Banking vs. Trading - Breaking into Wall Street

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.


********************

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!