Against the odds, you want to be a trader in an investment bank. Even though trading jobs are being displaced by jobs in compliance, risk and technology, you're convinced that trading is the place for you. Even though trading jobs in investment banks are now about making markets and managing client 'flow' rather than taking risk on the bank's behalf, you want to build a trading career. You're passionate about trading. So...do you want to trade equities (stocks)? Or do you want to trade bonds?
Historically, the distinction between equities traders and bond traders was considerable. In the City of London at least, equities traders were the 'barrow boys' with street smarts but limited education. By comparison, bond traders had bachelors degrees and PhDs.
"In the past, you needed to be a lot more mathematical to work in fixed income than in equities," says one government bond trader who's worked for both banks and hedge funds. "Bonds are much more complex than equities - a stock is simply a stock, and its value is based upon the way people value that company. But the value of a bond is determined by a lot of extraneous factors, like central bank thinking about interest rates and the yield curve. - A lot more goes into valuing a fixed income product than a stock."
Bond traders are also known as 'fixed income traders'. This is because bonds pay a fixed return ('income') until they day they vest (are paid back). Until that pay-back date, the value of the bond fluctuates in line with expectations that pay-back will actually occur and the interest rates that are available elsewhere. (For a simple explanation of bond pricing, click here).
Another bond trader, now a headhunter, says equities traders and fixed income traders tend to be temperamentally distinct. "Optimists trade and sell equities, pessimists trade and sell bonds," he says. "Equities are a growth story - they're all about potential and expansion. Bond traders need to be more cynical - bonds are bets on whether you'll get your money back." Because bond traders are smarter than equities traders, he says it's usually possible to move from trading bonds to trading equities - but not the other way. A few months ago, Citi transferred its head of European credit trading into European equities, for example.
Danny Kessler, chief executive of MET Traders, CEO of the MET Group, a diversified financial services group working in asset management, fund management, market making, proprietary trading and corporate finance. agrees that bond traders can be cynical pedants. "Bond traders need to be more methodical," he says. "They want to make sure their debt gets repaid, so they need to be very analytical. By comparison, equities traders are looking for growth drivers and growth threats, which may be less tangible. They need to be more instinctive and intuitive."
Next time a recruiter asks you why you want to trade equities, therefore, point to your interest in growth stories and company performance. And next time a recruiter asks you why you want to trade bonds, point to your interest in broader macroeconomic issues, the interest rate cycle and and detailed analysis regarding the probability of default.
At the same time, however, it's worth bearing in mind that electronic trading is bringing equity and bond traders closer together. Increasingly, both product types are exchanged electronically - with equities trades ahead of fixed income (50% of equities trades in Europe took place electronically in 2013) in terms of 'electronification.'