eFinancialCareers

The multi-millionaire 'second-hand' market traders.

Secondary markets buy and sell 'used' or 'second-hand' financial products to make a profit – or at least to avoid a loss. This compares to the 'primary market', where new financial products are issued by companies, governments and other institutions to raise money. Every day, millions of second-hand financial products are traded in the secondary markets. Sales people, traders and researchers advise on and carry out these sales.

1) Traders: These are the people who buy and sell. They make snap decisions worth millions and can make substantial profits in the process.

Traders are at their desks when the markets open and spend their day in front of an array of computer screens with hundreds of others on the 'trading floor'. The screens are a window onto the financial markets, and show movements in the prices of shares, bonds, commodities and other financial products. At the touch of a button, traders buy and sell the products they’re tracking.

2) Sales people: Sales people work the phones, calling clients from the moment the markets open. Clients are rich individuals, superannuation funds and institutional investors. Sales people take orders for financial products, which they communicate to flow traders (see below), who buy the products.

Midway between sales people and traders exists a hybrid – the 'sales trader'. Like sales people, they call clients to recommend securities. Like traders, they can also trade the securities.

3) Researchers: Researchers, also known as equities analysts, report on trends in the share prices of companies or industry sectors. Sales people use the information to advise clients on investing in that sector. Researchers spend their time scouring companies’ balance sheets and talking to company directors.

Trends

Traders have suffered from bad press recently. In 2006, two former National Australia Bank (NAB) traders were jailed for unauthorised trading on NAB's foreign exchange options desk, which cost the bank AU$326m in 2003-04.

“The NAB debacle has changed the fabric of Australian dealing rooms. Compliance structures are there all the time now. The previous gung-ho ethos is gone and the culture of banks has changed,” says Peter Whitely, senior analyst at Thomson Financial.

Rogue traders did damage, but the real blow has been technology. Traders working with simple products are being replaced by electronic systems. “In some cases, traders are no more than clearing clerks these days, because of computerised trading,” Whitely says. “It doesn’t require much skill, is pretty low level, has poor pay and no future. But complex trades and proprietary trades are still high level.”

Morgan Stanley’s head of recruiting Andrew Le Lievre, says even technology has its levels: “We don’t use web-based trades, even that is too slow for us. We use real-time information; it’s only a matter of seconds’ difference, but in some products, like FX, seconds count.” Old-fashioned floor traders simply cannot compete.

Research, however, is a vibrant field. “There is plenty of demand for researchers but they need exceptional qualifications and there is a lot of competition for the positions,” says Whitely at Thomson Financial.

Sales people have done best of all. The top ones work with complex derivative products, which account for a growing proportion of banks’ profits. For four years now, equity sales people have benefited from strong stock markets on the back of the longest bull run (rising market) since the 1950s. Globally, in mid-2006 there were signs that the good times were over but the Australian market was cushioned by its record commodities run and the ASX-200 keeps soaring on resource stocks.

“Demand for sales people is strong and will only get stronger as the current experienced workforce retires,” says Whitely. “There is a growing need for younger, better educated replacements, especially as those retirees are all sitting on big superannuation nest eggs which, themselves, call for wealth managers.”

Key players

In 2006, volumes in Australian equity capital markets reached US$38.2bn from 593 deals, up 48% on 2005, according to Dealogic research. Macquarie Bank led the league with US$200m, then UBS at US$190m, followed by JP Morgan (US$120m) and Citigroup Global Markets and Goldman Sachs JB Were, both on about US$100m.

In debt markets, Deutsche Bank led, followed by Citigroup and National Australia Bank for debt raised in all currencies. In the G3 currencies (US$, Euro and Yen), Citigroup, Deutsche and JP Morgan topped the list. Deutsche also dominated the fixed-income landscape in Australia, just as it does globally.

Roles and career paths

Most traders used to be flow traders – they buy and sell financial products on behalf of the bank’s clients. Sales people tell flow traders what clients want to buy and sell; flow traders tell sales people whether a particular trade is possible at a particular price.

A handful of elite traders trade on behalf of the bank itself. These are proprietary or prop traders. Their aim is to buy at low prices and sell at high prices, an achievement that requires both judgment and luck. Prop traders can make stupendous profits – and losses.

“It is a changing scene because of technology,” Whitely says. “Spreads have disappeared, volatility is nowhere near what it was and there are many changes in the market – a wider audience, and regulations that make the market more transparent. The pie has also got larger: technology itself sells products to new people and brings them into the market.”

Pay

Graduates working in sales start on AU$35k to AU$40k but with a juicy commission structure to boost the bottom line substantially.

Complex-product traders and researchers start on AU$55k to AU$75k with bonuses in the first year of up to 10%, although Thomson Financial’s Whitely says graduates with top degrees might be offered a starting salary of well above AU$80k for a research position. In all cases, performance brings high rewards.

The biggest earners are those who sell or trade complex derivatives. “Any analyst with a decent amount of experience in complex products and with the kind of flair to make them fly can pretty much write their own pay cheque,” Michael Page’s Wheaton says. The highest paid are proprietary traders, whose bonuses reflect the profits they make.

Skills

• “For sales, we want technical skills and financial understanding, but they also need a compelling personality,” Wheaton says. “Complex financial products require specific understanding; selling these complicated instruments does not appeal to everyone – it is structured and technical and not creative.”

• “Researchers need strong analytical skills and a knowledge of the market. Quantitative and modelling skills always help, but above all, researchers need to be highly literate both to understand information and to communicate it,” says Michael Hermens, senior director at Fitch Ratings.

• “You need very good qualifications. There’s a lot of competition for few places,” says Thomson Financial’s Whitely. “Once, traders were king, now they’re not. And where sales traders were ignored before, now they are king. The roles have reversed dramatically. The consequence is that the skills needed are also different. Analytical and numerical still dominate, but now personality and communication skills are right up there, where once they didn’t score at all.”