careers in trading

Careers in Trading:

Careers in Trading Hosted by: Speculative Trading & Arbitrage Team (STAT)

Basic Terminology:

Basic Terminology Speculation – taking financial risk with the expectation of profit ($$$$!!) Investing – same thing, but usually denotes “ownership” and “less risk” Arbitrage – making a risk-free profit Hedging – taking a position to offset/reduce risk exposure from another position Long – position to profit from a price advance ( Bullish = expectation of price advance) “ I am long 500 shares of AAPL (Apple) because I am bullish.” Short – position to profit from a price decline ( Bearish = expectation of price decline) “ I am short 500 shares of NFLX (Netflix) because I am bearish.” Fundamentals – info from underlying asset, such as earnings, financial ratios, cash flow, company products; also includes economics like int. rates Technicals – info from market transactions, such as price and volume Bid – price at which you can immediately sell Ask (Offer) – price at which you can immediately buy Volume – the amount of contracts (shares) traded PPS (price per share) – price of the stock Market capitalization (shares outstanding*price ) – “value” of the company in stock S&P 500 (aka the SPY ETF or ‘ES’ futures contract) – market-cap weighted index of the 500 largest stocks in the U.S., often used to measure the overall U.S. market price

STAT:

STAT Community, c ompetition, craft Club about the financial markets CORE MARKET CONCEPTS Trend: what is the direction of the market? Momentum: what is the velocity of the market? Volatility: how much uncertainty is in the market? Liquidity: how much does this asset cost to convert into cash? Correlation: how closely related are all markets & assets? Mean reversion: when & where will the market correct?

The Psychology of the Market:

The Psychology of the Market Personally, I think silver is right here…

Asset Mgmt. Terminology:

Asset Mgmt. Terminology Net asset value – the total equity contributed to a fund from investors Asset management fee – an annual fee that fund managers take as a percentage of total net asset value Performance fee – an annual fee that fund managers take as a percentage of total profits made Withdrawal/redemption – the addition/subtraction of investors’ money from a fund Buy-side – firms that “buy” positions (hedge funds, prop firms) Sell-side – firms that “sell” positions (market makers) Open-ended fund – new shares can be created for investors Close-ended fund – new shares are not issued for investors; they are usually traded on the market and issue a dividend Retail trader – individual that traders through a discount brokerage. Non-professional.

Market Participants:

Market Participants Asset Management Funds Mutual fund Hedge fund Proprietary trading firms Retail traders Investment banks Specialists/dealers/market makers Brokers Insiders Pit/floor traders aka “locals Hedgers E.g. airline company that trades oil, food producer that trades agriculture, importers/exporters that are trading currencies We’ll focus on these two because they are the most significant participants in the electronic markets

Possible Career Paths:

Possible Career Paths Investing Analyst Equities Fixed income/credit Data Portfolio (risk) Portfolio associate Portfolio manager Fund manager Quantitative Quantitative analyst Risk manager Structurer (derivatives pricing) Algorithm trader Statistical arbitrageur Proprietary trader Equities Futures/ Forex Options Fixed-income Floor/pit trader Sell-side trader Hedge fund manager Energy trader Trading

Slide 8:

Everyone has a role in the market

Mutual fund:

Mutual fund What is a mutual fund? A professionally managed investment fund that pools money from investors to BUY stocks, bonds, money market instruments, and other securities. They are pretty much restricted to going LONG Mutual fund companies usually have multiple managed portfolios that can be fit to investors preferences – market cap, sector, income, growth, value, foreign, cyclical/defensive, etc.” Examples of mutual fund companies : Fidelity, Vanguard, BlackRock , PIMCO, Barclays, FranklinT empleton , Oppenheimer Funds, T. Rowe Price, StateStreet Example of mutual funds: Fidelity Trend (FTRNX), Fidelity Contrafund (FCNTX, BlackRock EuroFund (MAEFX), PIMCO Total Return (PTTRX)

Slide 10:

Mutual funds by classification How mutual funds work

Hedge fund:

Hedge fund What is a hedge fund? A private investment fund that can speculate in a broad range of assets. Hedge funds can do the following (and mutual funds can’t): short sell equities (stocks) trade derivatives (options, futures, forex , swaps, etc ) invest in alternative assets such as physical commodities, sovereign debt, venture capital equity, etc. (even collector’s artwork!) u se leverage (buy/sell assets on borrowed money) Only “accredited investors” or family/friends can invest in a hedge fund. HFs are banned from advertising to the public. For this reason, they are not as transparent as mutual funds, although they must comply with same regulations as other financial entities (FINRA, SEC, CTFC, exchange rules, etc.) HF managers get paid a performance fee, in addition to the asset mgmt fee. The standard is 20/2 (20% performance/2% asset mgmt ) If The Mercury-Venus Fund, a hedge fund, has 20 billion in equity and returned 10% profits in 2010 ($2 billion), then the hedge fund is entitled to 20% of profits (.2*$2 billion) and 2% of total assets (.02*$22 billion)  total profit: $880 million Return on investment (ROI) is usually reported “AFTER-FEES”, so Mercury-Venus returned (22 billion – 20 billion – .88 billion) // 20 billion  ROI: 5.6%

Trading:

Trading 3 Career Paths in Trading Proprietary trading – trading positions on the behalf of a firm, to generate speculation profits Sales & trading (market making) – facilitating a market for clients to buy and sell, profiting off the spreads Retail trading – “DYI”, trading your own money Day trading Execution trading Derivatives trading Energy trading Algo -trading

Landing a job as a trader:

Landing a job as a trader Crafting a resume: Always a good bet: Ivy League status Collegiate athletics MBA/ pHD CFA/MTA credentials Proficiency in math, programming, statistics Professional trading experience Usually a good bet (do research): Sometimes a good bet : Poker/blackjack Retail trading experience Interview process: What they look for: Emotional stability History of competitiveness Neither risk-seeking nor risk-averse (opportunistic?) Ability to reason quickly (usually related to math) Passion for the markets Good fit

Local shops:

Local shops Edward O. Thorpe – hedge fund manager of Edward O. Thorpe & Associates in Newport Beach, former UCI math prof & BJ card counter John W Henry – former student (no degree) at UCI, hedge fund manager of John W. Henry & Partners, owner of Boston Red Sox/Liverpool Bill Gross – head of PIMCO, largest fixed income fund in the world List of hedge funds in California Proprietary day-trading: Coastal Trade Securities (Irvine), Bright Trading (Irvine), M&N Trading (Los Angeles), T3 Capital (Los Angeles), Gladiator Capital (San Diego) First New York Securities (FNYS) – branch in Irvine?