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by Derek Loosvelt | March 10, 2009


How is sales and trading different from investment banking?

There are several ways to compare and contrast the differences between investment banking and sales and trading. The first is the actual work that they do and the time in which this work is done. Investment bankers primarily help to raise money for clients through stock or bond offerings or advise clients on mergers or acquisitions. The endless flow of pitchbooks (PowerPoint presentations to clients), the detailed financial modeling and around-the-clock client schmoozing are all focused on achieving one result: a deal that will generate substantial fee income for the investment bank. This fee is calculated as a percentage of the deal (for example, a percentage of the money raised by an initial public offering). Investment bankers work for months -- even years -- to generate one deal, schmoozing comany execs until the company is ready to raise money or acquire a company. But when the company is ready and hires the bank to ehlp them, the reward for the bank is substantial.

Salespeople and traders also work on deals -- every trade is a deal -- and also entertain clients. Compared to investment banking, however, it takes much less time to consummate a transaction in S&T. Typical trades are consummated in seconds or minutes, and the average fee per trade is measured in cents per share traded rather than as a percentage of the deal's proceeds.

Another big difference between S&T and I-banking is the lifestyle. Sales and trading professionals are the first-in-and-first-out in the investment bank. To get a jumpstart on the trading day, salespeople and traders normally take the earliest train into work. But they are the first ones out of the office, leaving shortly after the markets close. Salespeople and traders also never work weekends -- trading desks are completely abandoned on the weekends. In contrast, investment bankers are expected to be their desks during the weekdays and weekends, at all hours and throughout major holidays. If you ever want to see a sad sight, go to one of the major investment banks on Christmas Day or Easter. Around lunch time, you'll see investment banking analysts trickle down from their cramped bullpens to pick up their food orders from the delivery guy. Sales and trading is a sprint; investment banking is an endless marathon that rarely ever stops for anything.

Why do investment banks have sales and trading departments?

The most important function of a sales and trading department at an investment bank is, of course, to make money. An investment bank collects significant fees every time its sales and trading professionals execute a deal for clients. Traders and salespeople add incrementally to the bottom line through daily profit and loss and commissions, and raise the profile of the firm in the marketplace.

But there are ancillary benefits to having a strong S&T department. Investment banks provide capital raising and mergers and acquisition advisory services. Salespeople and traders are needed to create and maintain an active secondary market in these new issues. (Investments that are simply bought and held, such as life insurance, do not have secondary markets. Secondary markets exist to allow investors to buy and sell investments such as stock even after an initial public offering.) Most large investment banks target their secondary market activities towards issues that will support the primary market activities and capital raising efforts of the investment bank (for example, a client company's IPO). Companies and other entities that raise money by issuing stock or bonds are primarily concerned with how much money they can raise and at what price, but they're also concerned with the ability of the investment bank to properly distribute shares of the new issue and the ability of the investment bank and its syndicate (other investment banks partnering in the deal) to actively trade the new issue. An investment bank's market share of the daily trading volume in the issuer's stock can often be a decisive factor in deciding which bank gets to bring the new issue to market. Of course, to do this properly, traders will also trade stocks that are important in the context of the overall marketplace.


Filed Under: Finance

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