Wall Street’s new kids on the block face Fed interest rate test
Magdy El Mihdawy remembers exactly where he was when the stock market tanked in 2009.
He was on Spring Break in Florida – as a 22-year-old undergraduate.
Today, Mr El Mihdawy is part of a Wall Street demographic whose own trial by fire awaits: traders who’ve never known anything but a post-crisis world of rock-bottom interest rates and ever-rising markets.
This youth brigade – call it Wall Street’s class of 2009 – is about to learn what higher interest rates from the Federal Reserve look like first hand. Their inexperience has left older, more experienced colleagues wondering how these relative youngsters will fare.
“What we’ve been through the past four years has been ‘what is the fastest, easiest money to find?’” says Mr El Mihdawy, who studied economics at Columbia University. “If one day that narrative changes and investors no longer believe in the omnipotence of central banks, then it will bring back what was old school – fundamental analysis and really caring about what’s going on.”
No one is suggesting that Wall Street traders are any less capable than they were in the past. But what’s remarkable is the sheer number of those who started their careers after the Fed dropped rates close to zero in 2008.
While the average Wall Street trader is 30 years old, about 30 per cent started within the past five years, according to Emolument.com, a salary comparison website, which compiles data from its 50,000 financial services users. And two-thirds of traders have never seen a full Fed tightening cycle.
Mr El Mihdawy works on Cantor Fitzgerald’s equity derivatives desk after joining the firm in 2009. That’s the same year Harvard University graduate Ezra Rapoport was venturing into finance, signing on with Transmarket Group to automate the firm’s bond-trading platform.
Mr Rapoport embodies Wall Street’s evolution in more ways than one, including how computers dominate functions that used to be done by humans. Now 31, he’s a trader at Flammarion Capital Partners, a New York-based firm that makes markets in fixed-income futures through automated programs.
Everyone at Flammarion is in their 20s or 30s, he says.
“The last place I would want to be in this business is a 50-something trader or salesperson,” he said. “I’ve seen a lot of senior talent eliminated in the past few years. I think that anyone who has survived the last few years, track record intact, should be considered reasonably veteran.”
While experience hones intuition, it doesn’t shield you from mistakes under pressure, according to Mr Rapoport.
“Older traders make novice mistakes,” Mr Rapoport says. “These things happen all the time.”
Brett Steenbarger, who writes about trading psychology and consults with hedge funds and trading firms, agrees that a rate increase could rattle traders.
“If markets always behave the same, you can figure out some formula that describes their behaviour, follow that formula, and make money,” he says. As we enter into a period of higher rates, “that could really throw people off.”
The biggest upheaval that many in equities have had to contend with over the six-year bull market was in October, when the Standard & Poor’s 500 Index slumped 7.4 per cent. Those losses were erased in just two weeks. The gauge has posted double-digit gains in five of the past six years, returning more than 200 per cent since the bear market ended in 2009.
Jonathan Corpina remembers what it was like being a young trader when the dot-com bubble blew up. Mr Corpina was 28 when the Nasdaq Composite Index began a historic plunge in 2000, losing almost 80 per cent of its value in 31 months.
When stocks were soaring “you thought it was the norm, because you hadn’t experienced anything different,” says Mr Corpina, 43, a senior managing partner at Meridian Equity Partners. “From that perspective, that was a disadvantage.”
The next big test may come when the Fed raises rates for the first time since 2006. For young traders who have only known zero-per cent rates, the risk is that they’ll misjudge the speed with which the Fed tightens policy, according to Stephen Stanley, chief economist at Amherst Pierpont Securities in Stamford, Connecticut.
Fed chair Janet Yellen said on May 22 that she still expects to raise rates this year if the economy meets her forecasts.
“My guess is that folks who are less experienced would have a natural inclination to underestimate the amplitude of the moves” in rates, Mr Stanley says. “A lack of imagination” could cause problems for young traders.
Yousef Abbasi, global market strategist at JonesTrading Institutional Services, relishes the challenge.
“I’m very excited about it,” says the 32-year-old, who began his current position in February 2011. “The macro environment has gotten so seemingly stuck in the mud that there are times I sit at my desk wondering what could actually shake things up.”
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Updated: June 1, 2015 04:00 AM