Hi,I am a junior studying math at a top school and will be interning at Merrill Lynch for a rotational program this summer. Given that I can choose (depending on availability) three trading desks I could work on (3 weeks on each), I would like to explore several areas of trading. I am mostly interested in equities (but I would consider FI), and would like desks which use quantitative methods. Given the profile of the company, and the outlook for the industry in the next 5-10 yrs, what do you think are the best such desks one could start a career in? By best I mean intellectually stimulating, good pay and not getting easily replaced by computers.I was thinking about prop trading, stat arb, exotics. What else is there? How is the work on an algo desk? Is there much human intervention? What area would be hot in let's say 5 years?Thanks a lot, I appreciate your answers.

I am amazed at how newbies here say "I am interested in equities, but I would consider FI too" like FI is some sort of a plague. What do you know about FI to say that you like equities better?!! I might be a little drunk right now and a little bit judgemental, but I still want to say to all of you, newbies, that when you say stuff like that, you really give away how shallow you are!!!! You want to get quantitative -- get into FIXED INCOME!!!! PS I don't know much about exotics desks, but I know a little (my best friend works at one at GS). To my understanding, the business there is to sell a client a complicated product (huge Monte-Carlo is run to price it) and to hedge away the risk. Of course, you add the fee from the deal to your P/L. So, they hedge the position which is left after shorting the structured product for a few months and then cut it into peaces and sell to somebody else (to stupid people). You make a lot of money that way, the stories about exotics desks bonuses are legendary! But I personally would not want this life for myself, because it's more of a deal to deal type of business and it has a bit of a cheating flavour too. Get into something that is called "quant trading". Honest money.PPS I didn't mean to offend anyone! Peace to all of you! Make love, not war!

QuoteOriginally posted by: YuraI am amazed at how newbies here say "I am interested in equities, but I would consider FI too" like FI is some sort of a plague. What do you know about FI to say that you like equities better?!! I might be a little drunk right now and a little bit judgemental, but I still want to say to all of you, newbies, that when you say stuff like that, you really give away how shallow you are!!!! You want to get quantitative -- get into FIXED INCOME!!!! newbies say the prefer equities to Fixed income, commodities, currency because they've traded stock before, maybe in their 401k, but it has been beaten into their head by th epopular press that ficc is a dangerous beast and stock picking is the goal of wall st.QuotePS I don't know much about exotics desks, but I know a little (my best friend works at one at GS). To my understanding, the business there is to sell a client a complicated product (huge Monte-Carlo is run to price it) and to hedge away the risk. Of course, you add the fee from the deal to your P/L. So, they hedge the position which is left after shorting the structured product for a few months and then cut it into peaces and sell to somebody else (to stupid people). You make a lot of money that way, the stories about exotics desks bonuses are legendary! But I personally would not want this life for myself, because it's more of a deal to deal type of business and it has a bit of a cheating flavour too. Get into something that is called "quant trading". Honest money.PPS I didn't mean to offend anyone! Peace to all of you! Make love, not war! yura, are you saying exotics desks are essentially a "huge casino + used car dealership"? by cheating do you mean "sales"? is stat arb also cheating, after all you are taking advantage of mispricing/ignorance in the market. (and it is not sales.)describe what you mean by "quant trading" some more.

QuoteOriginally posted by: YuraI am amazed at how newbies here say "I am interested in equities, but I would consider FI too" like FI is some sort of a plague. What do you know about FI to say that you like equities better?!! Thanks for the answer. I admit my knowledge of both is not that deep, nevertheless I have the impression that there are certain areas of equities which are high risk/high reward, which is what I am looking for. I feel in FI the bets are on a more macro level, thus unless strong global shocks happen, like this year, investing is somewhat steady. Please tell me if this is wrong, I'd certainly like to know more about FI and more volatile products/markets.

I will draw a parallel with the sub prime crisis to explain my point about "cheating". There were many reasons why it happened but one of the most significant ones was the model. They had a sub prime prepayment model (which didn't have enough historical data in it as we know now) which said "It's a good business" but then it turned out that the model was way off. Many believe that the same thing might happen in the exotics business. After talking to several people with experience, I conclude that it's sort of an unspoken expectation that something bad will happen with exotics in the future. That is (probably) why the hedges to exotics are split into peaces and sold to a third party. It seems like we have the same problem here as we had with originators of sub prime loans. They were in it only for a fee, they didn't intend to hold that stuff in their portfolio till maturity which created a huge problem with originating standards. So, "cheating" because the hedges are sold. If you're in it for a fair game, then hold the hedge till maturity, collect time-decay. (Feel free to argue, I'll be very interested to hear why I'm wrong)I am absolutely fine with taking advantage of market mispricing, stat atbitrage, and etc, when it comes to liquid stuff By quant trading I meant stat arbitrage, trend following, system trading, etc.2krufoux: FI instruments can also be very volatile and appealing in terms of risk/reward. What's wrong with "macro" level? Anyway, the level is not as "macro" as you think it is. Plus, FI has a unique unified structure, that equities do not have. I mean interest rate term structure, vol structure. You can see how different markets are connected. For example, eurodollar futures dictate the swap market, etc. In terms of quant work, there are plenty of models for you to study and to keep it interesting for youself.To summarize my point, to say that equities is better than fixed income is like to say that algebra is better than geometry in mathematics. The truth is that they are both beautiful but just different parts of mathematics and neither one is better in general. It's only a matter of personal choice and taste.

QuoteOriginally posted by: YuraSo, "cheating" because the hedges are sold. If you're in it for a fair game, then hold the hedge till maturity, collect time-decay. (Feel free to argue, I'll be very interested to hear why I'm wrong)I am absolutely fine with taking advantage of market mispricing, stat atbitrage, and etc, when it comes to liquid stuff By quant trading I meant stat arbitrage, trend following, system trading, etc.It would be dishonest if there was massive fraud/misrepresentation going on, ie if the lowest tranche was passed off as being AAA or something. But in the absence of such blatant fraud, getting out of trades by "selling the hedge" - why is that dishonest? Who says you should hold it yourself?Let me ask something about liquidity - If you trade the thinly traded commodities, timber or coffee or palladium and have huge execution slippage, do you think the market maker is "cheating" as well?So liquidity is not the source of the "cheating" problem per se. Why is it relevant, that illiquid market is more driven by "Sales" staff, rather than computer based trading in liquid market if both are executing variants of the same strategy. The problem has to be information asymmetry, but that is what every arbitrage strategy exploits!Your subprime example is identical in principle to any other arbitrage - there are loans you can buy for cheap, which you repackage and sell in tranches for much more - either the chap who sold it to you sold it too cheap or the chaps buying from you are paying too much. In either case, there is a temporary mispricing in the market, and you exploit it. How is this any different from any other arbitrage? The fact that your two trades were separated by several months in between and you hedged during that time -- why is this even relevant to "ethics"?Subprime might be in for a crisis, but that's not because it is unethical per se, it is because GREED has driven excessive risk seeking behavior. Who asked the banks to lend so much to those who cannot repay? and a littany of similar questions about various players..If I want to buy "toxic waste" from you, it should be my responsibility make sure I understand the product well enough before I buy it from you, should it not? Personal responsibility, due diligence and all that?

Now I feel like Jerry McGuire in the movie Jerry McGuire after he wrote that memo about how the industry should care more about the client rather than profits, but then he realised that the memo will get him in trouble, only it was too late I do agree with you that everything that you've described is legal to do. It is a different question weather you should do it or not, but certainly nothing is preventing you from doint "it" and moreover, the industry will push you to do "it", because the measures of perfomance are always relative. So, it is legal to do all these stuff, but who defines what's legal and what's not? Who defines how and to what extend certain activities should be regulated? You've guessed correctly, Sir! The regulators!!! Have you ever talked to a regulator? I have and the impression is very very sad. I claim that I can sell those guys almost anything! Besides, anything about "regulated" is always very political in real life, so even if a regulator wanted to take action, he/she not always can do so. My point is, the only way a certain practice can become illegal is only after something bad happens. The practice that the hedges to exotic derivatives which suppose to price rare events which are difficult to price are split into tranches and sold does not look bad or illegal, but it smells bad. I see an obvioud conflict of interests here.Also, concerning you remark that my sub prime example is "identical in principle to any other arbitrage". This kind of "arbitrage" is/was not just arbitrage. It brought a whole package of other stuff with it, and when the problem hit it didn't just hit one or two banks, it hit everybody. If it was just arbitrage there would be some winners and some looserd, but I only see loosers in this situation, so obviously (to me) it's not "any other arbitrage".

Yura, as you say illegal and unethical are not the same, and often times people walk the fine line of legal but unethical on Sales desks. But I am just saying that "reselling hedges" is not unethical in itself, unless one lies to make it seem more attractive. (which is not uncommon either!) Drug peddling say to minors is unethical (even say in legally relaxed Holland). But in the case of restructured exotics being bought from / sold to banks/funds (many of which have their own quant teams), the desk is effectively acting as a market maker in a very illiquid/otc market, and has a better pricing model, that to me is hardly unethical. It is in that sense I said this is like any other arbitrage - better info and better pricing.The fact that lot of people lost lot of money only means that greed was rampant, and peer pressure to underwrite stupid loans and resell them was high. The winners might very well be a large number of borrowers who will get interest rates and even loan amounts reductions if / when there is a bailout. At end of the day, the man on the street may be smarter than the (incorrect) quant models on wall street!kroufoux: I would advise concentrating on high learning than on high risk/reward at this stage, and you can't go wrong whichever desks you pick! stat arb is getting increasingly automated, talk to StatTrader about it.

As a newbie, this is easily one of the best Wilmott threads in months. Thanks Yura, AD.

QuoteSubprime might be in for a crisis, but that's not because it is unethical per se, it is because GREED has driven excessive risk seeking behavior. Who asked the banks to lend so much to those who cannot repay? and a littany of similar questions about various players..I am sure some people earned a lot of money from the subprime mesh. Just like in every pyramid investment scheme those who get in first have the greatest chance to make money, the last ones, are just doomed to fail. Those who were pushing aggresively subprime loans to misled, misinformed and most importantly, to subprime creditworthiness persons, essentially selling them hopes and expectations, made a lot of money if they got in the business early enough and had most if not all of the risks transfered to other parties with one way or another. Its unethical in my opinion the subprime lending, not only because because subprime originators gamed the eventual funding institutions and helped creating the RE bubble, but also because the earned money by misleading people selling them fake hopes and expectations. The last one is as ethical as a doctor convincing, by exploiting his expert power, his desperate "with two feet inside grave already" cancer patient and his relatives that he will live, if the X really expensive therapy is followed, instead of helping his patient "expire" painlessly and peacefully. Hope, and talk, is cheap....

ArthurDent - would be interested in which area of the industry you work in. I agree with Yura in a lot of what is being said. To quote a colleague of mine. There are two areas: Legal and Illegal, your job is to be on the line at all times....No bank in their right mind would engage in something that was out and out illegal. However to put in a more easy to understand terms. You have a used car, you have done all the servicing yourself, you know it was clocked by the previous owner (but not by you) - you also know that some component (I don't know the gear box), is pretty knackered and is going to need replacing. When you sell the car it is not illegal to not tell people about the potential faults - it is after all buyer beware - and a risk of buying the car. However whether you ethically want to engage in the transaction and sell the car for 5k or 2k is up to you and where you conscious lies.

QuoteOriginally posted by: rmaxArthurDent - would be interested in which area of the industry you work in. I agree with Yura in a lot of what is being said. To quote a colleague of mine. There are two areas: Legal and Illegal, your job is to be on the line at all times....No bank in their right mind would engage in something that was out and out illegal. However to put in a more easy to understand terms. You have a used car, you have done all the servicing yourself, you know it was clocked by the previous owner (but not by you) - you also know that some component (I don't know the gear box), is pretty knackered and is going to need replacing. When you sell the car it is not illegal to not tell people about the potential faults - it is after all buyer beware - and a risk of buying the car. However whether you ethically want to engage in the transaction and sell the car for 5k or 2k is up to you and where you conscious lies.It's unethical, unscrupulous and plain dishonest to sell anything without divulging all information (good and bad) about the product. There is NO grey area here at all. People say there is a sucker born every minute. Well, yeah, these suckers are the people (like AthurDent) who sell faulty products. SUCKERS !!!!

several thoughts ---rmax: How do you think used car salesmen make money? Ever see something called a "salvage auto", where the engine of one car is put into one which drowned in a flood, and the whole thing sold "like new"? You better get your car to a competent mechanic for a 100 point inspection before you buy it!---TJ, your reading comprehension skills are abysmal.Where am I advocating that anyone sell anything by hiding information? To quote myself: It would be dishonest if there was [] fraud/misrepresentation going on... "reselling hedges" is not unethical in itself, unless one lies to make it seem more attractive. (which is not uncommon either!)I think that makes it very clear about what I think is ethical and what is not!---It is always "caveat emptor." Due diligence is responsibility of buyer. When you get time go over to someone in PE and see how much effort goes on on the buy side before a deal is closed.---Who in his infinite wisdom decreed that you cannot sell opposite positions in a market to different parties? Market makers do it all the time and make the bid-ask spread, is that unethical? Ever been to a spread betting house in London? What exactly do you think they do? Let me clue you in, they run the tape ahead of you, because they are not brokers hence they are exempt from securities laws like front running... that's how they make money off you.Come on, guys, be realistic. Philosophically, structured products and exotics is just market making in an very very illiquid OTC market - buy a mortgage from Countrywide, sell a part of it to one of Bear's fund, pocket the difference.---Wells Fargo, Countrywide etc just lent ridiculous sums of money to any moron they could catch on the street, look up "liar loans", look up NINA. They were just greedy... they deserve to go bankrupt.And all those funds, whether hedgies or banks, who indiscriminately and blindly bought these shitty repackaged loans need to be cleaned out. That is precisely what the market is doing now. Why was Bear Sterns employing all those quants, paying them 500k a year, if they were blindly buying everything they could lay their hands on? "High-Grade Structured Credit Strategies Enhanced Leverage Fund" indeed. A 10 year old could tell you about this fund's chance of making money. Do topologists, computer scientists, statistical physicists have less common sense than a 10 year old?All the "independent" rating agencies with massive fraudulent ratings that were essentially "bought" seem to have gotten a great deal here, no one is pointing even a finger at them for complicity with the IBs, everyone is screaming at the monoline insurers... Why on earth hasn't moody's, s&p and the like been clobbered out of existence by now?---Yura says the desks in GS and elsewhere repackage and resell structured products - so what, damn it? Why is this bad? it lets poor people buy houses...The buyers of the structured products are not 3 year olds, they are f@#$ing quants - mathematicians, physicists and topologists for crying out loud!The bloody quants better be able to model the shit they are buying, otherwise they deserve to get wiped out.Sellers don't set prices in a vacuum, a price is a negotiation between seller and buyer. If you know you are buying a lemon AND STILL WANT TO BUY IT, negotiate the price down for crying out loud! Otherwise, just walk away.No amount of hand wringing and regulation can do anything to help you if you are stupid. (And some of the stupidest people work for the regulators as Yura correctly pointed out -- they will definitely lock the stable doors, 3 or 4 years too late.)---Better models, better info, better pricing always wins in the market. You need to have one of the three - that is how all money is made.If you are at the poker table and can't spot the sucker, then should you buy more subprime and call it "High-Grade Structured Credit Strategies Enhanced Leverage Fund"... Edited: to not hurt the sensitivities of some readers.

Some more thoughts -->An analogy that may aid thinking:IB ................................. = casinospread/fee ................... = house cut/edgeequity/FX/FI ................. = blackjack/roulette/crapsstructured product ....... = a new slot machinequant ........................... = game designerIB trader ...................... = dealer at tableother traders ............... = gamblersinvestors, funds ........... = gamblersThe spread is wide in some games, and narrow in others. A sharp gambler might count cards and win, but most lose.The house constantly introduces new games to bring in more players --> That is their primary model introduce new games, bring in more gamblers.Same with IBs: introduce newer, glamorous products to trade ... that's what quants do - create new ways and means to increase levels of gambling/trading ...---On Spreads and arbitrages --FX = tenths or hundredths of a cent.Equities = a few cents.Fixed income = a few basis points.Structured products has ??The trend is increasing liquidity/age of product/ awareness of how to model/ etc. reduces the spreads. Hence the need to introduce "innovative new products".The next generation of financial "innovation" will be even more illiquid to begin with,even less understood by many (most?) participants, and,considered even more of a rip-off / high profit -> depends on who you ask!Look historically for farmers' reactions to commodity futures -- how they thought the traders in Chicago were ripping them off by setting bogus prices.This happens even today - in USA, India, China, you hear people screaming how the foreign traders are "setting" high oil prices.It is easier (and more populist) to ascribe to malice what should be ascribed to ignorance.---On winners and losers --A free market gives its participants what they want... even if they don't explicitly state that they want it... a lot of lenders wanted to desperately write a lot of loans (who knows why? maybe to meet quarterly earnings and growth targets?) .... a lot of homeless people wanted to live in million dollar McMansions....A lot of fund managers and asset managers wanted to invest in more risky products to increase their returns....A lot of investors wanted their fund managers to invest in higher risk/reward vehicles....A government of a large country wanted to blame someone/anyone/anything for a 3-trillion dollar war gone wrong....Guess what? The whole society got its wishes fulfilled in the subprime drama."Everybody gets what they want from the market" Ed Seykota in Market Wizards, Jack Schwagger.

Very well put ArthurDent. Cuts to the heart of a lot of issues.