MJ: ? Don: Commodities trading

[MJ]

Don, I figured you might be able to provide some insight into this matter given your financial background.

I am exploring various careers in finance. First, which one do you think is a better job, commodities trading, stock trading, or derivatives trading?

I recently read a book by Ben Mezrich, entitled Rigged. Basically it deals with the true story of a Harvard Business School graduate (MBA) who sets out to set-up an exchange in Dubai.

In any event, a lot of the story takes place at the NYMEX. Do you think a trader is a good career? I have read about and seen the chaos that ensues out on the trading floor when I watch the movies. It seems like very fast paced, high energy, and exciting stuff (albeit inefficient). My sort of thing!

I know little to nothing about stocks, bonds, commodities, etc. Is it true that if a trader loses money (has a losing yr), then he is out of a job? I read it is a job with very high stress. But the day is not that long because they get to go home shortly after the market closes.

Additionally, I read somewhere that a trader is expected to put up his own capital when he starts out at a company. Is that true?

Thanks,
MJ

[Don Schlesinger]

> Don, I figured you might be able to provide some
> insight into this matter given your financial
> background.

I might! :-)

> I am exploring various careers in finance.

What will you do to prepare for them?

> First,
> which one do you think is a better job, commodities
> trading, stock trading, or derivatives trading?

Depends on what you mean by "better." Makes most money? More pleasant? In any event, there are all kinds of traders, but the two broad categories are floor traders and upstairs traders. Which were you thinking of? The difference is vast.

> I recently read a book by Ben Mezrich, entitled
> Rigged. Basically it deals with the true story of a
> Harvard Business School graduate (MBA) who sets out to
> set-up an exchange in Dubai.

Haven't read it.

> In any event, a lot of the story takes place at the
> NYMEX. Do you think a trader is a good career?

It did pretty well for me. :-) I just can't answer it for you; I don't know you. But, you just don't snap your fingers and say, "poof, I'm a trader." Derivatives traders at the top investment banks make fortunes, but how do you propose to get such a job? On the other hand, if you're talking about sitting in front of a computer and trying to "scalp" and/or day-trade, I'd forget about it.

> I have
> read about and seen the chaos that ensues out on the
> trading floor when I watch the movies. It seems like
> very fast paced, high energy, and exciting stuff
> (albeit inefficient). My sort of thing!

Don't be so sure. The newbies get eaten alive. There is a steep learning curve, and the floor trading in the pits is brutally demanding and physically draining. I couldn't have possibly done it, nor would I have wanted to. Your mileage may vary.

> I know little to nothing about stocks, bonds,
> commodities, etc.

Great background for breaking into the business! :-)

> Is it true that if a trader loses
> money (has a losing yr), then he is out of a job?

Depends on where he is. It could be true, but it certainly doesn't have to be true.

> I read it is a job with very high stress.

To say the very least.

> But the day is
> not that long because they get to go home shortly
> after the market closes.

Maybe. But, if you're a basket case, you may not want to go home. So, half of them are in the local bars, unwinding. Not my gig.

> Additionally, I read somewhere that a trader is
> expected to put up his own capital when he starts out
> at a company. Is that true?

It can be. Every deal or arrangement is different. But, if you work upstairs, at a firm, then, no, it isn't true.

Good luck!

Don

[bj player]

> I am exploring various careers in finance. First,
> which one do you think is a better job, commodities
> trading, stock trading, or derivatives trading?

> I know little to nothing about stocks, bonds,
> commodities, etc.

When an investmentcompany invites you, to introduce your self, be prepared, that you will be asked some questions about the basics in this business.
It is also always ok, to know the "optionsprice model", developed by the famous Mr.BLACK and SCHOLES.

bj player

[MJ]

Thanks Don!

> What will you do to prepare for them?

Well, once I determine which (if any) is a good fit for me then I suppose I will just have to read up and learn as much about the subject as I can.

Don't traders usually start off as junior traders working under a senior trader? Isn't there some type of training program provided whether it be on the job or classroom training? I read that many of the guys that started out at NYMEX (who became traders) did not possess any formal degree relevant to the subject.

> Depends on what you mean by "better." Makes
> most money? More pleasant?

Earning money is not my number one criteria. I just need something that is pleasant and stimulating, sorta like BJ.

I hear that in trading, the swings are brutal, just like in BJ. Are traders' compensated based upon salaries or commissions? The idea of being paid a commission does not sit well with me. What if you have a losing quarter or year? I suppose there is probably some base salary awarded.

> In any event, there are all
> kinds of traders, but the two broad categories are
> floor traders and upstairs traders. Which were you
> thinking of? The difference is vast.

From your description it sounds like floor trading is not for me. What do upstairs traders do, give orders for the floor traders to execute?

> Derivatives traders at the top investment banks make
> fortunes, but how do you propose to get such a job?

What are the prerequisites for such a position? I suppose if I decide to do it I would make some calls to HR reps.

> On
> the other hand, if you're talking about sitting in
> front of a computer and trying to "scalp"
> and/or day-trade, I'd forget about it.

I thought trading works one of two ways, either out on the floor or in front of a computer using software given by the company.

> Don't be so sure. The newbies get eaten alive. There
> is a steep learning curve, and the floor trading in
> the pits is brutally demanding and physically
> draining. I couldn't have possibly done it, nor would
> I have wanted to. Your mileage may vary.

Hmm, maybe floor trading is not for me.

> Maybe. But, if you're a basket case, you may not want
> to go home. So, half of them are in the local bars,
> unwinding. Not my gig.

They probably hang around South St. Seaport. I don't mind a casual drink once in a while.

So you think the money is to be made in derivatives trading. I was doing a bit of research and came across all these terms like futures, puts, options, etc. I need to read up some more on the subject.

So commodities trading is less lucrative then derivatives trading?

MJ

[Don Schlesinger]

> Thanks Don!

> Well, once I determine which (if any) is a good fit
> for me then I suppose I will just have to read up and
> learn as much about the subject as I can.

Vast field. Lifetime of reading to do. ;-)

> Don't traders usually start off as junior traders
> working under a senior trader?

Yes.

> Isn't there some type
> of training program provided whether it be on the job
> or classroom training?

Yes. But, training for trading is difficult. You can learn the math and the mechanics, but having the feel and the experience (and the stomach!) comes only with time ... if ever.

> I read that many of the guys
> that started out at NYMEX (who became traders) did not
> possess any formal degree relevant to the subject.

Quite possible. There's no degree in trading! ;-)

> Earning money is not my number one criteria.

Criterion.

> I just
> need something that is pleasant and stimulating, sorta
> like BJ.

I've heard trading called many, many things, including "stimulating," but "pleasant" was never one of them! :-)

> I hear that in trading, the swings are brutal, just
> like in BJ.

They can be.

> Are traders compensated based upon
> salaries or commissions?

Neither. And, it varies everywhere. If you're upstairs, you get a salary, of course, but, on Wall Street, salary is usually only a small percentage of annual compensation. The rest comes as year-end bonus, which is determined based on many, many factors, among them: how well you, personally, did; how well your unit did; how well your department did; how well the division did; and, finally, how well the entire firm did.

The goal for your boss is to pay you not one penny more than what will make you quit and go somewhere else! :-)

> The idea of being paid a
> commission does not sit well with me.

You're using the wrong term. You're not in sales, and there are no "commissions." You're trading to make money for the firm, and you are compensated based on what I've written above. Of course, all deals vary, and some trading operations, usually floor-based, have sliding scales for comp based uniquely on profitability. A floor trader and an upstairs trader are two very different animals.

> What if you have
> a losing quarter or year?

Shit happens.

> I suppose there is probably
> some base salary awarded.

See above.

> From your description it sounds like floor trading is
> not for me.

It's not for 99.9999% of the human population! :-)

> What do upstairs traders do,

Trade! :-)

> give orders
> for the floor traders to execute?

Well, your trades have to get executed, but, nowadays, everything is automated, and the old-fashioned way of sending orders by actually talking to someone has more or less gone by the wayside. Kinda sad; very little human element anymore.

> What are the prerequisites for such a position?

I suppose I could list a million, but if I had to reduce it to just a few, I guess I'd say being very smart helps, being very quick with numbers helps, and being able to put up with a great deal of stress and pressure helps. Oh, and having thick skin, too, because you are going to take a LOT of shit on a daily basis, and it isn't easy, when you know how smart you are, being called an idiot every day, by at at least one person, who isn't happy with something you did, or didn't, do! :-)

> I suppose if I decide to do it I would make some calls
> to HR reps.

You need some background and some sort of connection first. You can't just call the major firms and ask for a job; they have their own processes for recruiting.

> I thought trading works one of two ways, either out on
> the floor or in front of a computer using software
> given by the company.

Mainly, yes; but some people trade on their own, from home, trying to make money. It's almost impossible, though.

> Hmm, maybe floor trading is not for me.

Again, I don't know you, but it is a very, very hard job. I'd never have accepted to even try it.

> They probably hang around South St. Seaport. I don't
> mind a casual drink once in a while.

Not my area of expertise! :-) Never had a drink in my life.

> So you think the money is to be made in derivatives
> trading.

There's money to be made in any job on Wall Street, if you're good at it.

> I was doing a bit of research and came across
> all these terms like futures, puts, options, etc.

Yeah, there tend to be a lot of "these terms"! :-) It kinda helps to know what they mean!

> I need to read up some more on the subject.

Yes, I suppose you do. The Internet might be a good starting place.

> So commodities trading is less lucrative then
> derivatives trading?

I didn't necessarily say that. But, I think it's even more speculative and more prone to burnout and stress.

Good luck!

Don