INVESTMENT BANKS DESTROYED in this AWESOME Presentation - Part 1 of 5

good evening we're here today at the UCL with Anton creel X Goldman Sachs Lehman Brothers and JP Morgan trader a present he's the managing director of the Institute of trading and portfolio management and tonight he'll give us an overview of what it means to work in the industry in particular and Investment Banking hedge funds and what your career developments in the opportunities are it's a very important speech it'll really open your eyes in terms of what you can expect please give us a warm welcome to Anton okay fantastic we're ready to go so you're probably wondering why I'm here this evening well it's really to deliver a message a message that you won't get told by people who come to your University who are pitching you essentially to go and work for corporates so you probably get a lot of investment banks accountancy companies finance companies maybe private equity companies coming in and they're basically advertising their own companies and telling you guys or asking you guys to come and work for them so advertising internships graduate positions the problem is is these guys are actually delivering you a corporate PR message that's been given to them and they've been told what to say they tell you all the good stuff what they don't tell you is the truth they don't tell you the good stuff and the bad stuff and if you guys are spending a lot of money on your degree and you're applying to these places to go on internships graduate training programs you need to know what you're dealing with what you're applying to otherwise you're just going in blind so today what I'm going to do is actually tell you all the good stuff and the bad stuff ie the stuff they will never ever tell you and the stuff you're going to be shown today can literally take you ten years to work out so it can really really give you a fuss forward in your career if you understand all these things and how they work and how you can operate in the industry and be successful by actually dodging all the bad stuff and only getting the good stuff does that sound good right first thing we're going to do so this is the schedule for this evening first thing we're going to do is we're going to navigate the landscape so we're going to be looking at the trading and portfolio management industry and what professional traders actually do and operate in that industry we're going to move on to their real functions so I'm going to deliver you the truth on what these guys actually do day in day out you guys have a perception of what professional traders do unfortunately it's extremely misguided we're going to be looking at all those reasons why as well but we'll be looking at the realities and the functions of professional traders will be also looking at the compensation so what these people actually get paid there's different types of professional traders some get paid very well some get paid terribly in fact the vast majority don't get paid well at all but when corporates come to deliver you their message everything's rosy everything's sweet they don't tell you what the numbers are three four five ten years down the road and what you actually have to deal with so we'll be looking at the realities of what they do and what they get paid what we'll also look at is typical career progression so a career progression over ten years of somebody who walks into the investment banking industry now or the hedge fund industry so guys like yourself who are going to be working in the next couple of years starting in those industries what's the next ten years going to look like then we're actually going to formalize opportunity cost we're actually going to put numbers on it so what do you give up now if you go and work in certain industries and you'll be quite shocked at the numbers and once you formalize this opportunity cost it all comes home and it all becomes very clear what you should and shouldn't be doing then we're going to actually look at how you do follow the road to success in the industry so how you actually start off on the road to success there'll be tens of thousands of applications going in to investment banks hedge funds asset managers and literally everyone's got a 2:1 or a master's and everyone's in a society all those CDs go in the bin because there's nothing special about them and I've been on the other side and I used to hire the graduates and train them so I know what to look for and I know what the banks and the hedge funds want to see so we're going to show you what you need to be doing over the next couple of years to actually really stand out and get into the industry and start off as successfully as possible so let's start off with navigating the landscape this is the first thing you've got to do in any industry any industry you go into you want to apply to go into you need to know why you're applying you need to understand the landscape how the industry works so in this industry training and portfolio management it's no different you need to understand the landscape how it works you need to know what you're applying for what we're going to be focusing on is the major players places where professional traders actually work because there's different types of professional traders the vast majority of professional traders work in these two places investment banks and hedge funds in your own time you need to look up the following guys work out what they do because that's really the entire finance industry and trading and portfolio management industry so pension funds longer only funds private equity so non-publicly traded assets the brokers so inter dealer brokers they're the guys that trade exclusively with institutions retail brokers who trade directly with the man Street and retail banks who bank with the man on the street but we're going to focus today for the purposes of this presentation where the vast majority of professional traders and portfolio managers work investment banks and hedge funds so let's start with investment banks who are the clients of the investment bank well they range from blue chips pension funds hedge funds family offices private equity high net worth so what's defined as a sophisticated investor and retail banks they've also got a lot of financial interests in their clients as well so it works on a loop they're clients who do business with them they actually invest in quite a lot of them and these guys don't get up at 5:00 a.m. and get into the opposite six and stay up all night working for no reason every area of the investment bank wants to make profits they're public companies they're answerable to shareholders this presentation will be up online in about three weeks time so if you've registered for the event with your email you'll get an email with the link you'll be able to look at this in a lot more detail but essentially what you're looking at is the structure of an investment bank globally for today just focus on everything from the middle to the left so everything from the middle where it says primary market to the left where it says secondary market so the primary market site is where debt and equity is issued clients go to the investment bank and they raise capital in the debt markets and the equities markets what happens when those assets the debt and the equity become publicly available they're traded on the secondary market site by the traders and on the secondary market site the business is split up into agency and proprietary so there's an agency business and a proprietary business like I said you can look at that in more detail but that's the most important thing but today to understand this side of the industry because that's where traders and portfolio managers work so once assets become publicly available and publicly traded the traders and portfolio managers trade them but what is a guy in investment bank do what is a trader at an investment bank actually do you need to understand this if you're actually going to apply to an investment bank so let's have a show of hands first how many people in the next year are going to apply to an investment bank either for an internship or a grad position or planning to okay so that's pretty conclusive at least 90% of either how many people are going to apply to hedge funds maybe five or six people in the whole room okay before we go on and look at investment banks and what traders do there why don't we just work out the reasons why very quickly you're applying to investment banks what's the reason someone shout out a reason why they are applying to investment banks sorry hi pay let's remember these so the first one hi pay anybody else and interest in the financial market okay anything else hedge funds don't provide internships okay training opportunities yet remember that one that's good anything else we'll come back to these but just remember them so what was the first one high pay training opportunities so there's no opportunities to do trait there's no training opportunities elsewhere what was the other one over here what was the other one over here interest in the financial markets okay let's remember those let's start at the investment bank then where you're all going to apply trading and portfolio management so if you're a professional trader at an investment bank II if you're a professional trader at an investment bank ninety percent of your time is spent being a market maker you make markets in the assets that you trade to clients ten percent of your time is spent as a proprietary trader so using the bank's money to make money and it's called proprietary trading because it's really everything that the trader does that's proprietary to doing business with clients so it's going to be pretty important to work out if you're all applying to investment banks what the hell a market maker does because that's what you'll be doing 90% of the day if you go there for it for ten years you'll be doing it for ten years so you need to know market making on the secondary market side is the bread and butter of the business and it splits up into two areas agency and risk business it's the bread and butter of the business because it's the Commission business it's the backbone of all the profit of the company I'll explain in more detail why as we go along it becomes very very obvious these days a typical Commission on the secondary market side in equities is 5 basis points so 100 basis points is 1% typical Commission is 5 basis points so if we're looking at an agency example and by the way agency is 80% of all market making business these days we can use this example it's very very straightforward a client a hedge fund or a pension fund of the bank on the secondary market side decides they want to buy ten million dollars of Apple at five hundred dollars a share so they want to buy twenty thousand shares in Apple they've got two choices when they call the investment bank they can either give it to the investment bank to execute on their behalf in the market where the bank does it with no risk or they can ask the bank to commit capital so ask the bank full risk agency is when the investment bank takes no risk they buy it on behalf of the client now that can be done over the telephone or it quick or it can be done over the computer so the client can actually put the order into the order management system and it goes directly to the investment bank pops up on the screen of the salesperson the salesperson clicks send it goes to the trader the trader clicks right mouse send to the computer the bank hasn't taken any risk they're buying it on behalf of the client when it's done over the phone the dealer at the pension fund or the hedge fund calls the salesperson and says take an order for 20,000 shares in Apple to buy at 500 the sales trader enters it and sends it to the trader the trader accepts right Mouse's puts it in the computer either way it goes in the computer but in this example let's have a look at the way the business works in this example the clients decided to buy 10 million dollars of Apple 20,000 shares the bank gets paid 5 basis points for just doing nothing whether it's put in the machine by the client directly or done over the telephone mitad any capital it's risk-free what about the risk business the risk business in market making that transaction is done slightly differently this makes up about 20% of all market making so instead of the order going directly to the bank or via the salesperson directly to the trader or via the salesperson and put in a machine they're going to the salesperson and asking the bank to commit capital so they ask the trader via the salesperson to sell the 20,000 shares to the client the trader ends up short 20,000 shares and has to go into the market to buy them back if this if the stock goes down they obviously make money if the stock goes up they lose money market makers are measured on their ability to retain the Commission that the bank is getting paid so imagine if you're running your business on the trading desk at one of the investment banks and over the whole year you get paid fifty million dollars commission the bank gets paid fifty million dollars Commission for you to do that business to bring that 50 million in you had to commit capital in at least 20 percent of the orders so let's say you lost 10 million dollars doing that well you've got a retention ratio of 80% which is very good in this example the retention ratio 60 percent so a bad retention ratio is 50 percent a good one is 75 your ability as a market maker is measured on how much commission you retain so market making it's what 90 percent 90 percent of the time traders are market making at investment banks not prop trading this is what you'll be doing the vast majority of your day that's what you're applying for it's split up into agency and risk business but 80% of the time it's outsourced to a machine and 20% the market maker is required to take risk to the client so we're just doing 80 times 90 here 72% of the time a professional trader these days at an investment bank the day is spent monitoring software it's spent monitoring algorithms because the software the algorithms are processing agency orders and they might they may have lots of these all happening at the same time so 72% of a traders time is spent at an investment bank monitoring algorithms does that sound sexy there's there's no human skill in market making anymore ten years ago there was however the industry has been in structural decline for over a decade what you're applying now to is a totally different industry to what it was ten years ago what was the typical Commission number that we looked at before can I remember five basis points what do you think the industry standard was ten twelve years ago I wish almost it was around 25 basis points was industry standard 1012 years ago now if Commission is the bread and butter of the secondary market side and it's gone from 25 down to 5 that's down 80% what do you think's happened to everything at the investment bank because everything relies on it everything's down 80% this is the problem that you face now the other 18% of the time of the market maker if you think about that trades that we looked at in Apple where the market maker commits capital and sells the Apple to the client do you think that trader actually wants to do that trade well it's a catch-22 situation because when the client comes in and says I want to buy 10 million dollars of Apple 20,000 shares can you sell them to me at five hundred the trader says no three seconds later the trades done at the Investment Bank around the corner there's competition still in the industry of course there is so they're kind of forced to do the transaction they don't really want to do it they don't want to commit the capital but they'll do it if unbalanced it's worth doing so they're kind of forced to do it so the other 18% of the time unfortunately what you'll be doing at an investment bank these days is putting out fires you'll be unwinding positions that you don't want to have so 72% of the time you'll be watching machines trade making sure they're not screwing anything up if they screw it up you do a right mouse you pull the order out the market when the machine behaves or wants to behave you right mouse and put the order back in the market the other 18 percent of the time you're scrambling around to get out of risk that you don't want that's the job of a market maker that's 90 percent of what a trader does at an investment bank that situation where you've got lots of positions that you don't want to have that is termed in the industry as the negative selection portfolio those positions have been negative negative Lee selected you didn't really want to have them you got given them by the clients and now you're spending your time trying to get out of them

Channel: InstituteofTrading

Views: 680,302

Rating: 4.8869119 out of 5

Keywords: presentation, investment banks, investment, banks, trading, goldman sachs, morgan Stanley, ucl, university, college london, hedge funds, forex, stocks, commodities, institute of trading, portfolio management, careers, business, new york, nyc, bank of america, merril lynch, credit suisse, jp morgan, Million Dollar Traders (TV Program), anton kreil

Id: vbuborn14Mc

Length: 23min 12sec (1392 seconds)

Published: Wed Mar 05 2014