Friday, December 24, 2010

How To Become A Proprietary Trader - IV

A Day In The Life of A Trader
The daily work of all traders is similar. However there are variations according to the trades they do. Observing a trader at work, you may wonder if the job really warrants all those diplomas and other credentials. After all, it looks simple. Let’s take a look at the daily activities of a trader of any kind before we enter the world of a proprietary trader.

The basic trading job is driven by three factors: information, intuition and technical know-how. A trader keeps his eyes on the eight or nine screens in front of him, such as Reuters or Bloomberg, delivering world news continuously. Apart from the journalist himself, the trader is the second person in the world to get wind of breaking news. He will also observe a flow of scheduled company releases and economic statistics, among other news. There are also audio announcements, often unrelated to the text on the screen, from the trader's dealerboard, the system which connects him to brokers. Reading information takes up 45% of a trader's work day.

In order not to miss any breaking news, a trader seldom leaves his desk. He even minimises his visits to the toilet or Starbucks. As for lunch, he may ask the trading room interns to help buying.

Another time-consuming task involves watching the market and acting intuitively. The trader must make a subjective interpretation of the information they have. He forms an opinion on the market's direction by observing all the signs making up the price action, including price fluctuations and the liquidity of the orderbook. This is a matter of intuition, and it also takes up 45% of his time.

The remaining 10% is spent on market making as to issue quotes to his clients. The trader uses an Excel spreadsheet with the useful "pricer" functions invented for quantitative research, calibrates it to correspond to the market and then pushes the F9 key each time a client asks for a price. This may sound repetitive and boring.

All traders including market makers, plain vanilla securities traders, structured products traders and proprietary traders have similar daily activities. Then what is specific with a proprietary trader?

A Proprietary Trader (or prop trader) has carte blanche to speculate with the investment firm's funds on all markets. Unlike other traders, he does not provide quotes to clients. He also doesn’t need to share the profits with the structuring, sales and research teams. The prop trader only share his portfolio profits with the Bank.

In terms of working hours, a proprietary trader works typical 8 am to 5 pm. However, his work schedule depends mostly on the markets they trade. For example, a New York-based proprietary trader who focuses on Asian financial markets may have to work at night because of time differences. A trader in Hong Kong trading Australia market have to go to the office as early as 6am in order to pick up the latest market news and discuss investment strategies with his team. Nevertheless, be prepared to work long and flexible hours.

Want to become a proprietary trader? I'll talk about career path in my next post.

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Investment Banking Career

Wednesday, December 15, 2010

How to Become A Proprietary Trader - III

Why Does A Proprietary Trader Receive Fat Pay Check?

A prop trader's salary averaging around $68,000 doesn't sound extremely attractive. However when bonues are counted, the figure becomes completely different. Prop traders can take home as much as multi million $ per year. If his portfolios turned out to be profitable, his take-home money could be practically no ceiling. However I’ve seen star traders taking home millions of dollars and also traders who lost their jobs when their portfolios lose money.

Let's look into more details of how a proprietary trader make money for himself and the bank.

A proprietary trader (or prop trader) has carte blanche to speculate with the investment firm's funds on all markets. He doesn't need to provide quotes to clients. With a high-risk job, the prop trader is paid a percentage of the profits. When other traders have to share the profits with the structuring, sales and research teams, a prop trader doesn't.

For instance, a bank transfers $100 million at the beginning of the year to a trader's proprietary account. At the end of the year, if his portfolio grows to $300 million, he will then share a portion of the $200 million profit as his bonus. Hence prop traders are among the highest paid traders however have to be the most experienced kind of trader. They have usually put in ten years in the trading room before assuming this post.

Everything has a beginning. If you want to assume a role in proprietary trading, you usually begin as a market maker who works with basic products, such as spot (currency rates), cash equity and government bonds.

In my next post, I'm going to talk about a trader's job in a trading room.

Investment Banking Career - Proprietary Trading

Tuesday, December 7, 2010

How to Become A Proprietary Trader - II

Life In A Trading Room

OK, here is a 110+ seats trading room in the real world. A trading room is a restricted area in any investment bank. Only authorized persons can access. I have the privilege to borrow this photo from one of my clients.

If you want to be a proprietary trader or any other kind of trader, consider two things first. These have to come before qualification and experience counts.

Working Environment - Looking at the photo, you’ll see it is a huge room with no partition. There is no privacy at all. What you say on the phone will be over heard by people around you; and what you say on the phone will be recorded. Some banks ban the use of mobile phones within the trading floor. Some encourage you not to use mobile phones.

You need to also consider the noise level. People shout on the phone, because they were excited about a deal or because they couldn’t hear what the other party said due to noisy environment. If you feel comfortable working in a noisy open area without privacy, you meet the first criteria to become a trader.

Taking Risk – Chinese has a proverb ‘create wealth from taking risk’. You need to make quick and important decisions everyday and take risk. If this describes your personality, you meet the second criteria to become a proprietary trader.

I don’t mean to scare you. This is just a beginning. Please make sure you meet these two criteria before submitting a resume targeting for a trader’s role. Want to know more about a proprietary trader’s life, come back to my next post.

Investment Banking Career - Proprietary Trader