Sales and Trading -- The War Zone

If you've ever been to an investment banking trading floor, you've witnessed the chaos. It's usually a lot of swearing, yelling and flashing computer screens: a pressure cooker of stress. Sometimes the floor is a quiet rumble of activity, but when the market takes a nosedive, panic ensues and the volume kicks up a notch. Traders must rely on their market instincts, and salespeople yell for bids when the market tumbles. Deciding what to buy or sell, and at what price to buy and sell, is difficult with millions of dollars at stake. However, salespeople and traders work much more reasonable hours than research analysts or corporate finance bankers. Rarely does a salesperson or trader venture into the office on a Saturday or Sunday, making the trading floor completely devoid of life on weekends. Any corporate finance analyst who has crossed a trading floor on a Saturday will tell you that the only noise to be heard on the floor is the clocks clicking every minute and the whir of the air conditioner.

Shop Talk

Here's a quick example of how a salesperson and a trader interact on an emerging market bond trade.

SALESPERSON: Receives a call from a buy-side firm (say, a large mutual fund). The buy-side firm wishes to sell $10 million of a particular Mexican Par government-issued bond (denominated in U.S. dollars). The emerging markets bond salesperson, seated next to the emerging markets traders, stands up in his chair and yells to the relevant trader, "Give me a bid on $10 million Mex Par, six and a quarter, nineteens."

TRADER: "I got em at 73 and an eighth."Translation: I am willing to buy them at a price of $73.125 per $100 of face value. As mentioned, the $10 million represents amount of par value the client wanted to sell, meaning the trader will buy the bonds, paying 73.125 percent of $10 million plus accrued interest (to factor in interest earned between interest payments).

SALESPERSON: "Can't you do any better than that?"Translation: Please buy at a higher price, as I will get a higher commission.

TRADER: "That's the best I can do. The market is falling right now. You want to sell?"

SALESPERSON: "Done. $10 million."

S&T: A symbiotic relationship?

Institutional sales and trading are highly dependent on one another. The propaganda that you read in glossy firm brochures portrays those in sales and trading as a shiny, happy integrated team environment of professionals working for the client's interests. While often that is true, salespeople and traders frequently clash, disagree, and bicker.

Simply put, salespeople provide the clients for traders, and traders provide the products for sales. Traders would have nobody to trade for without sales, but sales would have nothing to sell without traders. Understanding how a trader makes money and how a salesperson makes money should explain how conflicts can arise.

Traders make money by selling high and buying low (this difference is called the spread). They are buying stocks or bonds for clients, and these clients filter in through sales. A trader faced with a buy order for a buy-side firm could care less about the performance of the securities once they are sold. He or she just cares about making the spread. In a sell trade, this means selling at the highest price possible. In a buy trade, this means buying at the lowest price possible.

The salesperson, however, has a different incentive. The total return on the trade often determines the money a salesperson makes, so he wants the trader to sell at a low price. The salesperson also wants to be able to offer the client a better price than competing firms in order to get the trade and earn a commission. This of course leads to many interesting situations, and at the extreme, salespeople and traders who eye one another suspiciously. The personalities

Salespeople possess remarkable communication skills, including outgoing personalities and a smoothness not often seen in traders. Traders sometimes call them bullshit artists while salespeople counter by calling traders quant guys with no personality. Traders are tough, quick, and often consider themselves smarter than salespeople. The salespeople probably know better how to have fun, but the traders win the prize for mental sharpness and the ability to handle stress.