Difference between trading and investment banking?

Ivy_Grad
Tue, 22 Feb 2005 00:44:44 +0000

jwblue brings up some valid points which I’d like to comment on…

1) the point about the increasing trend of specialization. totally agree. but this also bolsters my counter point - i.e. trading is a highly specialized skill to begin with - now with increasing specialization even WITHIN the trading divisions - a person entering that field is really putting all of their “eggs” into one highly specialized basket. Now, I’m not saying that a fresh graduate can’t pull it off successfully (in fact, a highly motivated individual with enough research and drive most certainly can). However, that said, if it doesn’t work out - what then? Trading desks are all about producing. Period. Your P&L is out there for everyone to see on a daily basis - in other words, how much money you’ve made or lost is plain to see. It’s largely a sink or swim environment. If you can stomach that kind of risky environment (better yet if you thrive in that kind of environment), then yes, this is for you. But for a lot of folks out there who want to get comprehensive exposure to the world of finance in the shortest possible time with a certain degree of structure, training, relative “safety”, and maximum flexibility post-2 years, then i-banking is still a great choice.

2) I agree that emerging markets are going to play an increasing role going forward (in terms of capital inflows, research coverage, liquidity, etc.) At the same time, these countries have an eye on developing their own capital markets as well. Of course the largest, best run, bluest of the blue chip international companies will be able to access capital in the international markets (i.e. London and New York), but the development of their own capital markets is and will continue to be an extremely important goal. What does that mean? These markets will (in time) be able to raise funds in their own currency on their own markets and will be able to retain liquidity / trading on their own markets (i.e as opposed to listing DRs on overseas exchanges). This means that the bulge brackets will need to have a presence in these local markets to compete - (hire local traders / research teams, etc.) My point? Yes, emerging markets will grow in importance - and there will be increased opportunity. But for everyone - i.e. the level of competition will also grow in step with this increased opportunity. I would argue that in the future, a trader with local knowledge of his/her particular emerging market has a huge advantage over a US trader who is sitting in NY trying to play the market with the differences in time zones, etc. In fact, most of the large banks already actively recruit the best traders of the best local firms to join their desks in emerging markets.


Hedge funds. Absolutely agree with the point about the increasing importance of hedge funds (that’s why all of the major banks are trying to leverage their capital base to get a slice of this action). The smart money is clearly being run by hedgies. That said, if one argues that trying to break into a top trading desk at a bulge bracket was difficult - its that much harder to break into the hedge fund business (and nearly impossible without prior trading experience). The best analogy would be the top M&A bankers trying to graduate to private equity firms or VCs - there just aren’t enough spots to accomodate everyone. In fact, most hedge funds are extremely small operations - some as small as 2 or 3 traders. And in order to get the attention and respect of the top hedgies, normally you have to have some kind of prior experience with these guys (e.g. a top hedge fund sales guy selling to hedgies or a structured finance / derivative sales specialist dealing with hedge funds). In short, its a very exclusive club.
Agree. In fact, my earlier post acknowledges this trend / shift. And any person who has spent time with a top prop trader would never call him “stupid” - he’s arguably going to be one of the sharpest people in the bank.


Bottom line? The purpose of my posts is not to discourage those thinking about pursuing trading careers, the purpose is to try and give a more balanced perspective to those who haven’t had any experience in the industry (which I have). Yes there is a ton of money to be made in the S&T area - but these positions come with their own particular risks and costs that people should at least weigh and consider as they eye the brass ring.