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Week 5 Sales and Trading

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Week 5 Sales and Trading

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aak245
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© © All Rights Reserved
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New Member Education Series

Sales & Trading

Teach-In Session 4
Spring 2024
Topics
● What is Sales & Trading?
● Difference between Sales and Trading?
● Types of banks/Overview of industry
● Is S&T for you? - Overview of lifestyle/hours/compensation
● Exit opps from Sales & Trading

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What is Sales & Trading?

● Make markets for all [most] securities (ready to actively quote a two sided
market) and provide liquidity to its clients
○ E.g., asset managers, hedge funds, insurance companies

● Pitch clients on different trading ideas and then execute these trades

● Instruments include stocks, bonds, currencies, commodities, derivatives,


etc

● Earn money based on fees, commissions, and the bid-ask spread on


trades
○ S&T: buy at the bid, sell at the ask ; investors: buy at the ask, sell at the bid

○ Arbitrage?
Sell Side vs. Buy Side

Sell Side Buy Side

● Investment bank ● Institutional investors

● “Chinese Wall” ● Examples

● Other roles ○ Private equity

○ Capital Markets ○ Hedge funds

○ Sales and Trading ○ Mutual funds & ETFs

○ Equity research ■ Insurance, pensions, and


endowments
Sales & Trading: Volcker Rule

● We talked about a “Chinese Wall” that separates M&A & CM from sales &
trading functions

● What other regulations are imposed on S&T divisions, particularly those


housed in banks?

● Volcker Rule - named after former Chair Paul Volcker


○ In the aftermath of 2008 financial crisis to avoid speculatory trading by Wall
Street’s biggest banks

○ Ban on using deposits to trade for a profit


Prop Trading vs Bank S&T
Prop Trading BB Sales & Trading

● Acts as a market maker ● Acts as a market maker

● Smaller capital base and less ● More about serving clients and
regulation -> profit chase executing trades on their behalf

● Can take positions with their ● Take positions for risk


own money on a thesis basis management purposes

● Lot more money here ● Bigger BS, so greater volume


Prop Trading Shops

● Roles:
○ Trader - trade securities and manage risk, using intuition, judgment, and algos

○ Quantitative Researcher - come up with mathematical models for algos

○ Developer - code out the mathematical models from your researchers

● Make money through price inefficiencies (merger arbitrage, index


arbitrage, volatility arbitrage)

●
Sales & Trading Roles - Bank

● Sales - manage client relationships

● Trading - make markets and execute trades on behalf of investors

● Adjacent Roles

○ Structuring - develop more complex products

○ Research - provide analysis, reports and recommendations (buy/sell)

○ Quant - use algorithms to execute strategies


Products in Sales & Trading

● Equities

● FICC

○ Fixed Income

○ Currencies (FX)

○ Commodities

● Structured Products (Derivatives)


Derivatives

● A derivative is a type of financial contract whose value is dependent on


underlying assets

○ Options

○ Futures

○ Forwards

○ Swaps
Derivatives: Options

● An options is the right to buy or sell an underlying asset at a


predetermined price at or before the contract expiration date

○ A call option is the right to buy

○ A put option is the right to sell

● The strike price is the agreed upon price


○ In the money

○ Out of the money

○ At the money
Derivatives: Futures and Forwards

Futures Forwards

● Obligation to buy or sell an ● Privately negotiated


asset at a predetermined future agreements to trade an asset
date and price at a future date at a given price

● Standardized contracts that ● Higher degree of counterparty


trade on an exchange risk (one party may default)

● Backed by clearinghouses and ● More flexible terms


require deposit as collateral
● One settlement date at the end
● Changes are settled daily of the contract
Derivatives: Swaps

● A swap is agreement to exchange assets that have cash flows for a set
period of time

○ E.g., interest rate swap, credit default swap


Exit Opps from Sales & Trading
Is S&T for you?

● 6am to 6pm per day


● Don’t have to work many hours
○ But the work itself is more intense because you’re always on call
○ If you are away from your desk for 10 minutes and the market crashes - what
happens!?
● Must Haves: interest in markets, lightning quick reactions to market
changes, high stress tolerance, knowing how to sell
● Mandatory 2 weeks off
● You have to take the SIE and a bunch of other exams
● Career path is centered around the place you start but you can exit into
hedge funds and other trading firms
● Our guest lecturer TAMMY CHHIBBZ can talk more
Stock Pitches
Deliverable

● Team Introduction Slide


● Company Overview
● Financial Analysis
○ Key metrics and multiples
● Industry Overview
○ Competitive Analysis
● 5-Year Annotated Stock Chart
● Investment Recommendation (long/short) and Rationale
● Growth Catalysts
● Risks and Mitigants
● Conclusion
Picking a Stock

● Stick with industries you understand


● Keep it simple
● Qualitative approach
○ Choose a sector/industry you think has particularly compelling cyclical
or secular themes
○ Choose the best or worst company in that industry
● Quantitative approach
○ Filter stocks with parameters
○ E.g., below average P/E, high revenue and earnings growth, high ROE
Crafting the Pitch

● Story

○ Description of business model

○ Competitive landscape and advantages

○ Catalysts

○ Risks and mitigants


Crafting the Pitch

● Numbers

○ Earnings per share

○ Revenues

○ Margins

○ Industry-specific metrics
Crafting the Pitch

● Valuation

○ Price to Earnings

○ EBITDA Multiple
Guest Speaker: Tamanna Chhibbar

Uchicago ‘24 - Econ & MIT’26 MBA

Sales & Trading Associate at J.P Morgan


Macro FX

Sister of Vansh Chhibbar the great

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