How Not to Make Friends

We like to believe Wall Street is a meritocracy. And in many ways it is. Very little is more truthful than a PnL, a flood of sales credits, or a won deal. While an element of luck definitely exists, on Wall Street one create's one's own luck. The meritocracy doesn't not, however, mean one can wander around burning bridges everywhere. Those who know me will find this post amusing because if there is anyone rude, obnoxious and apolitical, it would be I. One will find that I have made some of the right connections and somehow I have managed to be as I am while getting the right people to respect me and, in some cases, like me.

How does one navigate the jungle of politics in a Wall Street firm? Surely everyone's noticed how people often bring their friends with them when they jump firms and promote their friends. Often those people are not the most competent, but they are the most trusted by the guy in charge. Trust is ridiculously important when dealing with millions of dollars. You need to know that the guy you put in charge will tell you when he fucks up, so that you can help him resolve the issue. Wall Street politics survives on the trust that one man's word "done" creates a contract that instantly may be worth millions of dollars. Management needs to be able to trust his people with that responsibility. It's the backstabbing, PnL hiding, contract rescinding, double talking sleaze bag that no one wants on his team.

As one progresses, another important characteristic to have is the judicious use of the carrot and the stick. A lot of people get reputations for heavy use of the stick. People will loudly point out mistakes, berate and belittle others. That's fine, mind you. I'm not going to say you shouldn't do that. In fact, humiliation may be one of the fastest ways to teach a lesson. One must, however, to maintain respect also use the carrot in a judicious manner. Learning to give praise where it is due in a generous and sincere manner builds trust and respect. People need to know that you will fairly belittle and praise. Using the carrot and stick in a well balanced manner makes your praise that much more fulfilling when you give it while it makes your disappointment that much more stinging.

Here are some things you should never do:

1) Double back on a deal you just made.

2) Hide a mistake made by yourself or someone on your team.

3) Share details of something internal with outsiders.

4) Kick a man when he's down.

5) Point out a mistake someone else already caught.

6) Tell someone they're right when they're not.

7) Go over someone's head (to their boss) without telling them first.

8) Date your boss' or client's daughter (or ex-wife, yikes!).

9) Give praise where it's not due.

10) Give punishment where it's not due.

11) Steal

12) Embarrass someone with praise.
13) Help someone at another firm at a significant cost to your own firm.
14) Take credit for someone else's work.
15) Sleep with an analyst in your own group.
16) Sleep with anyone in your own group for that matter.
17) Blame someone for your mistake.
18) Argue a point to exhaustion without proof to back you up, especially when you're wrong.
19) Skip an easy/free opportunity to help out another person in the firm.
20) Not Take credit for your own work.
21) Let a friend get bashed when they're not present.

That seems extensive enough, no?


Building a good reputation as a loyal and trustworthy coworker can mean the difference between being promoted to the next big job and staying in your current role for ages. To some extent, you don't have to be liked as much as you are respected for the above characteristics, although it always helps to be liked (who wants to work next to someone for 70hrs a week and not like them?). Never let yourself get caught with a poor reputation in terms of your trustworthiness though, that will kill your career on the street faster than anything else.

Salespeople

Generally I find salespeople just to be annoying. And that's from a buy-side trader's point of view, not a sell-side trader. Of course sell-side traders hate salespeople because the nature of the relationship is to be slightly adversarial (the salespeople are advocates for their coverage and just want to do volume, while the trader wants to take the right risk at the right price and not necessarily just print big trades). As a buy-side trader though, I still hate most salespeople.

First off most salespeople are simply slimeballs. Their job, correctly done, is to act like your friend and get as much information out of you as possible. I don't need any more fake friends. I get plenty of those when I go clubbing and the hot 19 year old model-wannabes want a feel of the high life. Fake friends are a dime a dozen. I certainly don't need to be giving information about my intentions and my positions to help salespeople make their trading desks aware. Fine, that's their job, but I find it highly unnecessary. Granted I don't blame the salespeople for doing exactly what they are hired to do. Personally though, I enjoy talking directly to the traders when I'm trading. What good is a middle-man (or woman) just relaying exactly what I say to the trader?

Fine, perhaps I'm being overly cynical, but being a quant guy I like my screens. Most of the time I'd be content with a screen instead of a salesperson and trader.

So what is really a salesperson's role? Well, in reality they are there for their firm, not for their customers. They will tell you that they're there to be your advocate to the trading desk. That'd be cool, except that would align them against their firm (and thus their incentive structure since their firm pays them). The best salespeople I know learn all about their client, their trading style and their position/view. Then the salespeople can make the trading desk aware of the client's intentions so that the traders can adapt accordingly. Even better salespeople will know the client's trading style and requirements enough to suggest trades the client should do. Most likely, corporate clients need to be told what instruments are available to them to manage their risk. Exotics desks would not exist without salespeople hawking their wares.

So they do provide a service, simply not as much for the sophisticated trader, especially not the sophisticated hedgefund or prop trader. They do, however, generate tons of money for a firm by encouraging trading (bid-offer), especially in illiquid instruments (read: they'll rip your face off by selling you an exotic instrument where they made 25bps of bid-offer--actually usually they end up warehousing some of that risk because it's unhedgeable but they will charge 25bps through fair value to charge for having to warehouse the risk). I'd recommend being a salesperson as a job choice to many people, but don't expect to be everyone's best friend (although most of them act like it).

Is the market always right?

I've seen a lot of people struggle with fading the market recently. Fixed income markets have moved huge increments, pricing in everything from sub 1.75% fed funds to over 2.75% fed funds in the next six months. Many traders have been stopped out due to the move as they fade the market move in synch with their own view. Even economists have been forced into revising their views as most said a hike this year was impossible until after the market priced in 75bps of hike. Suddenly all economists were revising their forecasts to include at least one hike by the end of the year. I thought that was a sad showing. Economists, who are supposed to be more or less market independent, all revised their views to be more "in consensus" with the market. Fair enough if they think the market is always right, but then why do we need economists at all? Traders tended to fade the move until they got stopped out (everyone gets stopped out after 100bps of movement). So what gives?

Well, personally I think there's enough instability in the market that the Fed can't really hike this year. It would at most be one hike in December, but even that I believe is a longshot. But how is one supposed to express such a view in such volatile times? Every delta trader I know got stopped out of their position as they faded the move (actually one guy I know timed it right, but all the others were in too early). I think too many traders find themselves too focused on their particular market. Trading fixed income delta is great, but today's volatile markets are a difficult place to do so. Even if you "scale it right" you're likely to get stopped out.

Times like this are a great time to look for option based expressions. For example, fading the 75bps of hike by december via call spreads seemed to be an excellent expression as one can easily limit one's downside (premium) while having quite a good payout ratio. Other popular expressions were call flys (buy a low strike call, sell two of a medium strike calls and buy a high strike call) and 1 by 2s (buy one low and sell two high). Look for clever expressions of your view that limit your downside in markets as volatile as today's. It will prolong your life as a trader greatly as you won't be being stopped out (and perhaps "tapped on the shoulder") and you'll be finding risk-reward ratios that aim for that high payout at the end of the year.

You'll find that the market isn't always right. Emotions drive the market significantly, as do rumors and false information. Sometimes ancilliary effects (say. . .Europe) drive markets when they really should not. As a trader these represent great opportunities for those who can stomach the risk. Fading the market is extremely difficult--as they say "only monkeys pick bottoms." Finding the best expression of a view will payoff greatly when you identify times when the market is reacting incorrectly. They often say "timing is everything." I disagree. That's the old-school delta trader's view. Timing isn't everything. Getting the expression right allows you to do away with much of the timing issue.

Work-Life Balance

People often talk about having good "work-life balance." I've never quite looked at it that way. Being an economist, I've always thought everyone should simply maximize their own utility function. Some people get great enjoyment and fulfillment out of working all the time. Others find that relaxing on a ranch is far more fulfilling than putting in hours at an office. Every person needs to find what makes them happiest, and for some that doesn't exactly entail "work-life balance."

I think the most successful of people are those who really understand what they enjoy in life. A lot of people are just floundering about trying to reach some unknown goal, or even some goal that wouldn't necessarily make them happy. Perhaps I'm a just overly "Adam Smith-ian," but I think everyone should work toward happiness and everything else will fall into place. Those who find happiness by working 120hr weeks and getting the "thrill of the deal" will be bankers. Those who love the sense of accomplishment when helping others will become nurses and aide volunteers. Those who love the outdoors will become tour guides and camp counselors. The key is finding the right place for your own happiness. Too many people seem to think that money is the end-all and be-all of society. It's really not. I know lots of unhappy people with plenty of money as well as many very happy people with little money. You just have to find the right way to enjoy it.

Personally, I love my job and thinking about it all the time doesn't bother me. Going on vacation too long actually bothers me much more, as I will quickly get bored. Sites like http://projecteuler.net/ entertain me on vacations (yes, I'm a nerd). That being said, I do love the occasional extravagant vacation (but, of course, I'll have to be active the entire time -- sightseeing, eating, hiking, skiing, what-have-you).

If you're finding your job dreary every day and really enjoy something completely different, perhaps it's time for a career change. Don't define your job by how much money it will make you. Definitely don't allow your job to define you. Allow your personality to define your job. Too many people let society tell them that people (especially men) need to find jobs that will make them lots of money. Just have a job that makes you happy. You'll find a way to get around the money.

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