Sales&Trading-State of the Industry

Structure

Sales and trading professionals work at a variety of employers—from large “bulge bracket” investment banks and regional firms, to wholesalers and hedge funds.

Bulge Bracket Banks

Full-service bulge bracket investment banks usually provide both financing and advisory services, as well as the sales, market making, and research on a wide range of financial products including equities, currency, commodities, credit, rates, and financial derivatives. It’s very common for one bulge bracket bank to be competitive in investment banking, commercial banking, asset management, private equity, venture capital, mortgage finance, and more. Leading investment banks (by revenue) worldwide include JPMorgan Chase, Goldman Sachs, Bank of America Merrill Lynch, Morgan Stanley, Citi, Deutsche Bank, Credit Suisse, Barclays, UBS, and Wells Fargo Securities.

Most investment banks have a financial holding company structure, which serves as a shell corporation that issues common stock, the bank’s equity capital, financing the bank’s activities. The bank’s equity capital also serves as a financial backup in the event of any write-offs from bad loans or investments.

Boutique and Specialty Firms

Boutique firms tend to service one type of customer very well, or are very good at one type of transaction. Specialty firms focus their expertise on covering one or several market sectors, and can be thought of as mini-investment banks with a sales desk to support the trading effort, and investment bankers trying to nab the big deal away from the larger firms on the basis that the firm offers specialized service and expertise in a particular market niche. Boutiques and specialty firms include Allen & Co., Laqdenburg Thalmann, Neuberger Berman, Miller Tabak + Co., Sanders Morris Harris, Jefferies Financial Group, Weeden & Co., Cowen, and Baird.

Regional Firms

Some firms swim in small ponds and pick up the business that the New York City junkyard dogs overlook. These firms can be good alternatives for those who either are unable to land a position at a bulge-bracket firm initially, or who wish to live outside NYC. In some cases, specialty regional firms focus on one sector of the market that happens to be geographically concentrated in one region. Regional firms include SunTrust (Robinson Humphrey); Wedbush Securities; BB&T; KeyCorp (KeyBanc Capital Markets); PNC Financial Services (Harris Williams & Co.); Piper Jaffray; B. Riley FBR; Raymond James; Janney Montgomery Scott; and Legg Mason.

Options-Related Firms

These are typically floor-trading positions on regional or secondary exchanges. Options trading is a very entrepreneurial business—all it takes is a seat on the exchange, a willing trader, and a financial sponsor. The more developed a firm becomes, the more it is able to invest in a sales organization to solicit order flow. Firms in this category include Susquehanna Investment Group, O’Connor & Co., and Group One Trading.

Wholesalers

These firms are low-cost traders of large volumes of over-the-counter (OTC) securities. Wholesalers are, as their name implies, firms that specialize in trading OTC equities at low cost. These firms typically have a sales organization to support the firm’s traders, but there is not much of a commitment to investment banking relationships. They make their profits by trading large volumes to make up for the lower commissions. Wholesalers include Charles Schwab & Co. and Pershing (owned by The Bank of New York Mellon).

Hedge Funds

On the buy side, hedge funds are a major employer of sales and trading professionals. They are typically organized as legal entities onshore (United States) or offshore (Caribbean or other tax havens). The onshore entity is structured as a limited partnership. It has a general partner and limited partners. The general partner can be an entity or individuals, and in most circumstances is the fund manager, who may or may not have a portion of personal assets invested in the fund. The limited partners have limited liability depending on how much is invested in the partnership. General partners have unlimited liability since they have accepted legal responsibility for the actions of the hedge fund. This means that they could be subject to lawsuits. An offshore entity is typically organized as a corporation or other investment company form (limited liability company or limited company) in tax havens such as the Cayman Islands, Jersey, Bahamas, Bermuda, and the British Virgin Islands. There is no general partner, and the fund is overseen by a management company. Investors in offshore funds are typically non-U.S. residents because of the tax implications of this legal structure. Leading hedge funds by assets under management include Bridgewater Associates, AQR Capital Management, Man Group, Renaissance Technologies, Two Sigma, Millennium Management, Elliott Management, Baupost Group, BlackRock, and Winton Capital Management.

Snapshot of the Industry Today

Sales and trading professionals work for investment banks, hedge funds, securities firms, brokerage firms, commercial banks, insurance companies, asset management firms, and mutual fund companies.

The U.S. investment banking industry includes about 3,600 establishments (defined as single-location companies and units of multi-location companies). In 2017, revenue at U.S. investment banks was nearly half ($40 billion) of all worldwide revenue ($82 billion) for investment banks, according to Dealogic, an analytics and technology firm. Investment banks in Europe and Asia also are key players in the industry. Approximately 45 percent of U.S. investment banking revenue comes from brokerage and securities services, 30 percent from trading, and 25 percent from asset management and financial planning. There were 51,600 investment bankers, traders, researchers, sales people, and other frontline producers employed at the top 10 investment banks in the world in 2014 (the most recent year for which data was available), according to the London-based consulting firm Coalition Ltd. This was a significant decline from the 60,800 who were employed at these firms in 2009. According to Statista.com, the leading investment banks (by revenue) worldwide as of May 11, 2016, were:

1. JPMorgan Chase ($5.87 trillion)
2. Goldman Sachs ($5.21 trillion)
3. Bank of America Merrill Lynch ($4.72 trillion)
4. Morgan Stanley ($4.49 trillion)
5. Citi ($3.64 trillion)
6. Deutsche Bank ($3.22 trillion)
7. Credit Suisse ($3.04 trillion)
8. Barclays ($2.98 trillion)
9. UBS ($1.78 trillion)
10. Wells Fargo Securities ($1.67 trillion)

There are about 14,500 hedge funds in the world. In 2016, 668 fund managers managed at least $1 billion in assets, according to alternatives data provider Preqin. Although the number of hedge funds has declined in recent years, total assets under management (AUM) exceeded $3.2 trillion worldwide in late 2017. Approximately $9.8 billion of new capital was invested in hedge funds in 2017. Nearly 400,000 people are employed in the global hedge fund industry—an increase of about 33 percent since 2010, according to the Alternative Investment Management Association. As of June 30, 2017, Pensions & Investments reported that the 10 largest hedge fund firms in the world by assets under management were:

1. Bridgewater Associates
2. AQR Capital Management
3. Man Group
4. Renaissance Technologies
5. Two Sigma
6. Millennium Management
7. Elliott Management
8. Baupost Group
9. BlackRock
10. Winton Capital Management

The securities industry employed about 952,000 workers in December 2017, according to the U.S. Department of Labor. This employment total includes workers in every type of career—from accountants and lawyers, to financial analysts and researchers, to sales and trading professionals. “Pre-tax net income (profits) for all FINRA-registered broker-dealers doing a public business in the U.S. rose to $38.2 billion in 2017 from $26.8 billion in 2016,” according to the Securities Industry and Financial Markets Association. Approximately 30 percent of securities industry employees work in the greater New York City metropolitan area, a region covering New York, New Jersey, and southwestern Connecticut. Many largest U.S. companies have offices in foreign countries.

Salaries are excellent for sales and trading professionals—although they are not as high as they were before the Great Recession. Average compensation for equities sales, trading, and research at the 12 largest global investment banks totaled $500,000 (salary and bonus) in 2017, according to the research firm Coalition.

Many noteworthy professional organizations serve sales and trading professionals and others working in the investment banking, commercial banking, hedge fund, mutual fund, and securities industries, including:

• The Alternative Investment Management Association offers certification, continuing education, and other resources to its members (hedge fund managers, fund of hedge fund managers, prime brokers, fund administrators, independent fund directors, etc.). Its membership comprises over 1,900 firms (with more than 13,000 individual contacts) in 60+ countries.
• The American Bankers Association represents the “nation’s $15 trillion banking industry, which is composed of small, regional and large banks that together employ more than 2 million people.” It provides extensive continuing-education programs and publishes the ABA Banking Journal.
• The Investment Company Institute is a “leading global association of regulated funds, including mutual funds, exchange-traded funds, closed-end funds, and unit investment trusts in the United States and similar funds offered to investors in jurisdictions worldwide.” It offers continuing-education opportunities and publishes the Investment Company Fact Book.
• The CFA Institute offers certification and continuing education opportunities. It has more than 142,000 members in more than 150 countries and regions.
• The Chartered Alternate Investment Analyst Association provides a well-respected continuing education program and certification.  
• The CMT Association is a nonprofit professional regulatory organization of 4,500 market analysis professionals in more than 135 countries. It provides certification, publications, and continuing education opportunities.  
• The FIA is a major trade organization for the futures, options, and cleared swaps markets industry worldwide.
• The Hedge Fund Association is an “international not for profit industry trade and nonpartisan lobbying organization devoted to advancing transparency, development, and trust in alternative investments.”
• The International Association for Quantitative Finance offers membership for both students and professionals. Its Web site provides useful education and job-search resources.
• The Investments & Wealth Institute provides certification, continuing education, and other resources to its members, which include investment consultants and analysts, accountants, and others who provide financial services and advice to corporations, individuals, nonprofits, and retirement/pension plans.
• The Managed Funds Association is a membership organization for hedge fund managers and related professionals.
• The National Futures Association is the self-regulatory organization for the U.S. derivatives industry, including retail off-exchange foreign currency, on-exchange traded futures, and OTC derivatives (swaps). Its membership currently numbers approximately 3,735 firms and 50,400 associates.
• The National Investment Banking Association, which was founded in 1982, represents the interests of the micro-cap and small-cap investment community. Its member firms have a track record of “successfully completing thousands of transactions totaling over $17 billion in new capital for emerging growth companies and are responsible for 90 percent of all IPOs under $20 million.”
• The Securities Industry and Financial Markets Association represents the interests of securities firms, banks, and asset managers. It also offers the following professional societies for individual members: Compliance and Legal Society, Financial Management Society, Internal Auditors Society, and the Operations and Technology Society.
• The Security Traders Association is a “grass-roots trade association of securities-industry professionals, comprising 24 affiliate organizations in the United States and Canada.”
• Women in ETFs is a nonprofit organization for both women and men who work with exchange-traded funds. It has more than 3,200 members in chapters in major financial centers across the United States, Canada, Europe, Middle East, Africa, and Asia Pacific.

Current Trends and Issues

Advances in technology have had a major impact on the financial industry in recent years. For example, more institutional traders are using mobile apps to conduct trades. According to a survey by JPMorgan Chase & Co., 61 percent of institutional traders surveyed in 2018 said that they were extremely or somewhat likely to use a trading app, an increase of 30 percent from 2017. The use of mobile trading apps is expected to continue to grow, although some firms have established restrictions regarding the use of such technology. Fifty percent of institutional traders surveyed by JPMorgan said that company policy prohibits them from trading on mobile devices. Other trends worth watching include the integration of machine learning, artificial intelligence, and blockchain technology into trading platforms, the growing popularity of cryptocurrencies, and the continuing decline of trading commissions.

Machine Learning is Changing Trading in the Financial Industry

Machine learning is a method of data analysis that incorporates artificial intelligence (AI) to help computers study data, identify patterns or other strategic goals, and make decisions with minimal or no intervention from humans. Examples of machine learning include online recommendations from Netflix and the self-driving car. Machine learning is also being used in the financial sector. JPMorgan Chase & Co. has developed an artificial intelligence/machine learning program called LOXM, which captures and analyzes vast amounts of information to execute client orders with maximum speed at the best price. In addition to LOXM’s ability to capture and assess vast amounts of information, another benefit of this technology is that—unlike humans—it is always on, learning, and adjusting its predictions and trading strategies based on the latest information. “Big data and machine learning strategies are already eroding some of the advantage of fundamental analysts, equity long-short managers, and macro investors, and systematic strategies will increasingly adopt machine learning tools and methods,” according to JPMorgan Chase & Co.. But the investment bank says that “machine learning algorithms cannot entirely replace human intuition, or understand complex, long-term investment trends.”

So, what does the growing use of machine learning and artificial intelligence mean for traders. While there will still be jobs for traders, there will be far fewer positions. Newsweekreports that Goldman Sachs employed 600 traders to staff its U.S. cash equities trading desk in New York in 2000. That number has declined to a handful of traders today. There will be opportunities for traders who are skilled at programming and software development to create new trading platforms, as well as for those who can monitor and troubleshoot AI/machine learning trading systems.

The bottom line: CNBC.com reports that “quantitative investing based on computer formulas and trading by machines directly are leaving the traditional stock picker in the dust and now dominating the equity markets.” JPMorgan estimates that fundamental discretionary trading now accounts for only about 10 percent of trading volume in stocks today.

Blockchain Technology Will Increasingly Be Used in Trading and in the Financial Sector

Blockchain is a shared and distributed ledger database that uses advanced cryptography to maintain a continuously-growing list of financial records that cannot be altered. Financial firms are already using blockchain to improve efficiency and the accuracy of financial record-keeping and reporting. Experts predict that blockchain technology could be used in trading in several ways. For example, blockchain could be used to reduce settlement process time from days to minutes. “Because the blockchain would be transparent to all parties, the need for time-consuming reconciliations and audits would be dramatically reduced, potentially lowering the cost of doing business,” according to Lee Bohl, a Charles Schwab & Co. charted market technician, at the firm’s Web site. Bohl says that “blockchain technology is also facilitating trading in new digital assets. One recent example is Royal Mint Gold…a new cost effective and secure way to hold, transact, and trade physical gold using blockchain technology.” Here are a few statistics that reinforce the growing integration of blockchain technology in the financial industry:

• As of 2018, the financial services industry was spending about $1.7 billion per year on blockchain technology, according to Greenwich Associates. Blockchain budgets increased by 67 percent from 2016 to 2017.
• The average number of workers assigned to work on blockchain initiatives doubled from 2016 to 2017, according to Greenwich Associates. The typical top-tier bank has 18 full-time employees working on blockchain technology.  
• If the eight largest global investment banks embraced full-scale blockchain technology, they could reduce operational expenses by 30 percent or more per institution, according to a study by Accenture and McLagan, a business unit of Aon.

The increasing use of blockchain technology will create demand for software developers, programmers, and other computer specialists who are skilled at developing and using this technology. Sales and trading professionals with knowledge of blockchain technology—as well as artificial intelligence, machine learning, and data analysis techniques—will improve their chances of continuing to prosper in the financial industry.

The Growing Popularity of Cryptocurrencies

MotleyFool.com defines cryptocurrency as “an electronic cash system that doesn't rely on central banks or trusted third parties to verify transactions and create new units. Instead, it uses cryptography to confirm transactions on a publicly distributed ledger called the blockchain, enabling direct peer-to-peer payments.” The entire cryptocurrency market had a capitalization of $404 billion in late 2017, according to CoinMarketCap. More than 90 digital currencies are valued at more than $100 million. Bitcoin is the most popular type of cryptocurrency. In late 2017, it accounted for 63 percent of the total cryptocurrency market cap. Other cryptocurrencies with significant market capitalization include Ethereum, Bitcoin Cash, IOTA, and Ripple.

While the public has embraced the buying and selling of cryptocurrency, the financial sector has been more lukewarm regarding its viability. A late 2017 statement by the New York Alternative Investment Roundtable states that “at this point in time, investing in cryptocurrency is highly speculative and the majority of roundtable members have yet to invest in cryptocurrency.” Only 24 percent of members surveyed by the roundtable had purchased cryptocurrency. Kenneth Heinz, president of Hedge Fund Research, had the following to say about cryptocurrency in a press release: “While the recent performance has been exciting, trading and investing in these evolving areas requires specialized expertise and involves substantial volatility and risks, both real and structural.”

Despite ongoing skepticism, recent development suggests that the financial industry is warming to cryptocurrency. The New York Times reports that Intercontinental Exchange, the parent company of the New York Stock Exchange, is rumored to be developing an online trading platform that will allow investors to buy and hold Bitcoin. Goldman Sachs has announced that it plans to launch a Bitcoin trading unit, which will only trade futures contracts linked to Bitcoin’s price, although the unit may eventually buy and sell Bitcoin. Additionally, more than 120 hedge funds focus on cryptocurrency and blockchain technology. In December 2017, Hedge Fund Research launched the HFR Blockchain Composite Index and the HFR Cryptocurrency Index to track hedge funds that invest and trade in cryptocurrencies. As regulatory issues are addressed, look for more exchanges to begin trading cryptocurrencies.

Trading Commissions Continue to Decline

Investment banks, hedge funds, and other financial companies traditionally have earned strong profits from commissions received for facilitating trades for clients. But this has changed in recent years, reducing earnings. In 2016, “equity trading commissions in the United States averaged around 2.64 cents per share (CPS) for all-in rates and as low as 0.97 CPS for algorithmic trades, net of tack-ons for research,” according to a study by the consulting firm Accenture. Factors that have reduced trading commission fees include:

• The growing popularity of electronic trading (which is less labor intensive and, which, according to Accenture, “has also given rise to low-touch, low-commission discount brokerage models”)
• Deregulation, which has created competition for customers and fueled the end of fixed brokerage commission rates
• The embrace of low-cost passive fund managers; Accenture reports that passive fund managers have “gained market share held by traditional active asset managers and increased pricing pressure on brokerages by favoring lower-cost execution options that align with their low-cost business models.
• Increasing customer willingness to switch financial institutions in pursuit of lower fees, lower transaction costs, and ease of account access.

To address this loss of revenue, Accenture recommends that investment banks and brokerages “should focus on becoming excellent at what is considered ‘table stakes’ in the trading business—trade execution efficiency. The digital era has not only led to a sea-change in customer expectations, but also brought about technology advancements that innovative banks and brokerages can leverage to redefine their business models at lower cost, faster pace, and with a wider reach than was previously possible.”

Industry Outlook

After basically minting money for decades from the buying and selling of bonds, currencies, and other financial products, earnings at investment banks have decreased significantly in recent years. In 2013, fixed-income trading generated nearly $103 billion in income for the top dozen investment banks, according to Coalition, a London-based research firm. By 2016, income in this sector dropped to less than $76 billion. Overall revenue at the top 12 investment banks declined to $150 billion in 2017, a 4 percent decrease from 2016, according to Coalition. Factors that have reduced profits in the investment banking include:

• Increasing regulation (although the government is currently loosening components of Dodd-Frank, allowing some investment banks to engage in previously banned activities, such as proprietary trading, that will allow them to increase profits).
• Calm markets, which are bad for trading and profit generation. “Low volatility means less trading,” according to CNBC.com. “Average daily consolidated U.S. equity share volume declined 6 percent year over year” [from 2015 to 2016].
• Advances in technology, which allow securities owners to trade directly with one another (cutting investment banking sales and trading departments out of the equation).
• Competition from brokers, hedge funds, and other financial firms that offer the same services as investment banks, but more quickly and at a lower price. 

These factors—and the increasing use of automated trading and artificial intelligence—have caused steep declines in the number of sales and trading professionals. In fact, more than 10,000 sales and trading positions were cut at the 10 largest investment banks from 2010 to 2015, according to Coalition.

Employment of securities, commodities, and financial services sales agents (including investment banking sales agents and traders, but also many other types of investment industry professionals) is projected to increase by 6 percent from 2016 to 2026, or about as fast as the average for all occupations, according to the U.S. Department of Labor (DOL). However, the DOL predicts that “continuing consolidation in the financial services industry is projected to slow employment growth for these workers over the next decade. In addition, automated trading systems have reduced demand for securities traders. Because simpler stock purchases can be made online without a broker, financial firms will focus on hiring sales agents with specialized areas of expertise and strong customer-service skills.”

Given this information, should you still pursue a career in sales and trading? The answer is yes, but you need to enter the field fully aware of the highly competitive nature of the job search and the rapid changes that are occurring in the industry. Traders will likely want to work in areas where it is difficult to match sellers with buyers. These areas might include illiquid products and bespoke over-the-counter financial products.

Sales workers of the future will transition from being facilitators to generating trading ideas for clients and providing advice to clients to help them make the most effective trades. Many also see sales jobs splitting into “high touch” and “low touch” positions. “High touch” sales professionals will have the highest level of industry knowledge and experience and work with their company’s top clients. “Low touch” sales workers will have less knowledge and experience and work with a larger number of lower-level clients, often steering them toward their firm’s electronic trading systems.

Technology—artificial intelligence, algorithmic trading, blockchain technology, to name just a few examples—will continue to change the financial industry. “Technology is getting cheaper and the really sophisticated traders are getting younger, smarter, and savvier,” said Michael Spence, the founder and chief executive of the financial technology company NEX Group, in an article in Financial News.“In the future, we will see banks and non-banks poaching the very best from the likes of Microsoft and Google rather than from traditional peers. An expensive race for talent will begin and I suspect today’s classic lifestyle of long hours in an office will start to change. Traders of the future will expect more freedom in how they work, where they work and what they wear to work. It will be the firms that embrace this that win.”

Salaries for sales and trading professionals have also taken a hit in recent years due to automation, decreasing revenue, and other factors. Pay for equity sales traders decreased by 5 to 15 percent from 2015 to 2016, according to compensation consulting firm Johnson Associates. Despite this earnings decline, sales and trading professionals still make a lot of money compared to people in most other jobs. Associates in equity cash sales and trading careers can earn $200,000 to $250,000 a year, according to the Options Group, an executive search firm. Sales and trading managing directors may receive up to $1 million in total compensation.

Although the recent deregulation of the U.S. financial sector suggests that job opportunities may improve for sales and trading professionals, the long-term trend is toward fewer jobs due to electronic trading and other factors. But there are other opportunities for sales and trading professionals. Sales workers can transition to jobs in commercial banking, wealth management, and other financial fields, as well as to sales jobs in other industries. Traders in investment banking can find job opportunities with buy-side institutions, in risk management, with financial regulators, at private equity firms, or at management or financial consulting firms. Some choose to parlay their knowledge of trading into jobs in financial sales or customer relationship management. Others earn advanced degrees in computational mathematics, software development, or related areas and land positions in fintech.