A Day in the Life of an Exotic Derivatives Trader

The author of this article works as an associate for an investment bank in NYC trading exotic derivatives. The author holds a master degree.

5:30 am: Alarm goes off. Told myself last night that I'd go to the gym downstairs in my building for a quick workout before work today. Not happening. Back to sleep. I really do go through this process most days. I probably should stop even bothering to set my alarm for this time.
6:00 am: OK now I'm up. Shower, get dressed, get on subway to work. You'd be surprised how few people are out on the street at this time.
6:40 am: I'm at the desk now in lower Manhattan. I log in to my PC, start up all my applications. I have a pricer, risk management system, Reuters, Bloomberg, chats, broker screens, etc. There's a reason I have to use 6 screens piled on top of each other. One of the most senior sales guys is already in, wants to refresh a price I showed him yesterday for an important customer. Quickly make it for him. Don't have to think too much about it since I thought about this one yesterday. Just have to get it into my pricing toy and check that vanillas are truly trading where the system says they are before I show the price.
7:00 am: Good morning, London. I announce that I am ready to start my day formally to my London counterpart, who fills me in on what happened in the markets in Asia and London morning, how we've made or lost money since yesterday, what horrible trades got stuffed into our book, and how we've hedged and/or are planning to hedge them.
7:15 am: London goes to get lunch. I'm in charge of trading deltas for a little bit until he gets back.
7:30 am: Start running risk reports for our book. Since the markets moved since yesterday and there have been some trades done overnight, our positions have probably changed a bit. They probably haven't changed a huge amount, but it's good to keep on top of it since small changes unwatched do add up.
7:45 am: Breakfast is served! The new junior on the desk brings everyone coffee and breakfast. It wasn't so long ago that I was doing this.
8:00 am: A flurry of price requests from custies in London and New York come in just as I'm chatting with my partner in London about our positions. We split up the work and get down to making price after price. It's important that prices go out quickly and it's even more important that they're correct prices. You can't spend five minutes coming up with a price for a commonly traded product even if it is exotic. As I'm taking a bit long to get every price out I remember I should make some prices for the brokers as well - they get a request from a bank and ask each other bank anonymously to price it for them and proceed in an auctioning process until they match a buyer and seller and take a small commission on the trade - this is the best way to know exactly where the commonly traded exotic products are trading. This will in turn make me faster with price making since I won't have to think as much. Sadly as markets change every day, you have to continually follow the pricing in the broker markets every day and can't take a break. Otherwise you'll get run over on a big customer trade. So after all the prices go out to the customers I make all the unmade prices in the broker market as well.
8:30 am: Talk risks and positioning with my London. What risks are we running in terms of the greeks? How have they been performing? What deals are they from exactly? Should we keep them? If so, should we add to them? What's the best way to go about adding to them? There's not just one product that we can trade that gives us certain greeks. To get stuff done it's helpful to be a little clever about what we ask the market so people don't know exactly what we're trying to do. Any deals in our book that we think could turn into big headaches? What can we do about them now to help us if/when they become issues later? We've also got a reasonably sized prop book. We decide to punt something. So far this year we've just about broken even in the prop book, hopefully that'll change.
9:00 am: Time to execute what we've decided to do in our conversation. We both ask our various brokers for a bunch of stuff. We'll be working those interests for a while, probably.
11:00 am: The day has slowed down. We've gotten prices back on all our interests. Some we've gotten done, some we're still waiting, some are just too far away or wide to do anything with. Oh well.
11:30 am: Corporate sales asks us some weird structure. No clue why a corporate would want to do this, but we show a price. Corporate sales shows the company a price much worse than what we showed them. The corporate trades and has its eyes torn out.
11:45 am: I quickly get lunch from the cafeteria and bring it back to my desk to eat. No lunch breaks in this job.
12:00 pm: London's making an exit. I'm in charge of trading deltas now.
12:30 pm: Get an email with a resume attached from a current graduate student at my old program. Says a professor referred him to me. We don't really have all that much in common and his resume looks about the same as everyone else's. No real reason to go to bat for this guy unfortunately - I save that privilege for actual friends and even then I probably couldn't do anything.
1:00 pm: Some announcement has come out. The market's moving. I'm short gamma. Awesome. Stopping out like an idiot. I curse out loud in complaint to the trader next to me. He's also short gamma and doesn't feel sorry for me.
1:05 pm: Just got paid for one of my interests. I was on the offer. Probably should have raised my offer when the market started moving. Not really impressed with myself. Won't be mentioning that in my end of day report. History will only be recorded as I got the interest done.
1:10 pm: Stuff still moving around, which is just when sales like to ask us for something to pitch to a client. I suggest someone sells me some gamma at an off market price. Nobody finds it funny. They ask for some prices. I make them.
1:30 pm: Customer asks for a refresh of one of the exotic prices I showed earlier, now that market is calmer. Is it any tighter now? Sure. He trades with me. Salesperson does the delta hedge for me. I ask a vanilla in the market against some of the risk I've just taken on.
2:00 pm: Day seems over. Nothing much going on now. Chat with the other guys on the desk about weekend plans.
3:00 pm: Our most prized customer asks a pretty large exotic price request. I'm a bit nervous. I can't get this wrong. I show sales a price for it and promptly hide under my desk.
3:10 pm: Customer comes back, my ask was too high, doesn't trade. Worse things have happened. He says he'll be back tomorrow morning. Good. Then it can be my problem as well as my London's jointly. Truthfully it's this sort of stuff we make a lot of money on - doing this product with a customer and then hedging the component parts using vanillas. I'll send an email out to the rest of the exotic team explaining my price and asking for their opinions.
3:30 pm: Couple small trades done here and there, nothing earth shattering. Just take them into the risk and don't bother hedging (except of course for the deltas).
4:00 pm: Now the day is really over - hedge fund guys must have a nice life since they all seem be out of their offices already. Then I remember how often hedge funds unwind trades with us because the PM that put them on had been fired.
5:00 pm: Finish up all my end of day routines and send out a few emails. I like my job but they really do make you earn your money. I finish every day pretty mentally exhausted.
5:30 pm: Looks like I can head out now. Usually I can leave around now, definitely by 6pm. There are some days though I may have to wait for my Asia to get in, which is about 7pm. If there's a disaster in the markets I might be staying well past 7pm to help them catch up, get up to speed, and start the day. The latest I've ever stayed was 11pm but that was a big outlier. 9pm is a more reasonable estimate of how late I would stay if something awful happened. Thankfully this is rare anyway. Say goodnight to the other guys on the desk and go home.
6:00 pm: Make it home. Change. I'm not a fan of business casual outside of work.
7:00 pm: Meet up with my girlfriend for dinner.
9:30 pm: Have to get to bed early if I'm going to make it to the gym at 5:30 tomorrow morning...
Pretty intense. May I ask, what salary this guy must be making if he's working his a** off !? 
this guy is thinking of an MFE after such an experience on a daily basis!!
Was wondering- How much time will it take a fresh MFE grad to do the kind of work he is doing!!!
There's a ton of thinking that goes on all day long. Between pricing products and hedging dynamically, we spend all day discussing our positions, deciding which ones we think will perform well and which won't. It's not trivial to just "get greeks" - these greeks very often represent enormous, multi-million dollar risks, some of which we like and some of which we don't. It's our job to sort out the good from the bad and work out how to make sure our position is made up of all the ones we think are good. We talk about how to improve our positioning in order to reflect our views of the market. In order to come up with views in the first place, we of course glean insight from seeing directly the various flows and where they come from, but we also spend a great deal of time pouring through data, charts, correlations, backtestings, etc. We have a ton of tools that we've made over time that can grab relevant data for us, and we have tools that can come up with a model price for us, but when it comes time to make a decision about a market view and how best to express it, and when it comes time to turn a model price into a dealable rate in a large size, those are very much human decisions. As traders, we're expected to be experts in translating what machines do for us into real life. Our models are all limited (read: wrong) in some way, and so while they're great in getting us the majority of the way to a price, if we just dealt off the model and hedged out the exact greeks of the model every day, we'd lose money. Further, once we deal these products, it's up to the traders to decide how to go about hedging them. There's not just one way to hedge. Sure, there's probably a standard way to hedge each first generation exotic, but the trader knows fine alternatives and can decide which is most appropriate in current market conditions. The trader knows he can get option X done more cheaply than option Y because he knows how similar things are trading in the market, the vast majority of which is not computerized - and even it it were it would be exceedingly difficult to give a computer the judgement it takes to make that decision. If you make the wrong call you can move the market against you and lose money on your hedge. All of the above - and surely I'm leaving more examples out in this brief post - make the job an impossible one for a computer to do profitably.

I apologize that I did not make it clear that we do a lot of thinking on the desk, and I do hope this reply rectifies that mistake. What I was hoping that you would take away from the post was that we work very hard and very quickly. A lot of people out there like to think that traders are these guys that get paid a lot of money to sit at a desk and eat steak while telling sexist jokes all day. Half of the people who believe this despise the industry, and the other half want to be in the industry. I wanted to make it clear that it is not what we do, especially for people who think that the hard work will be over once they get an offer on the trading floor out of school. At times it's true that we don't get to think as much as we like to because we can be exceedingly busy and stressed out, but every single day we sit down at the desk we are expected to share our thoughts about the market and our book's positioning.
this guy is thinking of an MFE after such an experience on a daily basis!!
Was wondering- How much time will it take a fresh MFE grad to do the kind of work he is doing!!!
No, I am not thinking of getting an MFE - I'm not sure where you got that from. I already have a master's degree in another quantitative discipline and I'm quite content with that! Surely there are plenty of things I could still learn from an MFE program, but I am learning enough on the job to keep me happy.
For a fresh MFE grad to do this kind of work it would take just a couple years to really get up to speed on a trading desk. (This is assuming of course you get hired as a trader straight away.) You always continue learning but it generally takes 2-3 years to become semi-competent at your job! The same would go for an undergraduate. No matter what educational background you come from you still have no clue what you're doing during your first year.
It doesn't sound as if we worked for the same desk at all. First, no trader would tolerate the bonus pool being eaten up by someone who didn't work hard and perform, even if it was someone senior on the desk. No one can just sit there and do nothing - there would be mutiny. After all, we're there to make money for ourselves and having overpaid slobs around gets in our way. That's what PnL is for - if you don't do well, everyone knows. Second, the desk I work on is not a prop desk; it seems to me as if you're describing a prop desk. We don't have models that tell us to buy and sell. We have tools that present us with data that can give us an idea of relative value on various different tradable statistics. It helps us with coming up with trade ideas and biasing our spread on a price one way or the other on an illiquid request. We have tools that price exotic options for us. Neither the relative value tools nor the pricers are perfectly tradable. Same as with every other bank.

Our quants do very important work. They develop the models we use to come up with prices, see our risks, and mark our books. They develop environments in which it's easy to use these tools and in which we can view data to help us with idea generation. However, there's always a little tension on desks between quants and traders. Quants can sometimes view traders has arrogant and unintelligent; traders can sometimes view quants as too theoretical, impractical, and detached from the real world. The viewpoints come from the job descriptions and responsibilities. Quants on my desk are responsible for building and maintaining the infrastructure the traders are to use. The traders' task is to use the infrastructure along with expert knowledge of the market to generate revenue for the bank. A quant, as in your example, may come up with a very sensible model which points to a certain trade. The trader might just not take the suggestion. At the end of the day, it's not in the quant's job description to make money in the market - that's the trader's role. If the trade goes badly, the trader can whine about this, that, and the other, but it goes into his PnL and he's responsible for it. The quant ultimately won't be held accountable for risk the trader takes on. Furthermore, the feedback the quants get is generally from the traders who use their models. So of course quants will be hammered by traders if they mess up and never the other way around - traders don't get feedback from quants. Traders get hammered by management when they don't perform. It's just the organizational structure. On the other hand, traders can certainly get ahead of themselves as well. It's all too easy to forget that without quants around, traders would be stuck without the models that they so desperately need to have working in order to do their jobs. Without quants, traders would be lost. Quants certainly know how much they're needed as it's tangible. But then they forget that being a good quant doesn't usually imply being a good trader, and so good traders are needed as well to extract money out of the market. Traders focus more on the latter point and quants on the former. On my desk there have been quants who have transitioned into trading and traders who have transitioned into being quants. Most of the time they find they were better suited in their original seats, though there have been one or two exceptions.
There are a few ways to get into trading, but none of them are a guarantee. The easiest is probably starting out in a S&T analyst or associate program. In order to get into one of those programs without some sort of connection, you pretty much have to attend a "target school" for the bank in question. Target schools generally include the Ivy League as well as a handful of other top US universities. I don't know as much about getting into trading in Europe or Asia. Anyway, it's 500x more difficult to get an interview from a non-target school. But even if you do go to a target school, it's still incredibly competitive to land an interview. To do this you have to have done very well in school (high GPA), have high test scores, and some solid extra-curriculars. And even if you do land an interview, it's still difficult to make it through the process - which includes multiple rounds - and land the job. For these reasons, never consider a degree from any program from any university to be a sure way of getting into trading at a bulge bracket bank. You could also, as you said, start in another area of the bank which is not as competitive to get into and then hope to move onto the trading desk. From what I've seen, while this is not impossible, it is still very difficult to do. But it may be the best option for some people. The important take away there is don't sign up to do a job you know you're doing to dislike just because you think it'll definitely land you a spot on a trading desk in a couple years. It very well may not. In any case, from what I've seen, most traders began trading just out of school, i.e. they were hired into the above mentioned graduate programs, and a minority have crossed over from different areas such as quant and market risk.
Ekongkong, that's not entirely correct. If you get your MFE from a target school, you may be in the running for an analyst or associate program. There are also trading desks that prefer to hire graduate students and recruit directly from certain programs. It will matter a whole lot why it is you're getting an MFE to begin with if your goal is to be a trader. If you're coming straight out of undergrad, it means either you were unable to secure a position in your senior year - either because the university you attended didn't provide you the access you needed to the banks or because you didn't make it through any of the processes - or you studied something unrelated, had different goals, and now want to focus on trading as a career path. In either case, getting the MFE will increase your chances of getting in the door. You will of course have to do a bit of cost/benefit analysis on your own about whether the tuition is worth the extra shot at making it to a desk. Another reason why someone might want an MFE is because they're changing careers. If you want to be a complex derivatives trader, it makes more sense to get an MFE than an MBA (though there are complex derivatives traders with MBAs). In this case it will as well increase your chances of getting onto a trading desk, as desks will prefer you to have some meaningful exposure to the material if you're in your late 20s and want to join up. In any case, it's not like getting an MFE will turn your chances of getting a seat on a desk from 2% to 92% - it's more like from 2% to 12% (please don't analyze these numbers). There just simply aren't as many seats available as there are students who want to fill them. This is why getting into trading is so competitive and why you can't view any degree as a sure shot way to get into trading. Also just want to point the following out - I've come across so many students who feel that simply because they've made it into an MFE program, that means they will definitely get to be a trader just out of school. That idea needs to be wiped away from students' minds. You need to do very well in that program and you need to do legwork on your own to get yourself into interviews. But would an MFE simply increase your chances if you didn't make it in straight out of undergrad? Yes. It's up to the prospective student to judge how much that increase is and weigh that against tuition costs.
Generally that's true though I suppose it varies between different types of desks. Usually when one refers to a quant at an investment bank, it is a someone who develops pricing models and applications for financial products, which are used by traders to price and risk manage those products. So in that sense, yes, quants support traders. However, there is not just one kind of quant. You can find other quants at banks developing black box trading strategies, supporting risk management (departments that independently monitor trading desks' risk), creating relative value analysis tools and backtesting, and other generally quantitative jobs. You can also find quants in other places, from hedge funds to insurance companies. In particular, quants at hedge funds are probably the most likely to be those who are quant / trader hybrids, designing the logic by which trading decisions should be made as well as executing those trades. The main point, however, is that the term quant refers to a slew of jobs - hence your confusion. As a trader, the kind of quant I come into contact with at work almost exclusively is the kind who supports traders, but that's not the only kind there is.