The role of the trader
The function of the trader is to operate on the financial markets, and to transmit stock market orders. However, when they work on behalf of clients, the latter do not contact him directly. The customer gives his order to the salesman (commercial) who will try to steer the client towards a particular investment. The bank may have every interest in offering its client specific products or introductions that it promotes. Once the order has been set by the client, the salesman will send it to his trader, who will execute it according to the methods best suited to market conditions. Thus the trader will not transmit the order like a simple automaton, he will test the market, evaluate it, and then he will choose the best moment to place the order on the market. He will not hesitate to cut up the order to obtain the best pricing conditions for his client. Thus, for a purchase order of 5,000 securities, the trader can spread the transaction throughout the day. An order for 5,000 securities could in fact destabilize the market, while several orders for a few hundred securities will improve pricing conditions for the client.
However, the role of the trader is not limited to waiting for the call from the salesmen. He can, and must, act upstream and anticipate what customers will want. Thus he will be able to buy titles while waiting for the salesmen to be able to sell them to customers. It is most often protected by hedging instruments. In order to avoid taking too much risk, traders are monitored very closely by the bank’s back office. The overall position of their account, or the amount of their orders are monitored over time, and automatic computer systems can block certain orders. All of their telephone conversations are recorded. These records are used in the event of disputes.
The trader therefore intervenes between the salesman who takes care of the “sale” to customers and the back office manager who practically manages the execution of the order and the subsequent management of the securities. His room for maneuver is that which his principal leaves him, whether it is the client or his employer.
But the trader does not only act on behalf of a client. He can also carry out operations for the bank itself. These traders are among the highest paid traders. This is proprietary trading or trading for own account. Traders are entrusted with liquidity which they will have to invest in the best way to obtain the highest performance, within a framework of predefined risks. The trading room activity of banks has thus become over the years one of the most profitable activities for the banking sector, but also one of the most risky. For several years, by hiding his losses, Nick Leeson thus generated the bulk of the profits of Barings, an institution more than a century old. However, insufficient risk control and the traditional deposit activity may be in danger because of the trading activity. This largely explains the political will to split the two activities. The rescue of the banks by the States was in fact constrained by too high a risk in market activities.
Where does the trader invest?
In the collective imagination, the trader buys and sells shares with all his might, risking the bankruptcy of companies, if he can obtain a profit. In practice, traders invest little in stocks. Their sectors of activity are much broader. Thus a trader can speculate on the interest rate market, currencies, or even on commodities and bonds. Anything that is traded can be traded by a trader. They certainly speculate on the highest values listed on the markets, but their decisions have a greater impact on the other markets. Thus, several traders acting in the same direction, on behalf of large financial institutions can directly influence a currency, and thus impact the economy of a country. Prosaically, there is more money to be made in the forex world than in stocks. There are therefore more traders there.
Specific skills may thus be required depending on the market in which the trader operates. A currency specialist will have to quickly understand the impact of such economic data from a Latin American country on the dollar and an oil trader will have to know if a cyclone in the Gulf of Mexico will have a lasting effect on the price of Brent. So many elements that make each trader specialize in one area, even if an oil trader is not prohibited from working in the interest rate area.
The individual trader
It is also customary to qualify as a trader the individual who speculates from home. This is of course not a professional trader with the same tools, but an individual can just as easily follow the same codes as a professional. The individual trader can spend hours following the market and just as much information. He may even have stopped his job to devote himself 100% to his trading activity. Many individuals have thus, according to the stock market booms, decided to launch themselves with more or less success. The stress generated by this kind of activity, accentuated by the fact that the money gained or lost will directly influence the standard of living of the trader, is not necessarily compatible with a family life. A particular trader will therefore have to very clearly separate his trading activities from his personal and family life. He will also have to build up a sufficient liquidity cushion to speculate, and thus not call into question his entire strategy from the first small loss. In addition, a minimum capital is essential in order to obtain sufficient income. Even by speculating and obtaining excellent profitability, know that your capital gains will have to finance your personal needs at the same time without the capital decreasing. In other words, the capital must remain at least stable from one year to the next even if it is preferable that it grows each year. In addition, taxation on capital gains burdens a large part of profitability.
The trading activity for an individual is therefore an activity that must be carefully considered. It is important not to start on a whim or even after a year of more or less conclusive speculative operations.
Typical day of a trader
A professional trader, even if he does not sleep at his desk, works very long hours, and it starts in the morning. Its office is located in the largest cities in the world, often in a capital. Thus, traders are concentrated in Paris, London or even Berlin. The computerization of the markets has not decentralized activity, and the trading rooms have on the contrary moved closer to the computer servers of the main stock exchanges. High-frequency trading carried out by robots thus implies very close physical proximity to the servers of the targeted stock exchange. By turning on his screens, the trader is thus informed of the latest news from the Asian markets in particular. He has often been able to follow the close on Wall Street, and therefore consults the close in Tokyo, Singapore and other Asian markets. These markets are totally disconnected from the European market, but certain facts can greatly influence stock market indices. Throughout the day, the trader executes the orders of his clients. The opening of Wall Street is a key moment in the trading day in Europe. A lower open, and European markets can plunge into the red.
Get an internship in trading
Student in masters or business school, obtaining an internship is a necessary step to validate your diploma. Getting an internship in the trading industry is very complex. Internships are very rare and reserved for the best students. Relationships are also a good way to get a sought-after internship. But if the Holy Grail of Trader Junior is not reached, several paths are possible for a student. You can thus get closer to more classic internships in the front office, or even turn to the back office to better understand the workings behind the trade of a trader. Since the Kerviel affair, however, the boundaries between the back office and the front office have been reinforced.
The trader is a very informed character and his capacity for analysis is recognized. Applying for internships in the specialized press will then help you to quickly decipher financial and economic information, and thus react quickly to market news. In any case, and if you have the possibility, do not hesitate to apply abroad. Obtaining an internship abroad in a subsidiary of a large French group, for example, will boost the value of your CV for a future recruiter.
The hours of a professional trader are more than extended. Do not expect as an intern to respect the 35 hours, even if it remains against the law.
How to become a trader?
If you want to become a trader, it will not be enough for you to be motivated. A trader, due to the reactivity he must demonstrate, must process information excessively quickly. He must therefore know the financial and economic influences of events (announcement of results, legal liquidation of a company, level of money supply, etc.). Most traders therefore most often have a Masters II, a diploma from a business or engineering school such as X-Mines, and Centrale. A specialization in MBA is no longer rare and is now part of the trader’s almost compulsory background. It will be very difficult if not impossible for a self made man to join a team of professional traders. The drifts of the trader Jérôme Kerviel, who had not followed the traditional course, did not in any way facilitate access to the profession of trader to other training. But initial training alone will not suffice. Following the 2008 crisis, trading rooms no longer hire massively, and they select their future traders even more carefully. There is no question of making the same recruitment mistakes again.
In addition to his training, the trader must have significant psychological qualities. His head must not be spinning when he places orders of several million. Cold blood is one of the great qualities of the trader. However, he will also have to keep his feet on the ground. Some traders forget all about money, especially if the money is not theirs, they never physically see it, and it is just a few computer lines on a computer. To help him, the trader’s positions are limited within thresholds set by his employer. Thus each trader cannot logically take excessive positions.
This very stressful job is paid from €2,000 to €3,500 per month for a junior trader with performance-related bonuses, which can cause salaries to soar. Experience is paid for in cash with 6-figure annual salaries (excluding bonuses) for traders with more than 5 years of experience. Proprietary traders are the most favored. They act on behalf of their bank and not on behalf of their employer’s customers. They thus have greater leeway and more funds to speculate. His remuneration can then amount to millions of euros. The remuneration of traders is more than decried by the general public. They therefore remain more and more discreet about their individual remuneration received. Even within a trading team, remuneration is a taboo subject.
By accepting a loss of salary but a less stressful life, the trader will be able to orient himself thereafter in other financial departments. He will thus be able to take the direction of a trading team or turn to financial analysis, or even the back office. It can help to improve the tools aimed at reducing risks, and to better control the operations of these former colleagues.
The trader is a special individual in the world of finance. It is often put in the spotlight. Helping stress, the career of a trader is relatively short but his remuneration is all the more interesting. It can be an excellent starting point for a long career in the world of finance.
Bud Fox and Gordon Gekko are the two heroes of the famous film with Michael Douglas, Wall Street