Summer Intern Season

Summer interns are back again, but this time they've entered the market at a rather interesting time. Normally summertime is a relatively quiet season. We welcome summer interns because we have more time than usual to teach new hires the ropes. Summer is marked with outdoor bar trips, early fridays for trips to the hamptons, and MDs taking vacation to spend time with their children who are off school.

Not so much this year.

Well, we may still have the outdoor bars and a couple early fridays to unwind in the hamptons, but you can be sure that this summer will be a lot more hectic than the usual summer. The market in turmoil, summer interns may find the associates at their firm have less time to teach. The decreased headcount across firms may mean that fewer associates are available to share their time, especially as the ones that are left pick up the responsibilities of those who left. So how is an intern to navigate thier internship when there seems to be so little time for them?

Persistence is key, as always. Perhaps more than ever though, staying late and getting in early may really get you ahead this season. I know I find the most time to teach young associates and help with projects after hours. After I'm done with my work around 6pm, I'm likely to help analysts, techies and interns better understand their projects between 6pm and 8pm. Don't try to make people stay late to help you, but many people will be glad to stick around. When it comes down to it, your learning will eventually translate into their doing less work. So an intelligent associate will train you to be able to take some of the workload asap.

Be sure to try to listen into calls, take notes of things you don't understand throughout the day, and stay involved. Just because everyone seems too busy to talk to you doesn't give you the freedom to surf the internet, take two hour lunch breaks or chat with friends. People will still notice. Even taking up mundane tasks from people like getting the group coffee, running to get lunch, or making copies will show people you want to be involved. No these aren't the most glamorous jobs, but they'll keep you in the loop whilst visiting facebook will just show that you're not that motivated.

This summer is probably going to be one of the toughest summer intern seasons in recent memory. Finance companies are firing, not hiring, so it is that much more important that interns make themselves stand out. That being said, when associates are likely to ignore most of the interns, it may be easiest for the "go-getter" to stand out.

Good luck.

Historic Times

Yesterday the front end of the libor curve moved 40+ basis points. The 2s-30s curve moved 38-40bps depending on who you ask. Since 1982 there have been 37 occaisions of the front of the curve moving 40+bps. 14 of those happened since 1990. The 2s-30s curve has never moved as much as it did yesterday, even when the treasury discontinued the long bond (the 2s-30s curve moved 30bps that day).

Last night Bernake gave a speech that was interpretted to be hawkish. We sold off an additional 20bps from that.

This morning (9am london time) the BBA came out with their anticipated tape bomb (and you thought I was joking when I posted that here: http://getonthedesk.blogspot.com/2008/05/bba.html) saying that they'll add new banks to the libor survey.

We are truly living in historic times. Perhaps the most volatile the markets have seen for two decades.

Technology and Traders

Every day I find it absolutely striking how "old-school" trading remains and how much of an edge one can get simply by understanding technology. I think this holds especially true in fixed income. In equities, there is a fair bit of sophistication around electronic platforms and algorithms, but I would say what I am about to discuss is probably true. In structured products the key to those products comes in modeling them correctly (and not getting forced out of your position), but being able to build tools to react to market changes quickly still remains pivotal.

Fixed income still large revolves around the telephone. Everyone seems extremely relationship-centric and most products still trade over a telephone call. Many institutions get things as simple as modeling an interest rate swap wrong. An elemetary part of trading interest rate products, building a yield curve, is done in some surprisingly simplistic and ultimately incorrect ways. While most participants won't be off by more than a basis point, that basis point can be a rather significant edge over the long run (especially for a market-maker!). They won't be off for some simple ten year swap, but ask for specific dates on the forward curve and you can sometimes arb between dealers, albeit not in significant size, on something as basic as a swap.

In addition to the simplicity of their pricing tools, a lot of institutions have rather mediocre risk tools. Risk is absolutely paramount to a trader. If a trader knows his risk, he can trade around it and manage it. Any faulty risk will create PnL anomalies--one of the primary reasons for traders to get fired. A good risk system can mean the difference between a profitable desk and a non-existent desk. For a market-maker risk systems are especially paramount because they tend to make money on bid-offer, but not being able to hedge correct can cost millions.
It occurs to me that the reason these simple issues remain so unsophisticated is that most traders don't understand systems at all! The savvy young technologist can find many more efficient and more elegant solutions to many of the issues a trading desk runs into. Furthermore, a good couple of quants can usually come up with very good risk measures. The issue, however, is getting the technology people to understand the needs of the trading desk and getting the quants to understand what the trading desk needs to see.

One of my bosses used to say "visual display of quantitative information is the key to trading." I couldn't agree more. The trader who will survive and be able to pick-off other traders it he trader who can at once view everything in the market and everything in his risk in a consolidated, understandable form. I always see technology people going for the the most complicated and most cutting-edge solution when it doesn't help the trader's task at all (and often it takes so long that the trader's urgency with the problem makes them want to explode). With quants, the primary issue tends to be trying to find the "elegant" solution (I have to say I have been guilty of this) when the simple and quick solution will do just as well. Another issue with quants is that they often neglect the presentation of the information, which is really one of the most important parts to a trader who is constantly being bombarded with information and needs to be able to filter out the important from the unimportant. By providing a trader with proper systems to be able to quickly and concisely view market and risk information, he stands at the best advantage to make money in the markets--thus getting everyone paid.

How does an institution solve this dilemma? Of course it comes down to the people at the institution. Goldman often says "the key to the success is their people. Without their people, they would be like any other bank." I believe that statement to be 100% true. One way to solve the problem is to get the right quants and technology people who understand the trader's issues. This can happen either by having quants and technology guys who have been traders (nothing gets one to understand the traders sense of urgency and priorities more than actually trading), or finding ones who have a combination of quant/tech skills along with some significant experience with traders. I think the former approach works best. The other way to solve the problem is to get traders who understand technology and higher mathematics. Personally, I think this path is the better of the two.

In my opinion traders should all have the ability to re-create all their systems given sufficient time. No, they won't be the best, most efficient or fastest programmers. And maybe they won't be the best of mathematicians. They should, however, have a thorough understanding of how everything they use works. My experience shows me that the best way to do this is to actually have the primary technologists and quants hired by the desk. Specifically, that mean they don't work for the technology area of the company or risk or any other "branch." The desk themselves have to hire and pay the quants and techs. That dedicates the professionals to the well-being of the desk and helps them understand the needs of the desk. Just as important, the desk then needs to pick and choose the best of the techs and quants to actually become traders.

In this way, the people who best understand both the systems and the traders' needs become the next generation of traders. I have found this method of building a desk to be almost always successful. Another added benefit is the boost in morale the desk gets from this path. When traders can build the tools as well as the quants and techs, then the quants and techs respect the traders. In many places traders, techs and quants have a certain animosity for each other. If the traders know what the others are doing (because they've done it before) and can look over their shoulder to offer intelligent tips, that's what builds respect on the trading desk. The high morale that results from everybody being able to respect the breadth of knowledge thr traders have is priceless.

When I was first interning at a bank I was once told that most areas of the bank have a pretty good interview process, but the trading desks have the most issues because it's so hard to filter for the skills that make a good trader. I think my method of training new hires to think like traders and build the traders' tools makes the most sytematic and successful method of weeding out the best of the candidates to be traders. Too few desks on the street have a good systematic way of producing both good traders and good trading tools. In trading there is a never-ending supply of good ideas that need to be developed, tested and implimented. It seems no matter how long you've been developing tools, there are always new ideas to make the tools smarter and faster. The key to running a successful business in trading these days lies in the ability to continuously improve one's tools, and only the trader can drive that process.

BBA

The BBA met on Friday to review how the different "ibor" rates are set. It went something like this:

"Well mates, what do we think?"
"I think it's too bloody late. Why did we have to meet at 5pm on a friday to discuss this piss."
"It's those American gits. They think they're the center of the world, so our BRITISH Banker's Association meeting has to meet when it's convenient for them--noon New York time."
"I thought it was supposed to be noon GMT, I was here five hours ago."
(laughter)
"Yea, it was noon Greenwich Mean Time, by which I mean Greenwich Connecticut."
(laughter)
"Alright boys, settle down. So what do we think. The world's making a big deal about LIBOR rates. Doesn't seem they care much about the other rates."
"So we agree that all the other rates will remain the same? All those in favor?"
"AYE!" (all in unison)
"Well, that's settled."
"On to LIBOR, then. There are several options on the table. 1) we claim to keep a close regulatory eye on the banks submitting rates, which will probably keep libor rates high and not change much. 2) we can add a few American banks to the mix, which will probably lower rates a little bit. 3) we can suggest a market based approach, like that used for Euribor. 4) we do nothing."
"Let the American gits suffer and leave it be."
"I say we don't change anything. It's worked this long, why should we change it now? The system is perfect, we just have to let it shake itself out."
"I say we put more pressure on the banks to submit true libor rates or we switch to a market based structure."
"What, are you limit short eurodollars in your PA or something?"
(laughter)
"uh. . . no. . . I'm not a market participant. . . that'd be. . .uh. . .unethical. . ."
"Why don't we just watch it longer? The panic over libor seems to be settling down. Maybe we can wait it out and not have to do anything?"
"Yea, if we have to change something, we can always tape-bomb them later."
(laughter)
"Preferably we can tape bomb them in the morning so the Americans have to get up in the middle of the night to figure it out. You can imagine Colin Corgan (head US swaps trader, GS) getting that call in the middle of the night and having to throw off some blonde hooker to get to a computer."
(more laughter)
"Settle down now."
"I say it's getting too late. We can let's leave this up to another day and head down to the pub."
"AYE!"
"Okay, okay. Are we all in favor of calling it a day and going down to the pub?"
(it was known to be a rhetorical question so they all file out.)
"Hey, who's going to do the press release?"
"Thanks for volunteering. We'll see you at the pub."

A Swapper's Paradigm

So a lot has changed since I last blogged. Most notably, the market has found two major deficiencies with the current conventions and ripped a hole straight through them. The first is the mortgage market and how the agencies work to keep order in the mortgage world. I'll write about that another time. The most fascinating change in my opinion (being a rates derivatives guy) is the changes that have happened in libor space.

Libor (the London Interbank Offer Rate), which I've touched on briefly in my Rates "Learn the Lingo" (http://getonthedesk.blogspot.com/2007/06/learn-lingo-rates.html), has seen some dramatic swings. Swap guys pay very close attention to libor because swap payments are set off of libor. While fixed payments are made at whatever rate was agreed upon, the float payments usually reset every three months according to whatever level the three month libor rate set that day.

Libor sets through something of a committee. Basically a bunch of member banks (16, I think) contribute rates at which they say they would offer to lend unsecured cash to other member banks. The top four and bottom four rates are discarded and the simple average is taken of the remaining eight. It is set sometime around 11:45 london time. Many tenors are published from overnight to one year. The most important are usually the overnight rate and the three month rate.

It's worth noting that the rates published by each bank are not necessarily the rates at which they actually lent money nor the rates at which they actually borrowed money (that seems kinda dumb to anyone? Yea, thought it might.). People had pointed out this deficiency before, but it never actually became an issue until recently. Swap and repo guys will know about turn of year funding issues, where year-end (literally dec 31st) and month end funding cost more because companies have to balance their accounting statements. Funding on those days are particularly expensive. The fed has had to flood the financial system with liquidity (read: give away money for free) on these days at times of crises to prevent companies from being unable to fund themselves (thus going bankrupt).

It turns out that this year a whole lot of these sorts of issues were happening and the liquidity of several companies were doubted. We've all heard of Bear Stearns and the "run on the bank" they had, making the older folks remenisce back to the Great Depression days when such runs on banks were common. Those involved also would have seen a similar process (and many rumors) take place with Lehman, although they turned out quite fine.

Libor starting setting higher and higher as banks started to hoard their cash. In fact, it got so bad that at one point the Fed having cut 100bps had completely priced out of the libor market. That is, libor was setting as high as it was when fed funds were 100bps higher. That was both ridiculous and showed how damaged the sytem was. Then the Fed came out with some of their cool toys, most notably the TAF and the dealer lending facility (the name of which evades me at the moment), to inject liquidity without lowering the funds rate. Down came libor again as panic averted and we came back into a "normal" market environment (or as normal as you can say 20bp moves every other day are).

At one point, the allegations came out about banks lying about where they were funding via the libor rates they contributed. Ironically, I think the most publicized version of this allegation came from a Citi analyst. Well, shortly thereafter libor rates started to skyrocket again as scrutiny around libor made member banks carefully set their libor closer to where they actually funded themselves (and citi's new libor rate was much, much higher).

At this point it might be worth noting that or "IBOR" rates aren't as retarded as LIBOR. Some of them, like Euribor, are set via a market rate or market average. That kind of makes sense, doesn't it? To be able to actually see where the rate should be via market transactions. Well, some people really started to notice this as their funding rates went through the roof and trounced their income margins.

Lately a movement has begun to move the derivatives market away from libor. The action itself makes sense, and a gradual transition of swaps and other derivatives away from libor would probably work. Specifically Goldman has suggested that OIS become the new benchmark rate.

What's OIS? OIS stands for Overnight Index Swap. No, that's not helpful. OIS is a swap that goes off of the fed funds effective rate (the rate at which banks lends excess balances to the Fed overnight--basically banks with more cash on hand than required can make a bit of excess interest rate by keeping it at the Fed). The fed funds effective rate is a transactional rate that anyone can observe (well, anyone involved in the markets, at least). The fed funds effective rate usually stays very close to the fed funds target rate, which is the rate the fed announces their policy cuts around at those FOMC meetings.

OIS swaps already trade a bit in the market, but libor swaps still dominate. OIS swaps make sense for people who are hedging, and the uncertanty around reset risk would go away for both dealers and counterparties. The overnight money markets are less active these days and there are usually very few longer dated transactions anyway (for example, why would a bank ever lend for 6months or a year at libor? It seems silly. The only rate really observable was the overnight rate for libor.). OIS, being tied to the specific set of fed funds effective rates, would make the value of interest rate derivatives much easier to predict.

It will be interesting to see if OIS ends up becoming the new libor over the next year or so. It seems the transition will be slow, and it will be a difficult transition to force. If all the dealers agree to trade OIS swaps instead of libor swaps, they'd still have to get customers to convert. For most institutions it probably makes sense to use OIS, especially those who are hedging rate risk for a balance sheet (specifically bank portfolios funding at the fed funds rate, which are a major player in swap space). For other institutions (i.e. industrial companies), it probably doesn't matter as long as they get some sort of interest rate exposure. Personally, I'd say never bet against those Goldman folks.

I'm back

I'd been away from blogging for a while as I spent a lot of time redeveloping our trading desk's risk systems. I think I'm one of the few traders who really get's my hands dirty when new ideas come up. I spent a lot of time rebuilding how we see our risk, how we view the market (i.e. market monitors) and how we build our curves. It was a long process, but I finally feel pretty confortable with our systems. Just needed a bit of a push and support from above to turn everything upside-down.

Unfortunately doing development work is difficult during the trading day, so I spent a lot of my evenings and weekends building tools. It's good to be back in the game though. Trading more actively (and more products) than ever. Hopefully it will give me plenty of material to blog about as well.

No promises that I keep breaking this time, but I will try to remain active in this blog.

Cheers,
QT

Change is Good

One of things Wall Streeters seem to fear the most is change. New organizational structures, new bosses, new underlings. Well. . . I suppose the underlings usually don't scare people. All things considered though, these things should be seen as opportunities. Of course, constant organizational changes are just disruptive, but the occaisional shake-up can definitely be something to take advantage of.

New bosses give the opportunity for advancement. Having a new manager puts everyone on the same footing again. If you weren't in the limelight before, now you can be. If you were the boss's right-hand guy before, you get to show you were there because you're that good, not because you were his buddy. It's usually more the latter that find these situations fearful. I have found that the guy who can steadily be the number 2 guy though several organizational changes usually gets the next promotion. He's proven that he is the best guy for the job through several regimes. The changes just give an extra early opportunity to prove it.

Sometimes the fear comes because the company is cutting back. Well, that fear may be justified. There are times when good producers are let go for poor or unrelated reasons. You may feel you were unfairly let go or a friend was unfairly let go. If you were unfairly let go, well. . . can't do much there other than look for your next career move. If your friend was let go, you still need to view it as an opportunity for advancement. If you think it was truly unfair, you vote with your feet. Leave institutions that practice unfair human capital mangement and join institutions that treat talent as it should be treated.

Pop Culture and Wall Street

In my opinion finance has never really been part of pop culture. In fact, the stereotypical "finance geek" has been the paradigm of un-cool in the world. Sure, there is the occaisional film about the finance world (Wall Street, Boiler Room, Trading Places), but those are really financial world cult classics. The average person doesn't really care much for them. Recently, however, I have come across a strange phenomenon. Wall Street is really becoming part of main street.

Why did I come to this conclusion? It's a long weekend, and I was watching a new pop-culture phenomenon over lunch. I watched an episodes of this new show "Gossip Girl" online over lunch (don't ask). While I probably won't be watching another episode, it did provide me with some amusing insights into pop culture.

Normal people don't use the term "done" in normal conversation other than "I'd like my steak well done." These kids were regularly using "done" as a phrase in itself to communicate something being agreed upon. I think this clearly came from the trader's lexicon: "Bid fifty ten year notes." "Done." Normal people don't talk like that. Only market players talk like that. Apparently though, the new breed of teens out there are. Interesting, no? Maybe I'm extrapolating too much about pop culture from one episode of some teen show, but I don't think I'm extrapolating too much. Media does define language, afterall.

I suppose this progression is not too surprising with how much press Wall Street is getting lately. Hedge funds and investment banks are becoming part of everyday conversation. They're constantly in the news, and while they always stood as an illustration of wealth/greed they now stand as the glorified exemplars of wealth creation. Everyone thinks of bankers/traders and associates them with wealth and excitement. Well. . . maybe not so much excitement but some form of living the dream life. It's like investment types are starting to gain rock-star status.

Between Jobs

Getting lots of e-mails and calls from people who are looking for jobs these days. Some are fresh out of school but finding the current hiring environment difficult, others are veterans recently laid-off due to "cost cutting." What should you do when you're between jobs?

Well, I suppose it depends on the person. First off, a safe bet for someone straight out of school is to go find some productive job. Just make sure it's related. Financial consulting is a popular choice. Another is working for a financial research or financial software firm. Just keeping a hand in financial products helps.

Always be tracking what markets are doing and always be growing your network of people in the industry. The number one way into the industry is through connections. Don't be afraid to bug them fairly regularly (like once every 3-6 months, not once a week).

Some people help their resumes along during such periods by trading a small PA (personal account) and tracking returns or publishing a newsletter/blog regularly to anyone who will read. Such activities, while not really jobs at that point, help keep you up-to-date in the industry. They help you build some experience working some aspect of the industry and feeling the joys and pains of being right or wrong. Ultimately it also helps you attract people who are interested in people like you.

What if you've worked for a bit? That largely depends on what you did.

Traders and some salespeople might be perfectly fine trading their own acount for a while between jobs. I know plenty of people who enjoy trading their PA (Personal Account) enough to use it as a temporary job. Some of those people end up enjoying it enough to just do that forever. Depending on the risk profile of the trader he may trade a cash account or a futures/margin account. I'm a fan of the futures account. Some traders move on to sales or risk roles after their first lay-off. They find those jobs easier to find, and their experience as a risk taker gives them most respect as a salesperson or risk manager.

Some people go off to start their own firms. I know risk managers who started software companies, traders who started brokerages, and salespeople who started newsletter services. Each has its own appeal, but generally I think these people were fairly well-off and wanted the freedom of having their own shop.

Find something productive to do. Grow your skills. You'll find no new skill gained is ever wasted.

Building Your Personal Network

We traders tend to understate the importance of networking compared to salespeople, bankers and other investment/finance types. In truth though, building your personal network can be one of the most important moves even as a trader. Of course your PnL will speak for itself, but your network can speed up your progress serveral-fold. All new finance analysts/associates should be purposefully building a network of people that will be helpful in the future.

Here's a list of who you should try to befriend:

1) All your salespeople, brokers and/or clients. Depending on your role you will either have sales-coverage, brokers, clients or some combination of the three. They are the first set of people you should befriend. Meet outside work. Go out clubbing/barhopping together. See an occasional movie. Have dinner. The more you interact with these people on a personal level, the better it will be for your current role and for future prospective roles. I can't tell you the number of people I know who made great job changes because their broker, sales-coverage or client decided to either reccommend them or hire them straight-out.

2) Two to three up-and-comming big shots. There are a few on every floor. Those people who are clearly favored by management, are producers, and are about to make it into a big role. Everyone wants to be the corner office's friend, but the easiest way to being on walk-in chat terms with the corner office guy is to be his buddy before he gets there. This takes some speculation and perhaps is a bit calculating, but it can pay off big. I think your best bets are principals/SVPs who are about to make MD or MDs who sit on the floor who are about to get a managerial or C-level position. They tend to be interesting people who make great friends anyway. An extra bonus that they're about to become really important. To some people, this actually comes naturally--the people they befriend tend to become important.

3) The Admins. Have you read the book Monkey Business? I'm sure you have. Well, you know how they say the production people (copiers, printers, binders, mailroom whatever you may call them) need to be your best friend? The floor admin should be your best friend too. On many levels they hold the keys to the floor. They know schedules, events, passwords, relationships, the whole shebang. You can gain a surprising amount of leverage, support and knowledge by having frequent chats with your admins.

4) Rockstar junior people. As you get senior, you want to have the new rockstar analysts and associates be your friend. It's those people who are going to propel into big important roles, so they're worth knowing. Even better, if you befriend them you might eventually get to hire them into your group. The key to a strong franchise is getting the right people.

5) Peers. Know the people from your entering class. They will be with you and grow with you throughout your career. Some of them will continue on to become great people and do great things. Some will remain trusted mates and be around when you need a hand.

6) The office "hotties." Unfortunately this is mostly for guys, and it reflects how chauvinistic and male dominated the industry still is. As wrong as the state of things may be, that doesn't mean you shouldn't take advantage of it. The fact of the matter is the industry is dominated by guys. Guys also respect (consciuosly or unconsciously) guys who are with hot girls. Just being friends with the most attractive girls on the floor and frequently having conversations with them gains the floor's respect. Odd, but true. Okay, maybe not that odd. Just a quirk of society I guess.

Some of these recommendations may seem shallow or calculating, but they are just some part of building your in-house network that I've observed. I'm the least politically correct person I know. I despise office politics. I don't come across as a friendly person. I do, however, respect that there are some rules that can be broken and others that you just need to take advantage of. Just trying to tell it as I've seen it.