What edge do banks have over HFs/Prop Shops with regards to trading?
From my knowledge, the majority of S&T revenue is derived from market making. What I don't understand, is what separates the prop market makers (e.g. Jane Street, HRT etc) from the banks. The latter pay more to employees, and presumably get more talent (assuming from the increased competitiveness) - what are these guys doing differently?
As far as I can tell, the only difference is that a lot of market making firms nowadays rely on HFT whereas banks don't - HFT firms need SWEs rather than 'traders' to make money.
However, if this is the case, why haven't the banks followed suite? Or are they just more slow to adjust? Do you think that banks will start to restrict applicants to being from quantitative backgrounds similar to the top prop shops at the moment?
Thank you.
bump
Prop shops are dominant in cash equities and first-generation equity derivatives market making, but banks are better at everything else (credit, rates, commodities, etc.). Most importantly, where market making requires balance sheet like (e.g., treasuries and other FICC products), banks are more dominant because prop shops aren't really active outside of listed products (AFAIK) and don't have access to things like tri-party repo to fund their positions.
Thank you for the response, invaluable information.
Aside from balance sheet products, do you think things like credit, rates and commodities will start being competed against by prop shops?
If so why, if not why?
Agree it is mostly balance sheet and informational flow. That said prop shops are beating banks in many commodities now cause banks refuse to price or hold certain risk. Exotic options, are only priced by prop shops. Banks sit on and manage risk for clients only mainly now.
Why do they refuse the risk? Regulatory reasons?
Do you think the prop landscape will 'swallow' more of the bank coverage moving forward (e.g. move onto credit and such)?
They run very lean teams now so not worth the hassle. They do not run as hardcore correlation math as prop firms prefer. An example is the crude CSOs are all prop firms basically so if a merchant/fund wants to trade them banks wont take liquidity due to well “may 2020”.
Absolutely no banks are run by traders anymore it is all bankers/wealth-management. Only difference is banks are still hierarchical so the more political power you have can block other desks from even seeing potential flow. So last 2 years macro has been revived, so if you were bullish vol…could bully your way to get all the flow and put on a large position with limited downside, sky limit sort of thing.
Do you think all next-gen traders are basically required to know how to code, that traders being ficc/eq/vol (incl. phys com)/exotic
Bro I’ve been hearing this coding bs for god knows how long. Am a VP trader at a BB and can’t write a single fuckin line of code. We have strats do that shit. Regularly have meetings with those fuckers and aside from their CS/Stem expertise they’re virtually useless. They CONSTANTLY break shit to the point of where I can’t use the shitty systems they created idk call it twice a week. So I’m dim on the coding for a second language for the next gen of traders
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