It's the selling options for no real profit that seems dangerous.

A lot of non-trading circumstances are analogous. Don't be an ass-hole to random people you meet, you never know which might be your next boss--or be packing a gun and have rage issues (don't get me wrong, being an ass-hole in general is fine if you can pull it off. Just don't be an ass-hole randomly). Don't play hookey from work. Don't have unsafe sex with a hooker. Don't take chances unless you're getting the just reward for it.

The Rumor Mill

Spreading of rumors on Wall Street is fast and furious. They appear in all sorts of shapes and sizes. Here are three from which you might learn.

1) A "bitch"-in party
A couple years ago some girl who was interning at a major i-bank decided to throw herself a party at a ritzy hotel. I don't know the girl, but I did see the invite for the party. This girl sent this party invite out to a set of friends (probably around 40). The invite included an assigned arrival time so as to stagger the arrivals of friends, suggested gift prices, dress code, and all sorts of other unnecessary details. It was quite amusing reading the obsessive nature of this girl and how obviously the party's details were going to fail (and be ridiculed). This invite note ended up being forwarded to everyone on the street (yes, EVERYONE). I don't know if too many people went, but it became quite a famous fiasco. It even got a mention in a newspaper (I believe the newspaper was in Hong Kong). So if you're throwing a party, try not to make the invite ridiculous. You could end up with street infamy.

2) Moving Markets
Just today a broker called me to tell me about a rumor going around about Goldman making an announcement after the close that they expect a negative Q3 earnings. Right around that time the bond market skyrocketed and the equity market tanked. One minute later Maria Bartiromo mentioned on CNBC that she heard from a trader that one of the big banks would be making an earnings comment after the close. Yet one minute after that she announces that Goldman is denying the rumor that they would make such a comment. Bond markets tank again and the equity markets fly back to their highs. It's amazing how a rumor like that moved markets so quickly in both directions.

3) Top Recruit
Some guy with a Russian sounding last name who went to Yale sent out the most ridiculous paper and video resume to the street. The resume circulated the entire street. He ended up on MSNBC and some newspapers due to the ridiculous nature of the claims. On the resume he had cited a non-profit that he supposedly founded and runs (no one could find it, although it did have a defunct website). He taught several celebrities tennis. He was some sort of hitman or something (don't remember the details on that one). He claimed more ridiculous stunts than any sane person would bother. In the end, everyone knew he was a fraud. In fact there were articles on msn.com, a couple newspapers and other semi-mainstream forms of media about him. I have a feeling this guy never got a job on the street (let me know if you know him and I'm wrong).

Fed Day

Big move post-Fed today. Market had priced in some Fed help, perhaps with a more neutral stance on monetary policy, but received full Fed hawkishness. Pretty quiet trading day going into the meeting, although the 7bp flatter curve was weird. Then the Fed hits, yield curve steepens 7bps, then goes right back to the flats.

One lesson the market will teach over and over again is that getting the forecast right does not necessarily mean you will be able to out-guess the market. After the initial Fed announcement, the fixed income market dropped, as did equities. Then the fixed income market flew up as equities continued to tank. Finally the fixed income drops like a rock while equities start flying up. Weird volatility. Certainly nothing I can explain.

A day as exciting as today, I was surprised how un-engaged a lot of the interns and new analyst/associates were. This is exactly the sort of day you can learn a ton about market dynamics and ask questions about why things are moving as they are. I'd be willing to guess that at least a couple of them didn't even know why today was such a big day. If you're new or interning, get engaged. Watch markets intraday every day. Get your mind into it and try to figure out WHY everything is happening (as opposed to staring at it mind-numbingly like your favorite sit-com).

"Engage, Maverick, engage!"

Analyst/Associate Training

I've been hearing a lot of negativity about training, not only from my own bank but from people in other banks as well. I find this to be quite a misfortune. Training ought to be a real treat for hungry analysts and associates.

The two most common complaints I hear are "they try to go through so much material I can't possibly learn it all" and "I'm never going to use this anyway, so I don't care." These are both shitty ways to look at training. First of all, if there's too much material, look over it at night instead of partying every night. I know training's all about partying while life is good (I did it too, but trust me, life gets better), but if that's the case you can't complain about the information overload. Second, there is no such thing as useless information.

The key to taking advantage of training is paying full attention during class (stop playing those sudoku puzzles during class, quit checking your e-mail or facebook accounts, don't read your favorite magazine during class) and just soak up everything you can. You might not remember everything five years later, but you might remember a lot of it. I know the only time I've ever learned accounting is from training, but I can still identify cashflow statements, balance sheets and income statements as well as produce one from a combination of the others. Do I use this in my day job? No. Do I think it's useful information? YES! If I ever start a company I'll certainly need to know my accounting, and when I talk to the credit folks it helps to be able to speak their language. I even sometimes help the credit analysts with their analysis when the new folks don't remember some of the details. You don't necessarily have to study every detail if it's not going to be terribly important for your job, but you should certainly learn what you can.

That being said, as a new analyst or associate you never know where you career will take you. You might be going into M&A, but five years down the line you might transfer to a credit structuring desk where it'll suddenly be real important that you know what a reverse repo is. You might be going into trading, but you may well end up at a PE firm having to deal with the operations and accounting of a firm. The skys the limit for a smart person who is open to learning everything.

Of course I've heard a good bit of support for training as well. I give kudos to the usual firms, Training the Street and Adkins, Matchett and Toy, for their good work again this year. I hear the TTS record for that formatting exercise was broken again this year (while I mock the formatting exercise because I believe good information is good information no matter how it is formatted, I have to admit aesthetics are a large part of the human experience and thus it is important to a good many respectable professions.). For those of you engaged in these trainings and topping the class, hats off to you.

The Fed

Fed meeting this coming Tuesday. Looks to be a fairly important one. Let's talk a bit about what the Fed does and why they're so important to our economy.

The Fed is the United State's central bank. They control monetary policy, which is to say they try to control the money supply. There are three main ways in which they control monetary policy: The Fed Funds Rate, the Discount Rate, and reserve requirements.

The Fed Funds Rate is the interest rate banks charge each other for overnight loans. The market determines this rate, so the Fed can not use regulations to enforce this (well, maybe they could but that would screw with market dynamics). Instead of regulation the Fed conducts open market transactions to buy/sell treasuries from the open market to increase/decrease the amount of money available to the public. When there is less money circulating, the interest rate for borrowing it must increase. The Fed Funds Rate is what the market watches the most closely because it is the Fed's primary means of affecting the market.

The Discount Rate is the interest rate that the Fed charges for overnight loans. Most banks go to other banks to borrow at the Fed Funds Rate before going to the Fed for their loans. Clearly the Fed can choose its Discount Rate at will.

The reserve requirement refers to the amount of reserves banks have to keep as a percentage of their deposits. If banks have to keep more money in reserve (as opposed to lending it out or buying illiquid assets), then the demand for money is higher and interest rates go up. The Fed hasn't actually messed with the reserve requirement for along time, but if they did it'd be a really big deal. The reserve requirement is the Fed's sledgehammer when it comes to monetary policy.

Alright, so now we know what the Fed does. Now how does this effect the economy? Well all of the above change the supply and demand for money and thus interest rates. The Fed's mandate, however, involves inflation (go wikipedia inflation if you don't know what it is) and economic growth. This is slightly different from most central banks who are only mandated to control inflation. Too much money floating about invokes high inflation, which is disastrous on an economy (well, some theory says it doesn't matter, but in practice inflation has been the devil). So the Fed has to maintain a delicate balance between wanting to raise interest rates to control inflation and wanting to lower rates for growth. Most people think if the rates are high that's bad for the economy, if rates are low that helps stimulate the economy.

A "hawkish" Fed means they are primarily focused on the inflation rate (e.g. watching inflation like a hawk). A "dovish" Fed means they are kind on the economy and worry as much about economic growth as inflation. Most people agree that the primary target of the Fed should be inflation. A hawkish Fed tends to demand more respect and can more easily control inflation and the markets without having to mess with the interest rates.

When the Fed Funds Rate is high, banks have to fund at a somewhat higher interest rate, so they have to charge others a higher rate as well (for those of you familiar with LIBOR funding, LIBOR tends to trade at a spread to Fed Funds, we'll talk about this more later). When interest rates are high, however, companies can not borrow as much money, so domestic companies tend to suffer a bit and aren't able to invest in as many capital intensive projects. New bonds tend to come out at a higher interest rate. When interest rates are high foreigners are more likely to buy US dollar denominated assets, so the dollar would appreciate.

When the Fed Funds Rate is low, borrowing is cheap so liquidity is plentiful. Thus companies can invest a lot in projects with the thought that funding these projects is nice and cheap. Another way people talk about this is to say credit is plentiful, which seems to be a problem with the economy right now.

Alright, so now you know the basics of the Fed. Why does this seem like a timely post? Markets are really moving these days, and the markets just priced in a Fed "ease" (lowering of the interest rate) via the Eurodollar futures. Eurodollar futures basically point to LIBOR. Future LIBOR being lower basically means the Fed has cut rates. In fact a lot of what I saw on the ticker on Friday was a lot of banks buying Eurodollar future calls, which means people were buying protection against a Fed cut (if the fed cuts rates, then the eurodollars go up in value a lot and the calls are in the money). A lot of the hype is around the policy statement that the Fed gives after the FOMC meeting on Tuesday. As much as policy effects the markets, the statement tends to have just a large an effect because it points to future policy. A lot of the move in markets seems to be pricing in what the Fed will "say" about the state of the economy (and whether a cut will be necessary in the future.

The Next Job

Very few people stay in finance their entire life. Those that do very rarely stay at the same firm their entire life. The days of firm loyalty are sadly long gone, and even more distant a memory are the days when firms strongly valued their longtime employees. So what do we make of the rough and tumble, "hardly civil" world of today? The best safety net you will ever have is your network.

As much as your skills matter, your skills don't do anything for landing you an interview. In fact, your skills might have little to do with landing you a job at all. Your skills will be what you use to prove your worth after you find that job. Until then, it's the network you have to lean on.

Who make the best nodes of your network? Find the guys (and girls) who like to mentor people. These people tend to enjoy helping others develop their career and try to connect good opportunities with good people they know. They also make for great people to go to for advice when the time to find a job comes. Keep track of the people you find to be helpful and keep track of your friends who start moving around. You'll want to contact them eventually.

Why is the network your best safety net? Well, it turns out that a lot of jobs available are never posted or farmed out to headhunters. When a job opening appears, it's often the internal referral that gets it. Even more compelling, with a good reference some people are even willing to create a spot. You get the best of both world via this entry point.

You know you won't be in one spot forever. Start building that network because when people start shuffling around, you want to be on top of the game and in the know.

Learn the Lingo (Units of Meaure)

All these units of measure in markets. It's ridiculous. Of course in equity markets it's relatively easy. Everything trades in dollars and cents. What about all these other things though?

Pip - FX pips are the smallest unit of measure in FX. If we're quoting yen at 129.52 and it moves 0.22 yen, that's 22 pips. If we're quoting New Zealand dollars at .7805 and it moves 0.0025 that's 25 pips.

Big Figure - A "big figure" in FX is a hundred pips. So if we're quoting yen at 129.53 and it moves 1 yen, that's one big figure. If we're quoting New Zealand dollars at .7805 and it moves .01, that's a big figure.

Tick - ticks are more flexible. They are the general term for a basic move. A tick in bonds is one 32nd. A tick in commodities is usually a .01 move in the contract. It's worth noting that a lot of these aren't straight dollar values though. A silver contract that moves .01 (one tick) is not worth the same as an oil contract that moves .01 (one tick). The best way to look these up is via Bloomberg. The DES page will tell you the value of a one tick move. For US government bonds, for example, a one tick move is worth $312.50.

Par - 100, face value of a bond

plus - a plus is bond-speak for half a 32nd. So 98-24+ means 98 and twenty-four and a half thirty seconds. Some bonds trade in eighths of a tick (so eighths of a thirty-second. . .yes, that's a 256th, but don't think about it that way).

the figure - The figure refers to the exact amount. So "ninety-four the figure" means 94-00. In FX the figure means 00 pips.

cab - cab is a fourth (much like a plus is a half). Used in bonds sometimes as well as other derivatives.

even - even can mean zero or the figure. A switch being quoted at even means the front tenor and back tenor are the same rate (in a rate switch for instance, see "Learn the Lingo (Rates)" if this is confusing) so there is zero slope.

There are many more, but this will do for now.