The Rates Trading Desk in London: How to Break In, and What to Expect on the Job
If it is, what’s the best desk for you, and how should you recruit for it?
It’s tough to give universal answers to these questions, so we like to present different groups and let you decide.
We’ve published articles on equities and fixed income, but I’ve always wanted to go into detail on individual desks within those areas.
And just as I had this thought, a reader who works on the rates trading desk at a large bank in London volunteered to share his experiences:
What is the Rates Trading Desk?
Q: Before we get started, can you explain what the “rates trading desk” does and how it’s different from other areas in FICC Trading, such as credit trading?
A: Most assets that a bank trades are split into cash vs. derivatives vs. exotics, and the same split applies to the rates trading desk.
“Cash” here means sovereign bonds, while “derivatives” means interest rate swaps and futures, and “exotics” means structured products based on rates, options on swaps, and others.
Of those, we focus on making markets in sovereign bonds and interest rate derivatives.
Sovereign bonds are ones issued by governments, such as U.K. Gilts, U.S. Treasuries, EUR-denominated bonds issued by European countries, and Australian Government Bonds (AGBs).
In London, EUR-denominated bonds and U.K. Gilts are the most common, though there are teams for the others as well.
Interest rate derivatives are financial instruments whose values increase or decrease based on movements in interest rates.
The simplest type is the “vanilla” interest rate swap, where one party receives payments based on a floating interest rate and pays the counterparty based on a fixed interest rate.
If you’re receiving payments based on a floating rate, you hope that LIBOR increases so you receive more; if you’re paying based on a floating rate, you hope that LIBOR decreases so you pay less.
Other derivatives include caps and floors, STIRT futures, Eurostrips, swaptions, and interest rate call options.
“Making a market” means providing liquidity to clients who want to buy and sell.
We commit to buy and sell anything from clients, even if we don’t want the position, and then we address the risk and try to turn it into a profitable trade.
Rates trading is very macro-focused compared with equity trading and areas of FICC such as credit trading or distressed debt.
In credit trading, you focus on securities like corporate bonds and credit default swaps (CDS), and company-specific knowledge (“the micro”) is critical.
But almost anything could affect interest rates, so you focus on “the macro” on the rates trading desk: economic growth, trade policy, inflation, exchange rates, and monetary policy.
Rates products offer significantly more liquidity than other types of bonds, so flow trading desks here tend to be loud and busy.
When there are central bank policy announcements, geopolitical developments, or economic data releases, activity on the desk flares up.
Rates Trading Desk Recruiting and Interviews
Q: Great, thanks for that overview.
What should you expect in the recruiting process?
A: You don’t specify a desk upfront, so you’ll just apply to the sales & trading divisions of banks, usually starting in August; sometimes you will pick equities vs. fixed income upfront.
Typically, you’ll have a first-round interview with junior traders in-person or on the phone, followed by an assessment center if you’re in the EMEA region (or a Superday if you’re in North America).
Traders look for technically-minded people who are comfortable with numbers and quick decisions under stress, which is why there are so many athletes on the trading floor.
It’s critical to apply early in London, especially if you’re from a non-target school.
Networking definitely “works,” but there are some cultural differences.
Q: Such as?
A: Just as in the U.S. and other regions, alumni networks at top schools are very helpful, but they work much better for recent graduates (i.e., those within 2-3 years of graduation).
After a few years, school affiliation in the U.K. becomes a weaker connection than it is in the U.S., so just going to the same university as a senior trader usually doesn’t cut it.
Traders won’t have time to meet during market hours and generally won’t be inclined for sit-down meetings – so your best bet is to aim for drinks right after work, especially on Thursday nights.
The after-work drinking culture is so prevalent in London that you might even be able to network with traders simply by going bar-hopping at the right times.
In London, Canary Wharf and the area between the Liverpool St. and Bank stations are the hot spots.
Q: That sounds more fun than coffee meetings…
Once you get past the networking stage, are there any London-specific interview differences?
A: Not really; you should expect a few brainteasers and math questions, lots of competency questions (“Why our bank?” and “Why sales & trading?”) as well as questions about market trends and trade ideas.
Especially for macro-oriented and fixed-income desks, you need to articulate clear views about central bank policy, geopolitics, market data, and news stories.
Product knowledge is also helpful so you can answer the “Why S&T?” question convincingly, but groups here stagger their expectations based on your background – they’ll expect someone with an MSF degree to know more than someone with a liberal arts degree.
Q: And what should you expect in S&T assessment centers?
A: Long days! ACs for S&T can sometimes run from 8 AM to 5 PM.
As with any AC, you’ll interview with senior professionals and complete individual and group case studies.
The three most common case studies here are trading games, group investment presentations, and individual trade idea presentations.
With the trading games, you’ll form groups, and in each turn, one group will make a market while the other group will buy and sell. You’ll receive more information about prices and orders in each turn as well.
The winner matters less than how you play the game – always track your positions and P&L and manage risk appropriately (e.g., don’t buy a huge volume of shares under the assumption that you can easily sell them).
Write down what others are doing so you can quote appropriate prices and present your ideas without being overly aggressive.
The usual group presentation task is to recommend 1-2 investments out of a set of 5-10 companies.
There is no “correct” answer, so make a decision quickly and then spend most of your time outlining your pitch and anticipating the questions you’ll get.
You should volunteer for a useful task that no one else wants to do (such as timekeeping or note-taking) so that you come across as a “team player.”
When you present, try to speak at the beginning or end so they remember you, and stick to your allotted time (usually 30 seconds per person).
If you have an observed group discussion, try to bring others into the conversation and don’t just give your opinions the whole time – recruiters like to see “humility.”
With the individual presentation, you’ll receive market information and research, and you’ll have to propose a trade idea.
Once again, make a decision quickly and aim for only a few minutes of presentation time so that you can spend more time answering the interviewers’ questions.
With trade ideas, many students don’t consider how they might hedge the risks.
It is not necessarily a good idea to suggest something specific, such as using call or put options, because you’ll almost always be quizzed on how exactly it would work. And if you don’t fully understand the specifics, it could easily backfire.
However, it is worth doing a bit of research beforehand on possible hedges so you can answer follow-up questions if the interviewers ask you about the topic.
Finally, don’t tell everyone that their desk is your #1 choice, and don’t focus too much on one specific desk.
You need senior traders across the desks to like you, so say that you’re open to anything, even if you do have a preference for one product.
You can always say that you’re very interested in what the person does and that you would like to know more, as markets people love to talk about their own roles.
On the Rates Trading Desk: A Day in the Life
Q: Thanks for that summary.
Can you walk us through an average day on the rates trading desk?
A: I need to be there before the European markets open, so I arrive around 6:30 AM, start preparing my comments for the 7 AM morning meeting, send our “axes” (trades we want to make) to the sales force, and mark my bond prices once the market opens.
I’m then at the desk for almost the entire day until 5 PM, when the market closes, except for ~20 minutes to grab lunch at mid-day.
If U.S. payrolls come in lower than expected, the ECB makes an unexpected announcement, and China announces a new trade deal, activity will spike, and we’ll be very busy making markets for clients (in front of all 8 of my screens).
But if it’s a quieter day with no major announcements or surprises, I’ll spend more time on analysis, Excel modeling, and longer-term projects.
It’s not the type of modeling you do in investment banking – it’s more for retrieving prices and positions and building graphs and analysis for swap curves (for example).
Senior traders rarely stay past 5:30 PM, but junior traders often stay later to finish P&L and risk reporting or other projects. But even they usually leave by 6-7 PM.
Q: How much do you interact with the sales force and structurers?
A: If you cover products with high flow, such as government bonds and swaps, you’ll work with sales force quite a bit.
For example, a salesperson might come to us and ask for a price on a government bond that a client wants to buy. Then, we look at our positions, who the client is, market activity, and recent prices, and give a quote.
The salesperson then relays this quote to the client, and the client says yes or no or makes a counter-offer.
If the trade goes through, the salesperson will confirm and book it, and I’ll start planning the next steps: unwind it right away, keep some or all of it, or buy something else as a hedge.
The structurers tend to have more contact with the sales force than us because the salespeople manage the relationships with clients that want custom products; traders just price and execute the trades and manage risk.
Q: Have new regulations, such as MiFID II, affected the job? What about automation?
A: Yes; they’ve changed the trading floor dramatically over the past decade.
These regulations are intended to reduce insider and rogue trading by making discussions between market participants more transparent, but some people argue that they’re killing liquidity and forcing banks to consolidate.
I think banks will have to specialize in fewer markets in the future, and that consolidation will continue because regulations tend to favor large incumbents.
It’s ironic because regulators want to eliminate “too big to fail” institutions, but many new regulations have the opposite effect because they increase the costs of doing business and grant advantages to large banks that can leverage their franchises.
Evercore closed its European equities execution desk two weeks after MiFID II was implemented, and we’ll continue to see stories like that.
Automation has affected many parts of S&T, but rates products are more complex, and therefore harder to automate, so my desk hasn’t seen a huge impact yet.
But it’s certainly true that banks want to hire computer science graduates and train existing employees to gain the technical and coding skills required to build and maintain trading systems.
Q: How does the advancement process work in S&T?
A: After your 2-3 years as an Analyst, compensation and advancement are less rigidly defined than they are in IB.
Bonuses depend on individual, team, and bank-wide performances, and if you perform well for a few years, you could accelerate your career and compensation.
But the job is also quite volatile – especially when the markets are volatile – and firing rounds can be frequent and ruthless.
There’s a huge range in compensation and advancement because everything comes down to performance. Star traders could advance to the top in 5-10 years, while others could struggle for years and never make it far beyond the entry level.
Your title may change as you move up, but in practice, all that changes are your risk limits – unless you move to the managerial side.
Some traders do move into managerial roles to reduce career volatility, and if they do that, their base salaries tend to increase.
However, they’re also far less likely to earn “star trader” bonus packages as managers, and their total compensation may fall.
Rates Trading Desk Exit Opportunities
Q: On that note, how long do most rates traders stick around? Are there solid exit opportunities for something so specialized?
A: The turnover between teams at different banks is quite high, and it’s common to work at 4-5 different banks over your career.
Rates trading is very specialized, so banks are always looking to poach other traders who have the skill set; normal companies and non-trading firms don’t necessarily place a high value on those skills.
Some traders do leave for hedge funds (usually global macro ones) and prop trading firms, and others switch to different desks, but these options become more difficult as your career progresses.
It is common to switch geographies and move to New York, Hong Kong, or another financial center since you can trade almost anywhere in the world.
But the bottom line is that if you want broad exit opportunities, go into investment banking, or work in sales rather than trading.
Q: Thinking about everything we’ve discussed, who would be a good fit for the rates trading desk, and who would not be a good fit?
A: You’d be a good fit for the rates trading desk if:
- You’re comfortable with risk.
- You’re able to work in intense environments while communicating with salespeople, clients, and brokers.
- You prefer macro analysis.
- You prefer fast-paced day-to-day tasks rather than longer-term projects.
- You like math, but not quite enough to be a quant.
If you’re more project-oriented, or you want to work at your own rhythm, you’d be better off in structuring or research.
If you’re less comfortable with risk, but you have great people skills and you can work the phones quite well, you’d be better off in sales.
Q: Great. Would you recommend any books or other resources to learn more about this area?
A: Sure. Some of these books get very technical, but if you want to learn more about rates, I’d recommend:
- Interest Rate Swaps and Other Derivatives
- The Handbook of Fixed Income Securities
- Interest Rate Markets: A Practical Approach to Fixed Income
Q: Thanks for your time. I learned a lot!
A: My pleasure.
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To clarify, big 4 TAS would be in the US but the CB role would be in Canada
Thank you for your articles.
Looking for information on EUR bond trading desks and interview questions, would you be able to provide some direction please? How much greeks and derivatives is a junior trader interview based on?
Should we have some view on pars of the curve/countries and territory.ideas to trade or hedge?
Finally on pricing, should we expect total pricing and quoting on D-DAy?
Thank you for your time
Sorry, we don’t have much information on that specific desk, but yes, you should expect some technical and math-based questions about pricing, quotes, yield curves, etc. If it’s a pure bond trading role, i.e., not derivatives but just the underlying instruments, I don’t think you’ll get many questions about derivatives or the Greeks.
I had a few queries and would appreciate your help.
1. Is an internship in fund management at an insurance company a good opportunity if my end goal is Investment banking?
2. Apart from the different deal sizes, are the corporate finance teams at Big 4 a good way to enter the investment banking industry
1) No. You should pursue internships where you gain transaction/client experience (IB, PE, independent valuation firm, Big 4 TAS group, etc.). Fund management is OK and could work well for some things, but it’s not super-relevant for IB.
2) Potentially, or at least better/more relevant than fund management.
Hi Brian, thank you for the information on S&T desk. Kindly share some ideas on Delta One desk? Thanks
We don’t have much on Delta One, but the article on Equities Trading covers some of what to expect in derivatives: https://mergersandinquisitions.com/equity-trading/
There are some decent results on Google as well (https://ftalphaville.ft.com/2011/10/26/712701/how-delta-one-really-works/).
Hi Brian, I just graduated and I’ve been offered a role within the Corporate Banking Global Markets group at a bank. It is housed within CM (not CIB) and I’d be starting as a “Business Analyst” before moving up to an actual CB Analyst. From my understanding this is still front office, but the work is primarily to set up trading credit limits, and fx/commodity/derivative credit lines for borrowers, perform credit analysis, etc. Would this role be better for a switch to IB (or top MBA then IB) or would a Big 4 TAS-FDD role be better (MBA to BB IB)
Normally they would be about the same, but if the Big 4 TAS role is in the US, it’s probably a better bet because the US has a much bigger market for investment banking and more roles opening up. The CB role might be better if you want to stay in Canada, which I wouldn’t necessarily recommend because it’s a tougher market for IB recruiting, especially as a lateral hire.