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Interview with: Foreign Exchange Trader

This interview was conducted with a FX trader at a major bank.

How are FX desks set up?

I work in Canada, so we have bookrunners for each geographical region for currencies – usually someone who deals with USDCAD – mostly flow business but the biggest book by far.

There will be a guy who trades each of the following:

  • LatAm (Latin America)
  • G10 (Group of Ten – developed countries in North America, Europe and Japan)
  • Asia ex-Japan
  • EMEA (Europe, Middle East and Africa)

Obviously, the bulge brackets will have much more extensive coverage, but these desks are generally par for the course.

Can you comment on what trading some of the major currency pairs is like?

For USDCAD you have mostly flow – that is you give a price that is thin and safe. G10 is a mix between flow and prop (proprietary trading), where the trader will take a view. LatAm, Asia ex-Japan and EMEA have a strong prop component, mostly due to the illiquidity of the currencies requiring you to hold something without necessarily having an offsetting position.

In a way, you will have an advantage over most corporate clients as you are presumably more on top of the market than they are, so this in itself has a prop element to it.

What’s an example of a proprietary decision?

Let’s look at an FX option – and let’s explore gamma and vega (review in the sales & trading interview guide). Gamma is the second order of your delta, or the rate of change of the derivative versus the rate of change on the underlying asset – basically your rate of change of your rate of change. Vega is sensitivity to volatility.

Do I want to be long gamma or short gamma, do I want to be long vega or short vega – this really depends on what end of the curve you want to trade – do I see volatility as being mispriced? Are random whipsaw movements in spot going to correct?

What data do traders keep an eye out for?

Non-Farm Payrolls are huge. Industrial production data from the US and China. China is becoming more and more relevant and drives global markets. US employment and FOMC rate hikes are huge. US GDP numbers are important and ISM data is looked at, but will require surprises the market does not expect to move the currency.

As for Canadian data, no one really cares – recent positive GDP reports had been ignored repeatedly and now the market is forced to acknowledge the strong economy, but it has not been a standalone catalyst for USDCAD.

How do major geopolitical events affect your job?

Some desks were caught with their pants down after Brexit – traders like volatility (large spreads) but can be hammered when they are exposed and risk goes the wrong way. For large risk-off events such as Trump or Macron vs the National Front, having a book that does not move much in any scenario is key.

How do you interact with clients?

Corporate clients do not trade FX as their core business, they need it to repatriate funds or to hedge currency risk – as such, you always make a market for them and you always give a price (albeit not always a good one). For instance, an airline that operates overseas has a lot of currency it must repatriate because it reports in US dollars.

Financials are trickier – generally insurers and pensions are looking to hedge. Hedge funds, despite their name, are opportunistic. For a currency they know a lot better, especially just before the trading day ends, you can generally tell them to go away.

Do you deal directly with clients?

For corporate clients it really depends – sales guys will usually be an intermediary to some extent. For anonymous prop trading (until the deal is agreed), brokers are used. Major brokers include Cantor Fitzgerald, Tradition, GFI/BGC Partners, and Tullett Prebon.

Are you worried that your job will get automated?

Trading is certainly getting automated – the less opaque and structured the product the faster we will have computers. To put this into perspective, we used to have a trader for every G10 currency pair and now most people have one guy who does all of it.

Spot FX is almost completely automated – the longer dated you go or the more esoteric the derivative, the better it is for human traders.

Well what are you going to do when your job gets automated?

Either trade another product or play professional poker for a living. Or move into sales. There is always something to trade and fingers crossed for a more relaxed regulatory environment (Dodd-Frank repeal etc.) things may be looking up for the trading floor.

How do you get a job? Who do you hire?

Trading analysts and associates are hired either directly from on-campus recruiting or through being selected while on a Sales & Trading rotation (many banks have rotation programs where you spend 1-3 months on a variety of trading floor desks getting to know many products and how they interact – however rotational bonus is substantially lower than if you had a home desk). Many trading analysts are also returning summer hires.

Generally, analysts are undergrads with good grades and a demonstrated interest in financial markets, which we look for via previous work experience or a strong interview where we discuss various macroeconomic factors.

Associates are hired out of MBA and sometimes rigorous quantitative master’s programs, such as a Masters of Financial Economics. Sometimes MBAs and Associates will be hired as analysts, so it varies from bank to bank.

How do you ace the interview?

The standard Sales & Trading questions are fair game for technical knowledge – you need to know Black-Scholes, option payoffs, how to price a bond etc.

However, most questions we ask are dynamic and cannot be read in an interview guide. We like to see if the interviewee follows the market and more importantly develops a coherent viewpoint. On the trading floor, you always need to have a view.

Other than that, you need to like sports.

Do you have any views on currencies you would like to share right now?

No.

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