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 a trail of bad press. In 2007, a rogue trader at Société Générale lost the global bank billions in a frenzy of debt miscalculations, and closer to home, 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 and harmed the reputation of the industry.

Rogue traders have done damage to the trading sector, 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,” says Peter Whitely of Thomson Financial. “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, and demand for good traders has gone through the roof in the past year. It is very difficult to find experienced staff, and they can command astronomical salaries. Trading is where the profits are made.”

Research, however, is also 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.

In the past six years, sales people have done very nicely. The top ones worked with complex derivative products, which accounted for a growing proportion of banks’ profits. Equity sales people benefited from strong stock markets on the back of the longest bull run (rising market) since the 1950s, but the credit crunch has stopped that run in its tracks. “I think the emphasis will go back to vanilla products rather than high falutin’ derivatives,” says Whitely.

An earlier market correction in 2000 led to an employment freeze, with the result, says Lee Rochester of recruiter Futurestep, that there is now a shortage of experienced people at the VP and associate level, and demand for them is fierce, even given the tight market.

Key players

All financial institutions have sales, trading and research units central to their functioning. In 2008, the Australian equity market was worth AU$1.66 trillion, the seventh largest in the world, but volumes collapsed from US$38.2bn in 2006 to US$12.5bn on 2007, a vivid illustration of the effect the liquidity crunch has had on markets.

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$50k-$55k, but with a juicy commission structure to boost the bottom line substantially. Salaries vary widely between retail and global banks, Futurestep's Rochester says, with the globals offering up to half as much again for top people. Complex-product traders and researchers start on AU$70k-$80k, 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.

Foreign exchange traders with five years' experience receive AU$100k-$120k and rising to AU$150k-$170k with a few more years, Rochester says. Bonuses range from 5-10% to above 100%. And proprietary traders “can make heaps”, according to Whitely.

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,” says Michael Page manager James Wheaton. The highest paid are proprietary traders, whose bonuses reflect the profits they make.

Skills

• Wheaton at Michael Page: “For sales, we want technical skills and financial understanding, but they also need a compelling personality. 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.”

Click here to find out about global trends in sales, trading and research.