What Derivative Traders Do
Derivative traders work with securities that are valued based on value fluctuations of an underlying asset. For this reason, they’re commonly used to hedge risks. Common derivatives include things like stocks, bonds, currencies, and commodities, but in the modern era of big data, some are even based on the weather and other things that once seemed intangible.
There are many similarities between working in cash trading/ general securities and derivatives, such as there being professionals who work either on the buy side or sell side, following the market, and using modeling to predict how the asset will perform. However, derivative traders must work with more data and follow more factors when determining whether to buy or sell as well.
Who would enjoy a career in Derivative Trading?
People who are analytically-driven, and have a deep understanding of statistics, modeling, and general mathematics do well. However, because derivatives don’t deal with the value of the asset, but rather the fluctuations in the value, those who get into the field must also be highly-familiar with the sector the asset fits into, as well as what causes the value to rise and fall, and to what degree each variable causes change.
Following current events, staying up-to-date on trends, and monitoring related markets is essential as well. For these reasons, high-performing derivative traders are meticulously organized and move fluidly between various computer programs to collect, sort, and monitor data from various sources. A background in business is helpful, as is knowledge of programming in languages such as C++ and Matlab.
Who mightn't like the career?
Life as a derivative trader can become all-consuming and oftentimes repetitive. Although the markets close, which would seemingly leave nights and weekends free, many professionals use the “down time” for research and strategy. There is also considerable stress in determining which moves will be the most lucrative, so the career can be difficult to balance for those who either lack skills, struggle with time management, or can’t set boundaries.
It’s also worth noting that some firms focus more on what generates money for them, versus making trades in the best interests of their clients. Those who prefer to be associated with a client-focused organization must do research about the firm and its philosophies before joining to ensure values are in alignment.
Because derivatives are more complex than other forms of trading, most professionals begin with a firm and work on vanilla cash trades/ general securities initially and hone their skills over time. Moreover, trading in derivatives market generally requires additional training and licensing, beyond what those in general securities need. As a basis to get into a firm and begin the process, most professionals obtain degrees related to business and finance. Undeniably, the more prestigious the university, the greater one’s chances are to get into one of the big firms. For more information, see “Careers In The Derivatives Market.”
Most people move into derivative trading when they’re already established in a firm, so interviewing is not handled by traditional means. However, those who move from one firm to another should be prepared to answer many questions related to probability and statistics, demonstrate their knowledge regarding their specific market expertise, and discuss examples of their prowess. Individuals coming straight out of university can improve their chances of landing a job by doing internships or participating in graduate schemes.
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- What does a derivatives trader do? What are their day-to-day tasks, and what do you need to be successful if interviewing for a position like this?
Moving into Derivative Trading from another career
Due to the expertise required, there are not many careers that provide a smooth transition into derivative trading.
Role: While most financial careers begin at the analyst level, and there are derivative trading analysts, most newcomers to the specialty have already worked in analyst positions as general securities traders and therefore begin this career path at an associate level.
At a junior associate level, derivative traders don’t usually make trades. Instead, they gather data, create models, monitor trends, pitch ideas, and learn as much as they can from senior associates and above. At the senior associate level, some professionals become involved in trading, but it’s typically done under the supervision of senior traders.
Role: VPs are expected to be leaders in their niche. They not only have a good handle on predictions and have the finesse to sway clients, but they’re also often expected to devote time to cultivating new business relationships and strengthening the bonds with their existing clients. For this reason, VPs may travel some or take clients out. Depending on the financial institution and the individual’s experience, a person may be a VP for 3-4 years.
Role: Organizations may use the title “Senior VP” or “Associate Director” to denote the next step up. Directors spend even more time developing client relationships and oversee the work of less tenured staff members. There is no direct correlation between promotion to managing director and tenure. Sometimes, even skilled traders never exceed the role of director.
Role: One of the most unique things about a career in trading is that, although the positions may progress, the job, itself, doesn’t change in a remarkable way. Those who began a career in trading are still trading as a managing director, though they’ll also have underlings and work more on strategy. Those on the sales side will still be responsible for sales, though they may spend more time cultivating relationships and arranging larger deals.
Most derivatives traders don’t travel for work, and they don’t often move outside the territory covered by their license due to the difficulty in obtaining new regional licensure.
Analyst: According to Glassdoor, the average salary of a trading analyst is about USD$73,000 in America, CAD$83,000 in Canada, £48,000 in the UK, and AU$80,000 in Australia.
Associate: USD$110,000, CAD$85,000, ₤68,000, AU$90,000
Vice President: USD$140,000, CAD$90,000, ₤71,000, AU$100,000
Director/ Managing Director: Comprehensive salary information for executive roles in sales and trading is not readily available, though most sources indicate the rate is generally two or three times the salary of a VP. High-performing MDs may make as much as USD$1-2 million annually.
Bonuses are a major part of compensation in sales and trading careers. The amount awarded varies greatly on the institution and the role of the individual, as well as the profitability of the deals he and his desk secure.
PayScale data indicates that bonuses can be as small as 0.5% of an annual salary for an analyst or as much as twice the person’s salary; putting it in the six-figure range. Managing directors can earn more than $1 million dollars in bonuses in a year.
For a full chart on what UK professionals can expect to earn across various trading careers and specialties, click here.
Why Derivative Traders move on
The burnout rate for derivative traders is relatively high, and is often influenced by the stress of the job and/ or differing values from the firm. Many also see the career as more of a short-term stop in order to learn more skills or generate money rapidly so they can pursue their own interests and endeavors.
Sometimes, people move to another area of finance or a different area of derivatives, whilst others start their own businesses. Gaining firsthand knowledge of the profitability of a specific industry, asset, or product, can also pave the way for a business leadership role in that particular sector.
For more information, see “Why I Am Leaving Goldman Sachs,” “Equity derivatives salesman: The fun got squeezed out of it. That's why I quit,” and “Life after trading redux: How to leave investment banking, but stay in finance.”