Banking vs. Trading - Breaking into Wall Street

I get a decent amount of email from readers who ask my opinion on various issues (poor, misguided souls), and one recent note hit on a theme that has been the source of many inquiries over the past six months - "Where should I start - banking or trading?" Some of the text from this catalytic email is as follows:

I've read your blogs on how to succeed on Wall St. and also S&T vs IB and have found them incredibly informative for someone in my situation. I noticed that you've worked both in IB and in trading (and apparently all the shades in between). Ironically, I'm facing the decision of choosing between trading and IB right now; with an engineering undergrad, I have concerns that choosing trading would pigeon-hole me fairly quickly into that area. While trading is certainly something I want to do right now, I see myself doing something more along the capital market side of things 7 or so years from now.

I guess I'm asking, given the stigma and the attitudes of these two fields, how hard was it for you to personally move across the gradient? Without much experience in this area, I would don't really want to force myself into anyone area but on the other hand, I think I could really enjoy doing trading for a few years.

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Great question. To which I provided the following answer:

 

I’d say, in general, that it is hard if not impossible to move from banking into trading, whereas the converse is not necessarily true. While I did “this” (banking into trading) let me be clear: I have never actually traded. I have run massive groups of traders and run large books of risk, but this is not trading. I was a trading manager. Do I wish I had actually traded at some point? Yes. But once I was a successful banker and derivatives pro was this ever going to happen? No. So I’d say that if you’ve got the fire in your belly to give trading a shot, do it first. Also, if you are worried about the “pigeon-holed” element, go into a trading discipline that is at the intersection of trading and corporate finance, like credit derivatives. This requires understanding companies as well as markets, so it is kind of a cool area. FX trading, conversely, prepares you for nothing beyond FX trading, except maybe FX structuring. The more commodity-like the underlying asset, the less relevant the trading skills into value-added disciplines. At the more complicated end of the continuum you’ve got credit derivatives, mortgage-backed securites, etc. whereas at the other end you’ve got FX trading, futures/bond/swap traders, etc. So these are my thoughts. Hopefully they are useful. Hmmm, I may write a post about this.

After re-reading my answer, I'm sticking to it. If you are smart, hungry, quantitative and have the chance and desire to trade early in your career, take it. I'd argue that it is much harder to take this up later in life, particularly after you've become successful in other high-paying disciplines that don't train you to trade, ergo, you'd come in as a shoe-shiner on a desk (if they'd even have you) and take a 97% pay cut for the privilege. It just doesn't happen. And you know what, if you don't go for it early on you'll end up like me, as someone who will never know if he could trade and was too chicken to find out. And this sucks. Also, if you've never traded, whether fair or not, your credibility as a trading manager, regardless of your success in related areas (say, complex derivatives structuring and M&A, not that this is personal) will always be in question. Again, sucks. So this is a post about satisfaction and long-term happiness, not pure cash. Which is always the right way to think about stuff.

The other point is that if you do have the sense that capital markets, financial structuring or M&A might be areas of future interest, do pursue trading opportunities in more complex, less commodity-like asset classes like credit derivatives and mortgage-backed securities. In these areas you really need to understand the documents, the companies, credit, structuring, etc., not just the markets. You become conversant in issues of law, finance, capital structure, bankruptcy, rating agencies, and other non-trivial areas that prepare you for a career in banking later on. Besides, these are areas that will require smart people and not just machines for quite some time, whereas humans in the more commodity-like areas are rapidly being displaced by machines. And it wouldn't be fun to be replaced by a machine.

Anyway, this is my advice to young people after searching my soul in the wake of my Wall Street career. It was great and fun, don't get me wrong. But I will always be missing that little piece of the puzzle that says "I've traded." And my asshole trading friends from the Street will always have this over me!

Comments

[Jeff]

As a former engineer-turned-trader, I agree. My view is that trading is something to do first, not later. Lots of people can tell you about the financial knowledge and skills that trading will impart, so let me mention instead some less obvious, more general-purpose benefits:

1. Trading teaches you to deal with stress. Huge, overpowering, physical tremor stress, the kind most people only experience when going to war. Nothing will faze you, ever, after a few years on the trading desk.

2. Trading teaches you to make tough decisions in the face of significant uncertainty, which engineers are often poor at doing. This makes you a better manager and leader.

3. Trading teaches you to think and work quickly and efficiently. It removes the luxury of having enough time to think through every angle, build the perfect model, and work out the "optimal" solution. This makes you more productive and practical.

4. Trading teaches you a lot about people. It strips away the diplomatic veneer that exists in most other elements of society, exposing the baser attributes beneath.

Since I haven't worked as an investment banker, I won't pretend my perspective is balanced. I hope these thoughts are helpful nonetheless. There are undoubtedly some great attributes to investment banking as well. You're doing the right thing by asking around.

[Yaser Anwar]

Great advice indeed!

Also, one thing I'd like to recommend future traders is if you plan on a career in trading START NOW! Trading, unlike banking, is not something you can learn from a book of Amazon nor if you have a 4.0 GPA.

You need to practice it instead of reading about it. I can honestly say I learned more in 4 months at JPM working with traders and salesmen than in 3 years before that (in which I read copious amounts of books and traded both virtual and real $$).

Also, make sure its your personality type! A good friend of mine, who now works at ML, wanted to be a trader so bad- thanks to the swashbuckling, take-on-the-world attitude (not to forget the $$)- that he didn't care if he possessed the necessary characteristics of trading (position sizing, anticipating intra-day moves, indept technical knowledge etc).

Unfortunately he didn't do to well but lucky for him he got transfered in PCS division, where he enjoys it a lot more.

Point is- try to experience Asset Management, where you have a longer time horizon , and see if its for you.

Do not get sucked into the hyperbole of AM not being as cool as Trading. Its not, but then again Trading is not for everyone.

On a more personal note, having interned in PCS and S&T, I can clearly see where I want to be. So if you have aims of being a trader, I strongly urge you to find out whats right for you too.

If you're going into trading- learn to trade Index Futures! Whether its the Dow or S&P eminis, whatever! Traders I worked with usually take positions with futures now days thanks to the leverage and increasing liquidity.

Just my two cents. RE- feel free to correct if you think I'm giving the wrong impression.

[howard lindzon]

great post, great advice