The equity sales trader's life is not all beer and skittles.
Institutional customers are demanding more value-added' for their commission dollars. There is fragmentation and market impact costs. There are soft-dollar arrangements.
Still, the savvy sales trader knows how the game is won.
The mission begins at the morning research meeting where the sales trader finds out what positions the firm is carrying. And the day may not end until he has finished wining and dining his clients late into the evening.
Some say sales traders never stop working. "Bringing in new business is a 24-hour job," said Jim Whipple, head of institutional sales and trading at C.E. Unterberg Towbin in New York. "There are thousands of accounts out there that we want to cover."
Compensation Structure
Some sales traders earn a salary and a bonus while others receive a straight percentage of the commissions generated. By one estimate, sales traders at Jefferies & Co. take home just over 25 percent of the commissions generated by trading in equity and other instruments. That means the average sales trader at the firm took home about $3 million last year, according to one analyst. Tom Tarrant, a spokesman for Jefferies, said some sales traders make "over a million" dollars annually while others make a "reasonable living."
Covering accounts calls for an unflappable nature and a good sense of timing. Consider, for instance, a buy-side trader who informs his sales trader covering him at a Nasdaq firm that he wants the desk to bid for his buy-side firm's 500,000 shares of stock.
The smart sales trader might turn to his account and ask permission to check potential buyers – the natural liquidity – among his client list.
If the sales trader can uncover the natural liquidity to get his account out of the 500,000-share position, the chances are that the account will save money too. The dealer can probably price the block at a superior price for the customer because it does not have to carry the entire 500,000 shares on its books.
"The customer is changing dramatically as he looks for liquidity," noted Dennis Leddy, a sales trader and managing director of equities at ABN-AMRO in Boston.
Christopher Mahler, who oversees a team of about 14 sales traders at Weeden & Co. in Greenwich, Conn., said a good sales trader must fully understand his client's portfolios. "If you don't know the decision-making process behind the portfolio, then you won't know the intensity of the order: is it a fast order, a slow order, do you have time, is it passive or aggressive," he explained.
Inform Customer
Richard Holway, a veteran who has worked on both sides of the Street, said the successful sales trader must inform his customer of market activity that affects his firm's holdings.
One expert explained, "If a print hits the tape and I know my client is a major holder of [the stock], then it is my responsibility to call the trader that I cover at the [buy-side firm] and say, did you see the print in XYZ?'"
What's more, the expert added, a sales trader should keep his customer informed each time he puts up a print in a stock the customer is holding but did not turn over. "I have the responsibility to ask the buy-side trader did you see the print: do you want to get involved?"
"Most of our job is service," said Whipple at Unterberg Towbin. "The sales trader is the liaison between the buyside and the sellside."
Holway agreed. "That's a major part of what a sales trader does," he said. "He knows his customer's account; knows his holdings; what he's interested in; what his trading styles are."
Even so, critics on the buyside charge that there is an unofficial pecking order operated by some sell-side firms. "The [buy-side] shops that generate the most commissions get the first call' from the sell-side," said one trading pro. "The best accounts get a call before a print goes up and those at the bottom get the call after the print."
Whatever the pecking order, sales traders hit the phones after the morning meeting, contacting their clients on the buyside with the skinny on what's happening in the market. The sales trader is attuned to developments that may affect their clients, such as trading activity, market sector information and research, and IPOs.
The role of the sales trader is changing in the electronic world. The advent of electronic trading, and its competitive commission rates, has forced desks to justify their own charges. Some see the future in a world that melds the natural talents of sales traders with electronic trading systems.
Holway at Jefferies has been overseeing a revamp of the firm's web-based block indication matching system, dubbed @Haborside. The system, as originally conceived, allowed Jefferies' sales traders on either side of a trade to negotiate for customers after they found potential "matches" for their "indications of interest."
The system was originally offered to the buyside as a new tool to anonymously and confidentially locate liquidity.
Sales traders must work harder than ever before. But they are unlikely to disappear anytime soon. In numerical terms, they often outnumber the other pros on a trading desk. "The role of the sales trader is becoming stronger and more important," said Mahler at Weeden & Co. Four pros tell their story to Sanford Wexler.
Jim Whipple,
Head of institutional sales and trading,
C.E. Unterberg Towbin
The Typical Day
Our research meeting starts at eight in the morning. We go through the markets around the world and the research areas that we cover. That's over about 8:30. Then we go out and make our calls to our accounts. We try to get our accounts to be aware of what we are talking about and find out what they need. That's how the whole day starts.
Most of our day is spent calling accounts and making them aware of what merchandise we have to buy and sell and what we know and feel about stocks.
Research sales are on a portfolio level. We make our calls very concise. They are on a trading level. We focus on the news in the stock in a very concise fashion. Research sales is a very detailed call to a portfolio manager. If we hear a pertinent fact about one of the stocks that our account owns, we can get right to them. We get right on the phone and talk to them about it.
Most of our job is service. The sales trader is the liaison between the buy-side trader and the sellside. I cover about 20 accounts actively. But I make calls all day long.
We are a small company. We trade only about 250 stocks, mostly Nasdaq. We can actively cover more accounts than the larger firms who trade thousands of stocks.
All sales traders go out visiting their clients as much as they can. Because you always want to put a name with a face or a voice with a face. It's always good to know whom you are dealing with.
In this business, bringing in new business is a 24-hour job. There are thousands of accounts out there that we want to cover. The bigger you get and the more stocks you trade, the more accounts you want to cover. It's a snowball effect. The more salesmen you need, the more research analysts you have to have.
ECNs are good for anonymous trading of five or ten thousand share trades. But it's a tedious job if you have a lot of other orders to do. That's where sales traders come in. I don't think they will ever replace personal relationships. I think ECNs have their place in our business. You are still going to need sales traders when you are working intense orders.
Christopher Mahler,
National Sales Manager, Weeden & Co.
Traditionally, sales traders were relationship brokers. Now, they are information brokers with relationships. Trust and relationships are the most important elements in doing a trade.
The role of the sales trader and their day-to-day jobs has changed in other ways. Traders have been forced to become more electronic and to access their client base using order management systems. Orders are delivered to sales traders electronically and back to clients electronically. The service and the speed are more intense.
Five years ago the markets were slower. You had time to interpret information. You had time to make an informed decision. Today, with so many different ways to deliver order flow, your reaction time is much, much quicker.
Before, you slowed things down to your pace. Now, there are multiple buyers and sellers. As a sales trader, you need to basically interpret supply and demand, know when and how to access alternative systems, you need to have greater market knowledge, and need to understand your client's portfolio. Portfolios have become much more diversified and so have strategies.
If you don't know the decision-making process behind the portfolio, then you won't know the intensity of the order: is it a fast order, a slow order. Do you have time, is it passive or aggressive? All of these variables are what makes a sales trader more value-added. If he understands these variables he can make an informed decision as to how to guide his clients.
The role of the sales trader is becoming stronger and more important. Sales traders are information conduits. With the coming market structure changes and decimalization, sales traders have the ability to interpret supply and demand and can seek out sources of liquidity. The fragmentation of the marketplace has caused the role of the sales trader to become more important.
Sales traders should provide best execution on behalf of their clients. Best execution is accessing all systems when appropriate to get the best price for your client.
Best execution is our job. If you are a flexible and a creative brokerage shop you should be accessing every liquidity source that is out there. Follow your client's instructions, reduce market impact as you enter the marketplace, find the other side discretely. These are some of the tools that provide best execution.
Is there a particular measurement? No. Because every client's objective is different. Some strategies are momentum style and price is not a concern at the time.
Valentina (Valeria) Gabela,
Director of institutional trading,
Spears, Leeds & Kellogg
The Market Maker
I was a Nasdaq market maker [before becoming a sales trader]. I believe that you have to understand how to trade before you can become a successful sales trader. Without that knowledge, you will never be as successful as you can if you don't understand the trading world. The top ten sales traders at my firm were all market makers.
If you are a people person and you enjoy talking to people, the transition from trading to sales trading is very easy.
The ECNs are very easy to use, they are relatively inexpensive, and they do provide quick liquidity. But when you want to get into a stock that's not part of the Nasdaq 100, where there is less liquidity, you need a sales trader that will try to find you the other side. We call this a "natural." So you can put on larger trades without disturbing the marketplace.
We had a stock that trades on a typical day about 100,000 shares. In August we started buying it for our customer. It was a challenge because he didn't want us to move it, he wanted to own it. There were other buyers out there and the stock went from 23 to 63 in just a few weeks. It wasn't liquid. Everyday I tried to buy 20,000. I tried to do it at the volume weighted average price (VWAP). Every day I had to try to beat or at least meet the VWAP. It was so volatile with seven or eight point swings in the stock. But we got it done pretty close to the VWAP.
The social part of this business enhances relationships. When you are getting an order over the phone it's difficult to know all of your customers' needs in this changing environment. So you go out with your customer and touch base. I get to find out what more I can do to better serve their execution needs.
Twice a week I go out with customers. On the weekends I sometimes host dinners or go to conventions. You have to work at this business at 120 percent. Your family has to be very supportive. You really have to have one person who is willing to mind the kids and take care of the household things.
A good sales trader will have very loyal customers. You build trusting relationships with your customers.
Dennis Leddy,
Managing director for equities,
ABN-AMRO
Banging the Phone
The single most important contact to our customers, on the institutional equity side, is through sales trading. That has become more noticeable over the past three or four years. We are on the phone taking the orders for syndicate, getting the retention, and getting the information through. We have become the main line to the customer. The sales trading contact to the trading desk has become the live connect between the customer and the sellside.
We've seen a significant amount of consolidation on the Street. Clearly, issues of liquidity arise. The bulge bracket is now down to seven or eight firms. Not in U.S. terms, but in global terms. There's a less competitive climate for people worrying about whether [the Street] is getting the other side of a trade. [Dealers] aren't as aggressive in offering their firms' capital as they had been in the past.
The customer is changing dramatically as he looks for liquidity. The trading desk has a fiduciary responsibility to go where they can to find liquidity. The changes that have occurred with soft dollars and directed business have resulted in trading desks becoming much freer. Traders now have a greater sense of control over order flow.
They not only have a fiduciary responsibility to find best execution, but the portfolio manager has been taken out of the decision where orders should go.
We've seen it first in the hedge funds. The hedge funds didn't care where the research came from. The hedge funds care about execution. When the trading desk is unshackled from research, they do significantly better.
Customers don't need our research to determine their flow of trading throughout the day. I think more and more, the role of institutional sales trading is getting bigger and bigger.
Sales trading is a mainline into our customers. The hedge funds were the first ones to grab hold of the fact that their trading desk was focused on getting best execution. They don't want to handicap their trading desks by directing them to their research houses. They don't want to handcuff their traders. They want their traders to go where the flow and the liquidity are.
The human element will always be a very integral part of this business.
