In the continuing series here about the equity derivatives corner of finance, today a senior salesman at a major bank. He is in his early 30s and, this being a relatively small field, that is all that can be said about him.
Joris Luyendijk hears from an equity derivatives salesman about negotiating the relationship between client and trader
"You've got two types of people in investment banks, essentially. You have got those for whom their job is their identity. If their career does not go well or they threaten to lose their jobs, they face an acute crisis of confidence.
"Then there are the people for whom this is simply a job. It pays well, comes with huge demands, and, well, over all for them the balance tips in favour of staying in their job. But they will feel conflicted, constantly watching over their shoulder; is this new guy who came in from UBS really helpful or actually trying to steal my client? It's a competitive atmosphere. If you've done a particularly profitable trade, that will be mentioned in the morning meeting.
"It's a delicate balance for sales guys like me. Some clients are really nice, some are horrible. Same with traders. You get into petty situations where a trader may decide he hates a particular client and will not quote a good price. Or they will be deliberately slow, making you look bad to the client.
"There's also another side, when a trader may say, hey, I like that client, let's take him out for a drink and get to know him better, so we can do more business with him.
"Over all, it's very tiring to be a salesman, absolutely. You get absolutely fed up with people's attitudes, clients and traders. Add to that your boss. He can be a sociopath, or a money-obsessed person, or a genuinely nice guy. You have no control over that, but he has control over you as he will be the one to put your name on the list when there's a new round of redundancies. What if he pressures you to do something you feel is not to the advantage of the client?
"These days everyone is concerned about their jobs. Many banks and firms lay off five, 10, sometimes 15% of their worst-performing staff every year. It's a perfect storm. Personal budgets are up (meaning you are expected to make more), volumes are down, markets are trading sideways (not really going anywhere) and there's very little appetite for risk among clients.
"All of us think of our colleagues at RBS. They were doing their jobs, might have been top producing for five, 10 years, and then, through no fault of their own, their stocks have become worthless. If you have been paid in stock for years, and suddenly that's all gone … this is weighing on people.
"Or worse: Lehman. There were many people there who never traded a sub-prime security in their lives, yet lost everything from one day to the next. You have no control over that.
"In equity derivatives, there is flow trading in very standardised contracts, and there are the more complex structured products.
"In flow, you are making money from commissions on the trades you make for clients. Right now it's very hard to make any money in flow trading, let alone rip clients off. As I said, the contracts for equity derivatives are completely standardised and transparent, publicly traded on the exchange. Clients can get the product from 10, 15 market makers at a bank or brokerage firm, so they play us off against each other.
"There are some really big hedge funds out there, and in the current market, they can get very good prices.
"As for the more complex, structured products … There is now an incredible legal and compliance framework you have to work through. Clients got severely burnt in the sub-prime crisis and with the Lehman default, when their complex structured products blew up in their faces. So right now, the less complicated a product is, the more their appetite. It's all about counter party risk and transparency.
"There is now a lot of talk about our duty to clients. But how about our clients' responsibility? What I mean is, our clients are government agencies and people at hedge funds and pension funds. These people manage other people's money. Now, if they can't be bothered to go to three or four banks for a quote, and they just go along with the price quoted to them by the first bank they contact … That's not doing your job properly.
"Besides, those fund managers are rarely open about their own fees.
"Of course I read the public letter Greg Smith sent when he resigned from Goldman Sachs.
"He was in flow equity derivatives sales, where it must have been very tough. Yet the feeling in the industry is that Goldman is not drastically different from other banks. You are here to make money for the bank, that's what shareholders in banks buy the shares for, right? And if you make money for the bank, you do well in your career – that's the bottom line. All banks work that way, it's not new. If you deliberately rip your client's face off it will blow up in your face, but you're not working for free, not when your job is on the line.
"So, how it works. As a sales person you've got a portfolio of clients. They may call me because there's something they want to buy. Then I'll go to our trader and ask: what's your price? I take that price to the client, who will have a few other banks on the line, and then the client will compare, try to get a better price out of the trader through me.
"I also pick up the phone and call them with trading ideas, or just to touch base. Talk about a trade we missed because another bank showed a better price, or there may be a new product we are offering.
"The Greg Smith letter mentioned 'filling axes', where a trader has bought a certain product – in the parlance 'taken a position in the market' – that he wants to get rid of. For example, because he is approaching his risk limits, the bandwidth between which he is allowed to trade by the bank. In such a scenario, salespeople are leaned on to push that product with their clients. Obviously that generates tensions. A salesman will be building a relationship of trust with a client, and now you are trying to flog something that is in the interest of the trader.
"To make it even more complicated, my long-term relationship is with the client, but my performance is measured by the trades the trader makes on my client's behalf.
"Still, let's not dramatise. Some of my clients are hedge funds. Look, you can't bully a hedge fund and say: you have to buy this. They'll just laugh and hang up on you.
"With more complex derivatives there are now all sorts of new rules about the kind of representation of the product you can make as a salesman to your client. It's not like you can just pick up the phone, call someone up and push something on to them.
"Ethical dilemmas? Say the sales guy next to you is not getting anywhere with a client. You think you will do much better. Can you go after that client?
"I have been in this business for a decade now. In good times you help clients so that in bad times they will give their business to you. You want to be remembered in bad times.
"The pay. I am on £175,000 to £200,000, plus a bonus of maximum the same amount. Previously people like me would be on £75,000 to £100,000, plus a much larger bonus. But then there was the outcry over bonuses, so banks shifted part of the remuneration to the base pay.
"It's a lot of money but this is the going rate for people of my rank. It's also putting huge amounts of pressure on people to perform. Before you could have a bad year and get away with it. Now you're costing a lot of cash, the bank is bleeding every day, so you need to work much harder for that base salary.
"The biggest misunderstanding about finance? That we're all millionaires. The 1% of the 1%, they are the ones with the huge amounts. The rest of us, we have a nice middle-class life, a nice house, two or three kids in private school. But nothing wild. And remember, in part we're paid in stock. That can go up in value but, as we've seen recently, it can also go down."
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