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Morning Coffee: McKinsey’s advice for fixed income traders. How to build an algorithm when you can’t code

Eliminate high-cost-low value clients

What should you do if your fixed income trading career is going downhill? You don’t necessarily need to leave banking for a start-up.  All you need is to be ruthlessly efficient at what you do. Or so says McKinsey & Co, the strategy consultancy firm favoured by banks everywhere.

McKinsey's advice is designed to be implemented by banks rather than individual traders, but traders could always make a start. Firstly, McKinsey recommends ditching, or at least devoting far less time to 'value destroying clients.' These are the clients that take all your time and don't add too much value. McKinsey estimates that the bottom 40% of clients sap 30% of the resources and generate 10% of the revenues. Fixed income traders and salespeople must, 'have the courage to cut them off.' 

Secondly, McKinsey says that banks need to think about charging clients for holding the fixed income inventory that enables them to make markets. In the past, holding this inventory wasn't an issue. Under new capital and accounting rules, however, holding a lot of illiquid fixed income securities simply so that you can sell them to clients as required has a cost attached. These inventory costs were one of the issues highlighted by Bernstein Research in its recent exposition on the problems at Goldman Sachs.  McKinsey thinks that clients will favour banks with a lot of inventory - even if there is a slight cost attached to that. As clients converge on these leading inventory-heavy banks, the turnover of that inventory will increase and the cost to the bank of holding it will fall. Or at least that's the theory.

Finally, McKinsey thinks that fixed income salespeople and traders should focus on margins not volumes. For the moment, it says fixed income businesses are all about selling as much as they can. This is wrong. They'd do far better if they were focused on generating as much profit as they can. Some banks, like Morgan Stanley, are already doing this. Others need to get with the programme. By doing so, McKinsey thinks they can increase the profitability of fixed income units by 30%.  

Separately, if you're a trader and you've got a good idea for an algorithm but you don't know how to code it, then website Quantopian has the tool for you. It claims to have constructed an 'algorithm builder' with which you can build, test and trade an automated portfolio automatically, allowing you to 'select securities from Quantopian's database of over 8,000 stocks and ETFs and set their allocation weights.' This might not set you up for a job in electronic trading, but it may mean that your own portfolio can trade itself while you're busy doing something else.


It has been more than a year since fears about the health of a European bank badly rattled markets. (WSJ)

Investment banks’ costs are out of control. (New Financial) 

Oppenheimer is hiring for its fixed income desks. (BusinessInsider) 

Another JPMorgan executive director committed suicide. (Evening Standard)  

Boaz Weinstein’s hedge fund has declined for five months running. (Bloomberg) 

Did Goldman wrong Deeb Salem? (NY Times) 

Bankers are, 'a neurotic group of overachievers who will die with their nose in their desk. They are crazy, maniacal, highly insecure, never satisfied.' (Bloomberg)

Bankers and insurance clerks who were poets. (CityAm) 

The world’s most costly cities in which to be an expat. (Mercer) 

How to tell if you’re a workaholic or a high performer. (Inc) 

If you give employees the power to set their own hours and time off, they’ll work harder. (BusinessWeek) 

Related articles:

Earnest young bankers snatch last opportunities for inebriation. Compliance hiring overdrive

Careers in finance that will still be hot in 2030. Citigroup investment bankers take control at Barclays

JPM-backed hedge fund hiring in London. Goldman Sachs chief died after client meeting

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AUTHORSarah Butcher Global Editor
  • Sa
    Sarah Butcher
    11 July 2014

    @Oblivia - thank you for pointing that out. I don't use Word to write and therefore rely on my own grammatical abilities, which can be especially absent early in the morning.

  • ob
    11 July 2014

    There are also algorithms that will automatically spot embarrassing grammatical errors, but most journalists don't bother to learn how to use Microsoft Word.

    "This might not set you up for a job in electronic trading, but it may mean that your own portfolio can trade itself while your busy doing something else."

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