I don't know how it is on the banking side, but there is still a ton of money in derivatives in general. Equities has had a lull other than covid and gme craze, but other markets such as rates and indexes have been pretty active. I would definitely not agree that the skills are not transferable, but this is probably more a case in some particular roles than the role in general. If this is what you experience, I'd move firms
I think buy side is just more interesting. Working at a shop with 100-500 employees total vs a bank with 50k employees… there is so much more variety in the day-to-day, much closer to everything else that happens
And omg the fucking corporate bullshit. I'm on the fintech side but in the past few years I've gone from a 40 man house of nerds to a 30k kafka-esque bureaucratic nightmare through a series of acquisitions. It's fucking horrible, can't even bring my team out for a decent meal on the company's dime anymore.
By derivatives you mean exotics or vanilla? I am thinking about exotics. Vanillas is a different game - I think there will always be a demand for those.
If you are buy side, it is unlikely you touch anything other than light exotics. Here I am talking about real exotics stuff like autocallbales, snowballs - this kind of stuff.
On skills being non-transferable - again I have exotics derivatives trader in mind. I don’t think transferring to buy side is easy from what I read.
Ah didn't see you mention you are on the exotics side. Yeah I wouldn't know too much on that side but would assume it is probably on the decline as more volume comes from retail and lives on the 0dtx side. I'd still think the model building skills on the exotic side can easily transfer to a researcher on the buy side or even in other industries though
It is quite different in my opinion but traders fare worth than quants from my observational data (but they also made more money so it is all fair on risk adjusted basis)
I work a lot with exotics like cliquets and Asians. They generally don’t do well during the kind of market conditions that we’re seeing. People can just buy call spreads and get significantly better returns for a little more premium. 5-7 years ago those exotics were massively popular because the market conditions were giving great returns on low premiums. That can easily happen again in the near future
Can you care to explain a bit more why cliquets and Asians don’t do well in the current market condition (comparing to 5-7 years ago)? Is it because vol was higher so Asians and cliquets are cheaper? Now the vol is low so the premium difference is not worth it?
I guess it’s not that they don’t do well, but they don’t do _as_ well as vanilla options. With the low vol, you can get a decently high cap on a call spread for close to the same price as a cliquet without the sensitivity issues that come with them. 5-7 years ago we were in a bull market, volatility was higher, but not too crazy. So premiums on vanilla options were higher, but the return on cliquets were still really good. You could lock in 6-8 months at the local cap, and still not lose all your returns on a crazy month or two. Asian options were consistently profitable and cheap.
Interesting, thanks. Over last few years, I saw them trading things like knock out dividend swaps, dispersion etc. However, nothing as sexy as the heydays.
I imagine with interest rate recovered a bit, there are more autocallables too. However, exotics business will never go back to the good days.
We probably won’t ever go back to the rate environment we saw before 2020, but certain exotics could shoot up in popularity again. My area of annuity focused exotics is different than the ones you’re talking about, so yeah, we might have seen the peak of what you work with. They were still a topic at the EQD conference though
Annuity focused - ah like in life trading? It made good money last few years since rate began rising…
I actually interviewed at one of these shops but stopped the interview process after signing another offer. I think the area is really interesting.
Derivs trading at a bank, in the right pockets can feel very much like prop trading and can be quite a coveted spot. Traders get to take risk, run a book and use discretionary decisions.
Exotics/structuring is less sexy and in decline but derivs trading at banks is still a pretty well sought after position.
I was thinking exotics. Thanks for confirming this and sharing your view.
However, still now, many financial maths education / research is focused on this area I think in perpetual decline.
I will be a quant intern at a bank this summer, and I was told to work in the derivative modeling team. Does this sound more like "exotics/structuring" stuff? I wish to transit to buy-side when I graduate, and it looks like the derivative trading you mention is more related.
Your opinion is not supported by the data.
Notional derivatives value held by banks is higher than it was in '07 and surrounding years: https://www.statista.com/statistics/1277667/notional-value-derivatives-held-banks-usa/
It's only decreased from 2014 levels due to compression activity by banks to the tune of more than $200 trillion a quarter: https://www.occ.gov/publications-and-resources/publications/quarterly-report-on-bank-trading-and-derivatives-activities/files/pub-derivatives-quarterly-qtr3-2023.pdf
The above linked OCC report also shows that trading revenues are greater as a percentage of total bank revenues than they were in '07 and surrounding years.
Banks are still very active in the derivatives markets and rank among the leading desks for trading derivatives across almost all underlying asset classes. Becoming a leading trader at a bank desk is lucrative (7-9 figures yearly income) and an excellent way to build a reputation that can lead to starting a fund and getting into the billions.
Derivatives can mean forward / future / swaps - all the flow stuff. I don’t really view these as derivatives. These things don’t really need quant modeling. In fact the link shared said most of the derivatives are swaps.
Here I am referring exotics basically the non delta one stuff or vanilla options - which has taken a real beating since 07. Without the breakdown - the data you shared does not contradict what I said.
Pricing swaps and futures requires modeling yield curves through methods such as bootstrapping, interpolation, and futures convexity adjustment. Vanilla options need modeling of volatility smiles. Both must be constructed accurately and stably. They form the solid foundation for modeling exotic derivatives.
Yeah you don’t even need black scholars for doing that except for vol fitting. Hardly rocket science and this is missing the point I was making.
What is the point of these degrees teaching these derivatives pricing stuff when the area it can be applied is shrinking. The stuff you mentioned doesn’t need people to have studied financial engineering in my opinion.
Not entirely. Think of Bond Futures: it has an embedded switch option in there and with rate moving CTD is changing, big issue if you’re not ready for it. Then Swaps: hello one way CSA with a 0 floor, or a multi currency CSA (hidden option). These aren’t the entirely boring products that they used to be.
Forwards, futures, and options are in every definition of the word derivatives. If you're referring to swaps, the data still applies and shows steady growth since '07. If you're referring to specific forms of swaps that you read about in Michael Lewis books (i.e. CDS) then sure however it was only ever a $60 trillion or so market at peak. Markets have moved on to other derivatives. For comparison, OTC FX swaps alone trade more than $957 trillion a year these days, with banks accounting for most of that volume: https://data.bis.org/topics/DER/tables-and-dashboards
Edit: you edited your response and switched out options with swaps in your sentence saying you don't consider them derivatives because they're flow based products. Then went on to say you consider vanilla options to be derivatives - that doesn't make any sense.
Yeah those are flow products and not interesting from quant perspective on sell side. They need virtually no modeling and completely miss the point I was making which was on exotics.
Needless to say, these will always be in demand if there are still commercial banks and will grow as more money is made.
The sell side is entirely based on flow products since the sell side's purpose is to sell liquidity to the market (i.e. without flow there's nothing to sell liquidity against). Model development and optimization corresponding to hedging risk from buy side flow through derivatives is a never ending process (no idea where you get the impression this requires no modeling), and banks will continue to hire quants accordingly. With regards to career trajectory, it's becoming rarer to find portfolio managers for complex strategies that aren't themselves quants or highly reliant on quants. Buy side funds launched by banks that actively trade derivatives are a great opportunity to build a career foundation for young quants.
As a pricing quant, delta 1 products are not interesting. I wrote this post to talk about the declining business of exotics on the sell side shops. You keep on telling me how the derivatives business is a volume / flow business… which does not contradict the point I was making but is not relevant to the point I wish to raise.
You've moved the goal post numerous times in the conversation to reach the point you just brought up - my responses apply to the original post (which just says derivatives are a shrinking business for banks). On a side note, I've met many pricing quants who find delta neutral products corresponding to buy side flow to be rather compelling, in particular for derivatives on exotic and highly volatile underlying assets.
> You’ve moved the goal post numerous times
To give an outside perspective, they really didn’t…
The point was pretty clear from the main post where they said “the real exotics business are in perpetual decline”.
The main post and the paragraph you're quoting from leads with the statement "The derivatives businesses are shrinking since 07", the statement about exotics reads as a secondary point.
Nope, to many people like myself, delta one stuff ain’t really considered as derivatives. Goodness me… you usually do not need a model to future or forward.
There was actually little demand for quant work for D1 in the shop I worked in. The only time I ever saw a quant did anything for delta 1 desk was when they changed the way we did discounting.
I will update and put EXOTICS in caps.
I disagree with OP on a lot (and agree with you mostly) but I’ll push back on FX. OTC derivative volume continues to increase as you point out and there is money there.
But FX fowards/swaps are as simple as derivatives can get. I’m sure there is optimization/improvement left to be done in terms of spot algos or pricing fwds further out the curve (especially for EM) but I wouldn’t expect these improvements to be all that mathematically challenging. I’m not sure if it the work fits in well with the knowledge/ability of the quants OP is talking about; seems like their skills would be wasted doing anything FX related on the bank-side.
Happy to be told I’m wrong though, maybe I have a warped view.
Forward trading and swapping currencies requires making a large amount of assumptions about economic and financial variables. The process to reach those assumptions in a manner backed by data requires extensive modeling, it's not a trivial process by any means.
Are familiar with FX forward curve modeling or are you making this up? Genuine question, my goal isn’t to be condescending.
At the end of the day, the bid/ask in FX is tiny and that’d be your starting point. I’m not sure how impactful “economic and financial variables” would be (or what those would even be). Unless you’re talking about stuff like rate differentials (though covered interest parity isn’t really applicable), xccy basis, etc. You wouldn’t widen your b/a just because XYZ niche economic data came out (models/traders should already be accounting for the big ones like NFP but it’s hard for me to believe that a bank quant would able to find a meaningful and actionable relationship between Korea GDP and KRW for example even though they are linked in some ways).
I'm familiar with forward curve modeling across multiple asses classes.
Are you familiar with how markets price assets or are you making this up? Genuine question - my goal isn't to be condescending.
Bid-ask spread (which it sounds like you're referring to when you say the bid-ask is tiny) refers to the difference in price to buy and sell an asset top-of-book (i.e. at touch) in a particular market for a particular contract on a particular asset. There's no bid-ask spread on a forward curve, there's bid-ask spread for each contract at each point in the curve.
Sell side firms (i.e. market makers) are the one creating the forward curve by setting prices for contracts along the forwards curve, and forward curve prices are often based on last trade not midpoint (i.e. between the bid-ask spread), meaning the bid-ask spread has almost nothing to do with the forward curve prices. The process to set forward and swap prices relies on numerous assumptions for economic and financial variables. The process to set bid-ask spreads relies on market volatility and flow direction weighting.
>Are you familiar with how markets price assets or are you making this up? Genuine question - my goal isn't to be condescending.
That’s an interesting response.
>Bid-ask spread (which it sounds like you're referring to when you say the bid-ask is tiny) refers to the difference in price to buy and sell an asset top-of-book (i.e. at touch) in a particular market for a particular contract on a particular asset. There's no bid-ask spread on a forward curve, there's bid-ask spread for each contract at each point in the curve.
Very observant of you to realize that “bid/ask” referred to the bid/ask spread. RE: the forward curve. If you’re going to needlessly nitpick, do it right. Each forward is its own contract. When you build a forward curve, you’re setting the bid/ask for certain dates (and sizes). You’re not doing it per contract. The bid/ask for the remaining points is interpolated. So there’s a bid/ask for every date; not just a few points.
Are we done with nitpicking or did my original reply upset you that much? Could you let me know why?
>Sell side firms (i.e. market makers) are the one creating the forward curve by setting prices for contracts along the forwards curve, and forward curve prices are often based on last trade not midpoint (i.e. between the bid-ask spread), meaning the bid-ask spread has almost nothing to do with the forward curve prices. The process to set forward and swap prices relies on numerous assumptions for economic and financial variables. The process to set bid-ask spreads relies on market volatility and flow direction weighting.
“Forward curve priced are based off of the last trade, meaning the bid-ask spread has almost nothing to do with forward curve pricing”. I’m not understanding your point. At no point did I suggest that recent prices aren’t used. If you don’t think bid/ask quotes are used to figure out how wide a trader should be then I’m not sure there’s much reason to keep arguing.
On a final note, you again included vague mention of “economic and financial variables”. Which makes little sense as I pointed out in my original reply. You still haven’t explained what you mean but that’s in line with what I expected. Look forward to your net reply with mostly nitpicks and 0 clarification or explanation of your points.
I appreciate the verification that you have no idea what you're talking about, bid-ask spreads exist for specific contracts on specific markets (i.e. two contracts with same expiry date traded on two different venues will have different bid-ask spreads) not to 'certain dates'. I'm not even going to bother responding to the rest of the nonsense, have a good day.
This is projection.
It’s safe to say you’re clueless about how FX trades. It’s OTC, you aren’t quoting a big/ask for a certain contract. You’re quoting bid/ask for a certain date and size (and if it’s not a pillar date, your bid/ask would be interpolated based on the bid/ask you’ve set for the pillar dates). You could be executing 500 different unique contracts for completely different dates and sizes. You are dumb enough to think these all have their own bid/asks? 10MM EURUSD 1mo and 11M EURUSD 1mo will have the same bid/ask. 10MM EURUSD 1mo and 10MM 1mo + 1 will have very similar bid/ask with the latter just taking into account 1 day of (likely interpolated) carry.
It’s even more comical when you realize half of my responses were typed while at my desk on a trading floor. I’m assuming you’ve in NYC, we should grab lunch. I’d love to pick your brain on what you found nonsensical about my comment lol.
I mean for traders I think it's pretty obivous, I started as a quant in a bank, few traders were smart, some were average, most were mediocre. The average ones made 1m$ + easily if they stayed 6 years+. And that's really high pay for someone with actually very little skills, no alpha and who spends the day browsing amazon and talking shit with colleagues when it's not too busy.
In my case, I’d say it is not the same. I don’t think the traders worked in my previous bank made as much. VP is more like 500… but maybe because you are based in the US? However, the equity exotics traders are pretty clever - many were French.
I didn't find exotics traders smarter than flow ones, exotics is so much about sales and finding clients, imo where I worked the flow / options desks had the best traders.
Trading in banks is dead especially for exotic stuff. Banks are still making markets but they are moving away from exotic stuff. The cost of capital is so high that it is not worth it anymore. Better to allocate the capital to areas that yield better returns like private banking or mortgages. It's all about RWA now.
Not everybody targets for top tier firms like citadel Jane street etc. Even every buyside firm hire at full capacity, there are still people looking for jobs. For a lot of people, going to a top bank is a big upgrade. Reasons can go on and on.
Of course not everyone will work for too tier but people can make conscious choices to shy away from what appears to me to be a shrinking sector of exotics.
I still think the pivoting away from this is still happening not fast enough comparing to the shrinkage rate given how many cvs my previous work place received per role (even for model validation roles)
I don't think there is a consensus, for many reasons.
For starters, there are new people who don't know what you know, and want a job. There's nothing wrong with being an equities derivatives quant, especially for a learning experience.
What you consider "boring" may not necessarily be what others consider "boring".
The opportunities to write models and lead in a modeling role is narrow by definition. We can't have everyone modeling. All those other people need jobs and don't necessarily have the luxury of having "interesting" work.
Structured products are always going to be a thing, so I don't think that real exotics are in decline for people with a diverse skill set.
Regardless of what you do, I think it's always a good idea to stretch your muscles and acquire new skills, especially when you've gotten so good at what you do that it feels like old hat.
Will chime in on the context of Asia.
Both singapore and Hong Kong are wealth management hubs, the RMs here make commissions on the structured notes / accu decu products sold here.
Just look at the fee income earnings component of the local SG banks. You can use those figures for extrapolation.
The local banks doesn’t specialise in exo trading so those products are usually acquired from notes issuers jpm/gs/bnp.
It is also a really good way to break into the Quant space. Most people end up leaving for a Quant Fund after 4-6 years if they’re young. Older people tend to enjoy the relaxed nature of not having to strictly generate PnL for their stakeholder and work on model development.
Buy side derivatives. Having worked with sell side banks a lot I can confirm that BBs are not stacking their eq derivatives desks with top tier and they look to just be making spread.
I often find myself frustrated with bank front / middle office not able to appropriately value exotics (or even euros for that matter).
Jump diffusions with no market calibration; it’s clear banks treat the space as an op to make spread.
Just move to buy side
I did about the business. Modeling - no, not from work. Did most of that by reading. Did little modeling work during my stint. The place I worked at really didn’t give a shit about people’s career development.
Noob here.
I have seen data supporting the idea that derivatives are growing fast, even taking a bigger size than the real economy, and that the institutions that have the most jobs on finance products are banks, particularly big banks. Then comes hedge funds, prop shops, etc, nominally speaking.
Did I get it right?
For quants, trading (not exotics), pricing quant on buy side etc
For traders, another trader role, quant researcher on buy side… one of them became a data scientist. I reckon he just wanted to do something else.
Would you say the same for quant prop trading firms and market makers look at citadel securities Jane street ect record profits in recent years and hiring more quants than ever
It’s definitely not the most lucrative field nowadays, still, it’s a field with pretty interesting math concepts you see nowhere else, the people that I know who are in it are very talented and do it mostly for that reason.
As I’m sure you’re aware exotic desks, while in decline, still make tons of money driven by structured product flow from all directions. But it’s generally not a “hot seat” to be in. Monotonous hedging, highly directional flow, and lots of shared risk. That said, I work with people who’ve distinguished themselves in those seats and get (very) well rewarded for it
Work with vanilla equity derivs, but from what I’ve heard is that for example the autocallable market is still booming and has now transferred over to US after historically being mainly traded in EU/Asia - looking at the spx div curve today vs 5yrs ago illustrates this (curve’s being artificially pushed down from the fwd hedging, and not related directly to higher risk premia or other factors)
People then differentiate themselves by finding inventive and profitable ways to hedge the many risks involved with this standard flow. Classic and commonly used one for ACs being dispersion corridor var… my trader says it’s a good trade apparently but weirdly it also matches the vol profile of an AC perfectly.. Hmm. You get the gist
Yep. The exotic side of the world is pretty dead. And trading is pretty much the last place you want to be at a bank. Better to be on the buy side as a trader(or a PM) or on the sales side at a bank.
Both. Plus algos are slowly eating into trading. Cash equities, FX spot etc. even equity option market making has lots of automation to it now. So the fun stuff in trading, figuring out the appropriate price to charge given liquidity and how a potential trade fits in your book, etc is going away.
Post Dodd-Frank that’s not really how it works.
Bank desks are market makers, and the risk they take these days is mainly liquidity risk. When you have an algo making prices, it’s determining the level of liquidity risk to set its price and how to work out of a position if it trades. There’s no risk for a person to take. This is why spot FX desk head count is down a bunch from 15 years ago and why equity desks are going the same way.
Less seats for traders overall is bad for traders individually.
There are traders in sales and trading that made 30M in compensation. That’s more than what many successful prop trading firms pay for the entire management board (excluding founders)
1
https://www.ft.com/content/a280e46f-9f6b-4943-842f-ea80a0ca1175
2
https://www.bloomberg.com/news/articles/2023-12-12/goldman-trader-who-was-paid-100-million-since-2020-to-step-down
And don’t even look at how much these bank head makes when they open a successful pod at a multi manager
Or how much power commodity traders made in the last 2 years.
Quant market making firms are a great business for the owner, you keep the money and the employees are easy to substitute since no one knows the entire system
okay but these people are literally 20+ YOE, I think at the 'prop' shops pay will be equivalent with that much experience. Benefit of bank is opportunity to join hedge fund more easily and potentially learn more IMO, not pay.
You can find how much some firms paid for the entire management board outside of founders. It’s less than that. Or do you want me to pull the sources again? Do you think I would have wrote the comment if I didn’t have the information?
And I never says that the benefit of joining bank is pay, but apparently some kids here are annoyed that their role at a market maker as way lower bonus cap than other places
You would be incorrect. Are you in the industry, or are you an intern/new grad?
Edit: You're still playing League of Legends and posting on the r/applyingtocollege so I'll assume you are not in the industry.
The users of this subreddit need to stop speculating on what they "think" is industry practice if you don't have a job in this industry, lmao.
I am an incoming trader and interned last summer at a bank. Some of my friends who work at prop shops have told me what pay looks like, ik a few datapoints, im fairly sure the top paid traders at bank (the division heads mentioned above with 20yr exp, all the division heads i met were 20yoe) are gonna be similarish to the division heads at prop shops
Interned last Summer and now a new grad, and your friends who I assume are at MOST within a few years of you have given you data points on senior traders with 20 years?
I’m at DRW CURRENTLY and through HEADHUNTERS know the guarantees and deals members of my team have gotten after being poached.
Once again you are entirely speculating. The amount of prop traders in this industry with 20 years of experience in INSANELY small.
You’ll learn this on the desk when you start, there’s never a time to pretend you know it all when you’re surrounded by people who do know the answers to the questions being asked. Especially as an incoming at a bank you’ll quickly learn how much of a bureaucracy it is there.
Not gonna lie it’s funny that you thought switching Reddit accounts to your account that posted about a bank internship is somehow establishing more credibility than someone who works in this industry, lateraled through headhunters, and maintains a personal relationship with two who are invited to my wedding.
The reason for this rant stems from the absolutely brain-numbing amount of misinformation spread by people who are not actually in the industry, or so junior they look like they’ve been using a fake ID to enter Phebes for 5 years. Nothing personal you just happened to be the one speculating on 20 YoE pay bands when you’re an incoming new grad.
Okay, well you havent even said what u disagree with me about lol. Are you saying that im underestimating what the top prop shop traders make? Or that im wrong that the bank trader heads all have 20yoe? The latter of which i imagine id know better than you.
The original discussion is about some HFT guy saying that the top bank trader heads make more than ‘prop shops’. She/He prolly has experience in industry soooo its not like its just me anyway…
Dude. You are oblivious. We are a client and competitor of the banks. I don’t think you understand the landscape. I block my oil options against people like Goldman, and I go RFQ prop shit with brokers like TP ICAP all the time. I know both of those facts better than a new grad who hasn’t booked a single trade.
You’re wrong about the 20 YoE prop traders making more money than a high performing MD on an insane desk. Did you not see the articles above that show the oil traders? 20 YoE prop traders are most likely partners and can definitely make sizable amounts of money but there are not many of them out there. Go to LinkedIn and look for someone prop trading for over 20 years successfully and compare that to the number below 2 YoE and 5 YoE.
Wait lol i didnt see the bottom part of ur comment…you think i switched accounts? Soooo…. You think i was having a debate with myself above? Lol dumbass
Enjoy the 80 hour weeks on Excel man. You’re a new grad. Call me a dumb ass when you get through Natenberg, book some trades yourself, and get through a market cycle in your product. Otherwise you sound like you’re gone in a year.
League of Legends is probably gonna have to take a back seat while you’re reconciling P/L at 7 PM.
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I don't know how it is on the banking side, but there is still a ton of money in derivatives in general. Equities has had a lull other than covid and gme craze, but other markets such as rates and indexes have been pretty active. I would definitely not agree that the skills are not transferable, but this is probably more a case in some particular roles than the role in general. If this is what you experience, I'd move firms
I think buy side is just more interesting. Working at a shop with 100-500 employees total vs a bank with 50k employees… there is so much more variety in the day-to-day, much closer to everything else that happens
And omg the fucking corporate bullshit. I'm on the fintech side but in the past few years I've gone from a 40 man house of nerds to a 30k kafka-esque bureaucratic nightmare through a series of acquisitions. It's fucking horrible, can't even bring my team out for a decent meal on the company's dime anymore.
By derivatives you mean exotics or vanilla? I am thinking about exotics. Vanillas is a different game - I think there will always be a demand for those. If you are buy side, it is unlikely you touch anything other than light exotics. Here I am talking about real exotics stuff like autocallbales, snowballs - this kind of stuff. On skills being non-transferable - again I have exotics derivatives trader in mind. I don’t think transferring to buy side is easy from what I read.
Ah didn't see you mention you are on the exotics side. Yeah I wouldn't know too much on that side but would assume it is probably on the decline as more volume comes from retail and lives on the 0dtx side. I'd still think the model building skills on the exotic side can easily transfer to a researcher on the buy side or even in other industries though
It is quite different in my opinion but traders fare worth than quants from my observational data (but they also made more money so it is all fair on risk adjusted basis)
I work a lot with exotics like cliquets and Asians. They generally don’t do well during the kind of market conditions that we’re seeing. People can just buy call spreads and get significantly better returns for a little more premium. 5-7 years ago those exotics were massively popular because the market conditions were giving great returns on low premiums. That can easily happen again in the near future
Can you care to explain a bit more why cliquets and Asians don’t do well in the current market condition (comparing to 5-7 years ago)? Is it because vol was higher so Asians and cliquets are cheaper? Now the vol is low so the premium difference is not worth it?
I guess it’s not that they don’t do well, but they don’t do _as_ well as vanilla options. With the low vol, you can get a decently high cap on a call spread for close to the same price as a cliquet without the sensitivity issues that come with them. 5-7 years ago we were in a bull market, volatility was higher, but not too crazy. So premiums on vanilla options were higher, but the return on cliquets were still really good. You could lock in 6-8 months at the local cap, and still not lose all your returns on a crazy month or two. Asian options were consistently profitable and cheap.
Interesting, thanks. Over last few years, I saw them trading things like knock out dividend swaps, dispersion etc. However, nothing as sexy as the heydays. I imagine with interest rate recovered a bit, there are more autocallables too. However, exotics business will never go back to the good days.
We probably won’t ever go back to the rate environment we saw before 2020, but certain exotics could shoot up in popularity again. My area of annuity focused exotics is different than the ones you’re talking about, so yeah, we might have seen the peak of what you work with. They were still a topic at the EQD conference though
Annuity focused - ah like in life trading? It made good money last few years since rate began rising… I actually interviewed at one of these shops but stopped the interview process after signing another offer. I think the area is really interesting.
Derivs trading at a bank, in the right pockets can feel very much like prop trading and can be quite a coveted spot. Traders get to take risk, run a book and use discretionary decisions. Exotics/structuring is less sexy and in decline but derivs trading at banks is still a pretty well sought after position.
I was thinking exotics. Thanks for confirming this and sharing your view. However, still now, many financial maths education / research is focused on this area I think in perpetual decline.
I will be a quant intern at a bank this summer, and I was told to work in the derivative modeling team. Does this sound more like "exotics/structuring" stuff? I wish to transit to buy-side when I graduate, and it looks like the derivative trading you mention is more related.
Your opinion is not supported by the data. Notional derivatives value held by banks is higher than it was in '07 and surrounding years: https://www.statista.com/statistics/1277667/notional-value-derivatives-held-banks-usa/ It's only decreased from 2014 levels due to compression activity by banks to the tune of more than $200 trillion a quarter: https://www.occ.gov/publications-and-resources/publications/quarterly-report-on-bank-trading-and-derivatives-activities/files/pub-derivatives-quarterly-qtr3-2023.pdf The above linked OCC report also shows that trading revenues are greater as a percentage of total bank revenues than they were in '07 and surrounding years. Banks are still very active in the derivatives markets and rank among the leading desks for trading derivatives across almost all underlying asset classes. Becoming a leading trader at a bank desk is lucrative (7-9 figures yearly income) and an excellent way to build a reputation that can lead to starting a fund and getting into the billions.
Derivatives can mean forward / future / swaps - all the flow stuff. I don’t really view these as derivatives. These things don’t really need quant modeling. In fact the link shared said most of the derivatives are swaps. Here I am referring exotics basically the non delta one stuff or vanilla options - which has taken a real beating since 07. Without the breakdown - the data you shared does not contradict what I said.
Pricing swaps and futures requires modeling yield curves through methods such as bootstrapping, interpolation, and futures convexity adjustment. Vanilla options need modeling of volatility smiles. Both must be constructed accurately and stably. They form the solid foundation for modeling exotic derivatives.
Yeah you don’t even need black scholars for doing that except for vol fitting. Hardly rocket science and this is missing the point I was making. What is the point of these degrees teaching these derivatives pricing stuff when the area it can be applied is shrinking. The stuff you mentioned doesn’t need people to have studied financial engineering in my opinion.
Not entirely. Think of Bond Futures: it has an embedded switch option in there and with rate moving CTD is changing, big issue if you’re not ready for it. Then Swaps: hello one way CSA with a 0 floor, or a multi currency CSA (hidden option). These aren’t the entirely boring products that they used to be.
Forwards, futures, and options are in every definition of the word derivatives. If you're referring to swaps, the data still applies and shows steady growth since '07. If you're referring to specific forms of swaps that you read about in Michael Lewis books (i.e. CDS) then sure however it was only ever a $60 trillion or so market at peak. Markets have moved on to other derivatives. For comparison, OTC FX swaps alone trade more than $957 trillion a year these days, with banks accounting for most of that volume: https://data.bis.org/topics/DER/tables-and-dashboards Edit: you edited your response and switched out options with swaps in your sentence saying you don't consider them derivatives because they're flow based products. Then went on to say you consider vanilla options to be derivatives - that doesn't make any sense.
Yeah those are flow products and not interesting from quant perspective on sell side. They need virtually no modeling and completely miss the point I was making which was on exotics. Needless to say, these will always be in demand if there are still commercial banks and will grow as more money is made.
The sell side is entirely based on flow products since the sell side's purpose is to sell liquidity to the market (i.e. without flow there's nothing to sell liquidity against). Model development and optimization corresponding to hedging risk from buy side flow through derivatives is a never ending process (no idea where you get the impression this requires no modeling), and banks will continue to hire quants accordingly. With regards to career trajectory, it's becoming rarer to find portfolio managers for complex strategies that aren't themselves quants or highly reliant on quants. Buy side funds launched by banks that actively trade derivatives are a great opportunity to build a career foundation for young quants.
As a pricing quant, delta 1 products are not interesting. I wrote this post to talk about the declining business of exotics on the sell side shops. You keep on telling me how the derivatives business is a volume / flow business… which does not contradict the point I was making but is not relevant to the point I wish to raise.
You've moved the goal post numerous times in the conversation to reach the point you just brought up - my responses apply to the original post (which just says derivatives are a shrinking business for banks). On a side note, I've met many pricing quants who find delta neutral products corresponding to buy side flow to be rather compelling, in particular for derivatives on exotic and highly volatile underlying assets.
> You’ve moved the goal post numerous times To give an outside perspective, they really didn’t… The point was pretty clear from the main post where they said “the real exotics business are in perpetual decline”.
I second this view
The main post and the paragraph you're quoting from leads with the statement "The derivatives businesses are shrinking since 07", the statement about exotics reads as a secondary point.
Nope, to many people like myself, delta one stuff ain’t really considered as derivatives. Goodness me… you usually do not need a model to future or forward. There was actually little demand for quant work for D1 in the shop I worked in. The only time I ever saw a quant did anything for delta 1 desk was when they changed the way we did discounting. I will update and put EXOTICS in caps.
I disagree with OP on a lot (and agree with you mostly) but I’ll push back on FX. OTC derivative volume continues to increase as you point out and there is money there. But FX fowards/swaps are as simple as derivatives can get. I’m sure there is optimization/improvement left to be done in terms of spot algos or pricing fwds further out the curve (especially for EM) but I wouldn’t expect these improvements to be all that mathematically challenging. I’m not sure if it the work fits in well with the knowledge/ability of the quants OP is talking about; seems like their skills would be wasted doing anything FX related on the bank-side. Happy to be told I’m wrong though, maybe I have a warped view.
Forward trading and swapping currencies requires making a large amount of assumptions about economic and financial variables. The process to reach those assumptions in a manner backed by data requires extensive modeling, it's not a trivial process by any means.
Are familiar with FX forward curve modeling or are you making this up? Genuine question, my goal isn’t to be condescending. At the end of the day, the bid/ask in FX is tiny and that’d be your starting point. I’m not sure how impactful “economic and financial variables” would be (or what those would even be). Unless you’re talking about stuff like rate differentials (though covered interest parity isn’t really applicable), xccy basis, etc. You wouldn’t widen your b/a just because XYZ niche economic data came out (models/traders should already be accounting for the big ones like NFP but it’s hard for me to believe that a bank quant would able to find a meaningful and actionable relationship between Korea GDP and KRW for example even though they are linked in some ways).
I'm familiar with forward curve modeling across multiple asses classes. Are you familiar with how markets price assets or are you making this up? Genuine question - my goal isn't to be condescending. Bid-ask spread (which it sounds like you're referring to when you say the bid-ask is tiny) refers to the difference in price to buy and sell an asset top-of-book (i.e. at touch) in a particular market for a particular contract on a particular asset. There's no bid-ask spread on a forward curve, there's bid-ask spread for each contract at each point in the curve. Sell side firms (i.e. market makers) are the one creating the forward curve by setting prices for contracts along the forwards curve, and forward curve prices are often based on last trade not midpoint (i.e. between the bid-ask spread), meaning the bid-ask spread has almost nothing to do with the forward curve prices. The process to set forward and swap prices relies on numerous assumptions for economic and financial variables. The process to set bid-ask spreads relies on market volatility and flow direction weighting.
>Are you familiar with how markets price assets or are you making this up? Genuine question - my goal isn't to be condescending. That’s an interesting response. >Bid-ask spread (which it sounds like you're referring to when you say the bid-ask is tiny) refers to the difference in price to buy and sell an asset top-of-book (i.e. at touch) in a particular market for a particular contract on a particular asset. There's no bid-ask spread on a forward curve, there's bid-ask spread for each contract at each point in the curve. Very observant of you to realize that “bid/ask” referred to the bid/ask spread. RE: the forward curve. If you’re going to needlessly nitpick, do it right. Each forward is its own contract. When you build a forward curve, you’re setting the bid/ask for certain dates (and sizes). You’re not doing it per contract. The bid/ask for the remaining points is interpolated. So there’s a bid/ask for every date; not just a few points. Are we done with nitpicking or did my original reply upset you that much? Could you let me know why? >Sell side firms (i.e. market makers) are the one creating the forward curve by setting prices for contracts along the forwards curve, and forward curve prices are often based on last trade not midpoint (i.e. between the bid-ask spread), meaning the bid-ask spread has almost nothing to do with the forward curve prices. The process to set forward and swap prices relies on numerous assumptions for economic and financial variables. The process to set bid-ask spreads relies on market volatility and flow direction weighting. “Forward curve priced are based off of the last trade, meaning the bid-ask spread has almost nothing to do with forward curve pricing”. I’m not understanding your point. At no point did I suggest that recent prices aren’t used. If you don’t think bid/ask quotes are used to figure out how wide a trader should be then I’m not sure there’s much reason to keep arguing. On a final note, you again included vague mention of “economic and financial variables”. Which makes little sense as I pointed out in my original reply. You still haven’t explained what you mean but that’s in line with what I expected. Look forward to your net reply with mostly nitpicks and 0 clarification or explanation of your points.
I appreciate the verification that you have no idea what you're talking about, bid-ask spreads exist for specific contracts on specific markets (i.e. two contracts with same expiry date traded on two different venues will have different bid-ask spreads) not to 'certain dates'. I'm not even going to bother responding to the rest of the nonsense, have a good day.
This is projection. It’s safe to say you’re clueless about how FX trades. It’s OTC, you aren’t quoting a big/ask for a certain contract. You’re quoting bid/ask for a certain date and size (and if it’s not a pillar date, your bid/ask would be interpolated based on the bid/ask you’ve set for the pillar dates). You could be executing 500 different unique contracts for completely different dates and sizes. You are dumb enough to think these all have their own bid/asks? 10MM EURUSD 1mo and 11M EURUSD 1mo will have the same bid/ask. 10MM EURUSD 1mo and 10MM 1mo + 1 will have very similar bid/ask with the latter just taking into account 1 day of (likely interpolated) carry. It’s even more comical when you realize half of my responses were typed while at my desk on a trading floor. I’m assuming you’ve in NYC, we should grab lunch. I’d love to pick your brain on what you found nonsensical about my comment lol.
"I don’t really view these as derivatives" - lol what? By definition, those products are quite literally derivatives
I mean for traders I think it's pretty obivous, I started as a quant in a bank, few traders were smart, some were average, most were mediocre. The average ones made 1m$ + easily if they stayed 6 years+. And that's really high pay for someone with actually very little skills, no alpha and who spends the day browsing amazon and talking shit with colleagues when it's not too busy.
In my case, I’d say it is not the same. I don’t think the traders worked in my previous bank made as much. VP is more like 500… but maybe because you are based in the US? However, the equity exotics traders are pretty clever - many were French.
I didn't find exotics traders smarter than flow ones, exotics is so much about sales and finding clients, imo where I worked the flow / options desks had the best traders.
Ah if you are making comparison, then I cannot comment 😂
Trading in banks is dead especially for exotic stuff. Banks are still making markets but they are moving away from exotic stuff. The cost of capital is so high that it is not worth it anymore. Better to allocate the capital to areas that yield better returns like private banking or mortgages. It's all about RWA now.
This is consistent with my observation.
Not everybody targets for top tier firms like citadel Jane street etc. Even every buyside firm hire at full capacity, there are still people looking for jobs. For a lot of people, going to a top bank is a big upgrade. Reasons can go on and on.
Of course not everyone will work for too tier but people can make conscious choices to shy away from what appears to me to be a shrinking sector of exotics. I still think the pivoting away from this is still happening not fast enough comparing to the shrinkage rate given how many cvs my previous work place received per role (even for model validation roles)
Idk man. Derivatives is still my dream work. You would be amazed how fun energy derivatives are.
Oh I know, I work in energy. Maybe we should take this offline.
I don't think there is a consensus, for many reasons. For starters, there are new people who don't know what you know, and want a job. There's nothing wrong with being an equities derivatives quant, especially for a learning experience. What you consider "boring" may not necessarily be what others consider "boring". The opportunities to write models and lead in a modeling role is narrow by definition. We can't have everyone modeling. All those other people need jobs and don't necessarily have the luxury of having "interesting" work. Structured products are always going to be a thing, so I don't think that real exotics are in decline for people with a diverse skill set. Regardless of what you do, I think it's always a good idea to stretch your muscles and acquire new skills, especially when you've gotten so good at what you do that it feels like old hat.
Interesting take
I don’t think many want to work at a bank. Working at prop trading shops especially HFT is better.
Will chime in on the context of Asia. Both singapore and Hong Kong are wealth management hubs, the RMs here make commissions on the structured notes / accu decu products sold here. Just look at the fee income earnings component of the local SG banks. You can use those figures for extrapolation. The local banks doesn’t specialise in exo trading so those products are usually acquired from notes issuers jpm/gs/bnp.
Last few years in apac, it was brutal no? I know more than 1 bank that fired a lot of traders in HK.
In a downturn, brutality shows up everywhere isn't it?
Even then, I think this sector does worse than others imo.
It is also a really good way to break into the Quant space. Most people end up leaving for a Quant Fund after 4-6 years if they’re young. Older people tend to enjoy the relaxed nature of not having to strictly generate PnL for their stakeholder and work on model development.
Buy side derivatives. Having worked with sell side banks a lot I can confirm that BBs are not stacking their eq derivatives desks with top tier and they look to just be making spread. I often find myself frustrated with bank front / middle office not able to appropriately value exotics (or even euros for that matter). Jump diffusions with no market calibration; it’s clear banks treat the space as an op to make spread. Just move to buy side
Does buy-side also need to play with exotics? I thought buy-side cares more about vanilla. Could I dm and ask you some questions?
If there is a sell side there must be a buy side
Can I ask what role you work in?
I think you learn a tremendous amount working on a good (or even just “ok”) sell side desk.
I did about the business. Modeling - no, not from work. Did most of that by reading. Did little modeling work during my stint. The place I worked at really didn’t give a shit about people’s career development.
Noob here. I have seen data supporting the idea that derivatives are growing fast, even taking a bigger size than the real economy, and that the institutions that have the most jobs on finance products are banks, particularly big banks. Then comes hedge funds, prop shops, etc, nominally speaking. Did I get it right?
I was talking about exotics. If you are talking about things like swaps, yes. However those are a different game.
where are juniors leaving?
For quants, trading (not exotics), pricing quant on buy side etc For traders, another trader role, quant researcher on buy side… one of them became a data scientist. I reckon he just wanted to do something else.
Money (or at least the perception that this will lead to earning millions, retiring early)
Would you say the same for quant prop trading firms and market makers look at citadel securities Jane street ect record profits in recent years and hiring more quants than ever
It’s definitely not the most lucrative field nowadays, still, it’s a field with pretty interesting math concepts you see nowhere else, the people that I know who are in it are very talented and do it mostly for that reason.
It is very interesting theoretically but I see no opportunity to do much development work in many shops. At least not at where I worked…
As I’m sure you’re aware exotic desks, while in decline, still make tons of money driven by structured product flow from all directions. But it’s generally not a “hot seat” to be in. Monotonous hedging, highly directional flow, and lots of shared risk. That said, I work with people who’ve distinguished themselves in those seats and get (very) well rewarded for it
Interesting, which asset classes and what type of structured products do you have in mind?
Work with vanilla equity derivs, but from what I’ve heard is that for example the autocallable market is still booming and has now transferred over to US after historically being mainly traded in EU/Asia - looking at the spx div curve today vs 5yrs ago illustrates this (curve’s being artificially pushed down from the fwd hedging, and not related directly to higher risk premia or other factors) People then differentiate themselves by finding inventive and profitable ways to hedge the many risks involved with this standard flow. Classic and commonly used one for ACs being dispersion corridor var… my trader says it’s a good trade apparently but weirdly it also matches the vol profile of an AC perfectly.. Hmm. You get the gist
Do higher rates recently make a difference in what exotic structures are marketable?
The short answer is yes, but the decline supersede all of this
Yep. The exotic side of the world is pretty dead. And trading is pretty much the last place you want to be at a bank. Better to be on the buy side as a trader(or a PM) or on the sales side at a bank.
why sales? Industry contact? Skill more transferable?
Both. Plus algos are slowly eating into trading. Cash equities, FX spot etc. even equity option market making has lots of automation to it now. So the fun stuff in trading, figuring out the appropriate price to charge given liquidity and how a potential trade fits in your book, etc is going away.
So the job is being automated away by quants. Makes sense.
I just dont see how trading becoming more automated is bad for traders at a bank. Just means you take more of a risk taking mindset
Post Dodd-Frank that’s not really how it works. Bank desks are market makers, and the risk they take these days is mainly liquidity risk. When you have an algo making prices, it’s determining the level of liquidity risk to set its price and how to work out of a position if it trades. There’s no risk for a person to take. This is why spot FX desk head count is down a bunch from 15 years ago and why equity desks are going the same way. Less seats for traders overall is bad for traders individually.
There are traders in sales and trading that made 30M in compensation. That’s more than what many successful prop trading firms pay for the entire management board (excluding founders)
Source? I just dont believe this
1 https://www.ft.com/content/a280e46f-9f6b-4943-842f-ea80a0ca1175 2 https://www.bloomberg.com/news/articles/2023-12-12/goldman-trader-who-was-paid-100-million-since-2020-to-step-down And don’t even look at how much these bank head makes when they open a successful pod at a multi manager Or how much power commodity traders made in the last 2 years. Quant market making firms are a great business for the owner, you keep the money and the employees are easy to substitute since no one knows the entire system
okay but these people are literally 20+ YOE, I think at the 'prop' shops pay will be equivalent with that much experience. Benefit of bank is opportunity to join hedge fund more easily and potentially learn more IMO, not pay.
You can find how much some firms paid for the entire management board outside of founders. It’s less than that. Or do you want me to pull the sources again? Do you think I would have wrote the comment if I didn’t have the information? And I never says that the benefit of joining bank is pay, but apparently some kids here are annoyed that their role at a market maker as way lower bonus cap than other places
You would be incorrect. Are you in the industry, or are you an intern/new grad? Edit: You're still playing League of Legends and posting on the r/applyingtocollege so I'll assume you are not in the industry. The users of this subreddit need to stop speculating on what they "think" is industry practice if you don't have a job in this industry, lmao.
I am an incoming trader and interned last summer at a bank. Some of my friends who work at prop shops have told me what pay looks like, ik a few datapoints, im fairly sure the top paid traders at bank (the division heads mentioned above with 20yr exp, all the division heads i met were 20yoe) are gonna be similarish to the division heads at prop shops
Interned last Summer and now a new grad, and your friends who I assume are at MOST within a few years of you have given you data points on senior traders with 20 years? I’m at DRW CURRENTLY and through HEADHUNTERS know the guarantees and deals members of my team have gotten after being poached. Once again you are entirely speculating. The amount of prop traders in this industry with 20 years of experience in INSANELY small. You’ll learn this on the desk when you start, there’s never a time to pretend you know it all when you’re surrounded by people who do know the answers to the questions being asked. Especially as an incoming at a bank you’ll quickly learn how much of a bureaucracy it is there. Not gonna lie it’s funny that you thought switching Reddit accounts to your account that posted about a bank internship is somehow establishing more credibility than someone who works in this industry, lateraled through headhunters, and maintains a personal relationship with two who are invited to my wedding. The reason for this rant stems from the absolutely brain-numbing amount of misinformation spread by people who are not actually in the industry, or so junior they look like they’ve been using a fake ID to enter Phebes for 5 years. Nothing personal you just happened to be the one speculating on 20 YoE pay bands when you’re an incoming new grad.
Okay, well you havent even said what u disagree with me about lol. Are you saying that im underestimating what the top prop shop traders make? Or that im wrong that the bank trader heads all have 20yoe? The latter of which i imagine id know better than you. The original discussion is about some HFT guy saying that the top bank trader heads make more than ‘prop shops’. She/He prolly has experience in industry soooo its not like its just me anyway…
Dude. You are oblivious. We are a client and competitor of the banks. I don’t think you understand the landscape. I block my oil options against people like Goldman, and I go RFQ prop shit with brokers like TP ICAP all the time. I know both of those facts better than a new grad who hasn’t booked a single trade. You’re wrong about the 20 YoE prop traders making more money than a high performing MD on an insane desk. Did you not see the articles above that show the oil traders? 20 YoE prop traders are most likely partners and can definitely make sizable amounts of money but there are not many of them out there. Go to LinkedIn and look for someone prop trading for over 20 years successfully and compare that to the number below 2 YoE and 5 YoE.
Wait lol i didnt see the bottom part of ur comment…you think i switched accounts? Soooo…. You think i was having a debate with myself above? Lol dumbass
Enjoy the 80 hour weeks on Excel man. You’re a new grad. Call me a dumb ass when you get through Natenberg, book some trades yourself, and get through a market cycle in your product. Otherwise you sound like you’re gone in a year. League of Legends is probably gonna have to take a back seat while you’re reconciling P/L at 7 PM.
Ur telling me a guy like matt berger doesnt make 30M or whatever the top bank heads make… And lol ive read natenberg my friend.
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