There are many flavors of "traders" out there, even if you narrow it down to the institutional world. I'll split it up into two main categories - the "buy side" and "sell side."

The Sell Side

Sell side traders are employed by institutional brokerage firms and investment banks to execute customer orders. That sounds easy - salesman gets order for 100,000 shares of IBM and calls a trader, who finds someone to take the shares and crosses the block. They do a lot of that, but these traders also try to "sniff out" demand as well (this is a volume business.) They build relationships with buy side traders and try to anticipate order flow. If they can approach a trader at a mutual fund who is nervous about a position with an offer to get him out at a good price, he will get paid to do that. Sometimes the trader will even put shares on the bank's books to help out, if he believes that the ongoing relationship outweighs the risk he takes on for the firm.

So, not only does the trader need classic "trading" skills (quick thinking, good with numbers, etc.) he needs to be able to make a lot of friends - because friends mean order flow, and order flow means money. Most sell-side traders come from top business school and/or undergrad programs, and go through a "sales and trading" rotation program upon hiring.

The Buy Side

Buy side traders are divided into two camps - execution traders and proprietary traders.

a. Execution traders. Execution traders execute buy and sell orders for portfolio managers at large mutual funds and some hedge funds. They are paid to minimize cost - full stop. If Fidelity wants to buy 100,000 shares of IBM, they want to get in as quickly as possible without moving the market. These traders are always looking for liquidity, and know when the best times to find the most shares. (Which is why they value a great sell-side trader.) These traders also come from top schools, in some type of apprenticeship program. Quantitative skills are increasingly valuable, as they fight the high-frequency algorithms every day.

b. Proprietary traders. Proprietary traders are paid based on their ability to buy what goes up and sell what goes down. They put their employers' balance sheets at risk to get this profit. (Note that some prop traders work at "sell-side" firms, behind firewalls.) This is probably what you see in the movies, and they come in all shapes and sizes. The career path basically consists of starting at a firm out of college (or math PhD program) and consistently making money. The more you make, the longer leash you get. You "blow up", you're gone. Thanks for playing. Its a very stressful, fast-paced eat-or-be-eaten job, but a top trader will make millions, if not tens or even hundreds of millions.

In case you haven't noticed, there is a common thread here - you need a degree and outstanding grades from a top institution to get in the door. So many people want to do this job that financial firms can pick and choose.

Republished with permission from Doug Mewhirter.