Neither trading nor M&A are what they used to be. So which will it be?
If you want to work in a prestigious, well- paid job in an investment bank, two alternatives have probably suggested themselves to you: trading or M&A.
Both are very different.
However, while both business areas are exciting, prestigious, and well paid, they are less prestigious, well paid and exciting than they used to be. If you're toying between the two, there's some stuff you ought to know.
1) TRADING: It's become much harder to take a view and to trade it in an investment bank
So you want to be a trader in an investment bank? You think you know the markets and you're interested in the effects of peak oil/hyperinflation/eurozone immolation, the downgrade of UK government debt on exchange rates/bond prices/the FTSE 100. You want to take positions. You think you can make money for the bank given half a chance.
Fair enough. However, it's worth bearing in mind that it's harder to take a position and trade it in an investment bank than it used to be. Since the (start of) the financial crisis in 2007, banks have been under pressure to reduce (if not eradicate altogether) the amount of trading they do with their own money.
In the past, banks employed large teams of so-called 'proprietary traders' to place bets on the direction of the market with the bank's money ('proprietary trading'). Banks made a lot of money out of this. But they also lost a lot.
Following legislation like the US Volcker Rule, banks have pulled back substantially from proprietary trading.
Proprietary trading desks are being closed, and proprietary traders are being slowly removed.
"There's huge pressure on banks not to engage in proprietary trading and banks are shedding prop traders by the day. If you want go into proprietary trading, you probably need to choose a boutique trading house or a hedge fund," says Danny Kessler, chief executive of the Met Group of [trading] companies.
So what will you do as a trader in an investment bank if you're not a proprietary trader?
The emphasis now is all about trading on behalf of clients. This means banks must find clients (usually large pension funds, companies, or hedge funds) who will place their trades through them. Trading now involves:
At its most simple, the role of the trader is to execute a trade. If a client wants to sell a security for 5, it's all about finding someone who will pay 6 (the so-called bid-offer spread) and pocketing the difference as a profit for the bank.
Executing trades sounds easy, but it takes skill - particularly if the trades you're executing are large ones - it's about placing a trade at the right time and in such a way that it won't influence the price. A big sell can push the price down and a big buy can pull the price up, so large trades are often executed in smaller blocks.
In order to trade efficiently and to 'make markets' quickly, banks will also hold some of the inventory being traded on their own books (Eg. If shares in company X are particularly popular, a bank may own some of X in its own inventor so that it has some to sell quickly when required.) This incurs a risk for the bank. If X's share price declines, the bank will make a loss.
For this reason, traders also need to 'hedge' the bank's exposure by buying securities that will rise in price when X falls (eg. Buying shares in competitor company Y in the belief that the industry they operate in is sound and that it's a zero sum game with two players - if X doesn't make money, Y will).
Hedging is a complex procedure and provides plenty of opportunity for traders to devise methods of reducing the risk of a bank's market making activities.
Within the confines of trading as market making for clients, sales traders have an interesting role. They formulate trading ideas (with the help of researchers) and pitch these to clients in an effort to encourage clients to trade. When clients like one of these ideas, sales traders execute the trade for them. Some cynical individuals have suggested that sales traders are simply there to persuade investors to buy banks' unwanted inventory....
Some senior traders point out that prop trading hasn't been eliminated in investment banks - it still happens, but it happens quietly. "Banks still take a view and trade with their own money and that view is informed by the flow of customer orders they get," says one. "If a bank can see that customers are all selling X, they will too. If you give them an idea they like, they'll still trade it."
Trading in banks is still exciting. It's still interesting and it's still well paid. But it's less easy than it used to be to achieve a position in a bank where you can make money for your employer based on your belief that the US will default on its debts before 2015. Bear this in mind.
2) M&A - It's less about advice and more about cross-selling the banks' other products and funding the M&A deals
In the good old days, M&A bankers considered themselves impartial advisors who would objectively advise chief executives of companies whether to buy another company and whether to sell part of themselves. The senior M&A banker wasn't in it for the hard sell, but for the long term advisory relationship and the chance to become the confidant of the CEO.
Not any more. These days, the role of a senior M&A advisor at a big bank is as much about helping to fund the deal using the bank's debt and equity capital markets teams, or the bank's own balance sheet (providing a loan) as it is about advising whether the deal is a good bet in the first place.
Christian Meissner, head of investment banking for Europe, the Middle East and Africa (EMEA) at Bank of America Merrill Lynch explained the shift of emphasis last month.
M&A is becoming increasingly standardised, said Meissner and fees are falling. Big companies have their own M&A teams and because of this, they use banks less. "In the old days, companies would hire an investment bank every time they peeked around the corner," Meissner said. "Those days have gone."
Today, M&A is much more about 'balance sheet and capital' (funding the deal), said Meissner. But he added that the role of the senior M&A advisor is still important because it's, "a direct line into the chief executive and the chief financial officer, which you can lead to other business. "
With companies less interested in pure advice, M&A has become a door-opening function. This difference may not be apparent to M&A juniors who are working very long hours assembling pitchbooks of ideas to try and win clients, but it will be apparent to senior M&A bankers.
If you make it to the top in M&A in future, it will be because of the quality of your relationships and ability to work with other areas of the bank to finance deals and sell the banks' other products. This is still exciting, but it's no longer about pure impartial M&A advice. Some people may not like that.