Can anyone settle ONCE AND FOR ALL what TRADERS in INVESTMENT BANKS do?
I have a very hard time understanding what traders in investment banks do. It seems like every time someone asks this on a forum, a ton of vague answers like "they make markets", etc get through out. I know what the sales people in the sales and trading division of an investment bank do, they generate trade ideas to clients such as hedge fund managers and get a commission if the client bites.
However, it seems that no one really knows what traders do. Do they prop trade? (I know they dont really anymore ever since the financial crisis) Do they act as brokers and only execute trades? What exactly do they do?
Because it seems that if their only role was to execute trades, then isnt that what a broker is? And why would there be so much talk about the P&L of a trader and why would they even need to do analysis of the markets and keep abreast of whats going on?
A concise answer would be greatly appreciated!
They trade baseball cards. At my bank, I have even seen a few of them trade Pokemon cards.
They mostly make markets... How is that vague?
Exemple : Client calls Sales 1 he wants a quote on a random product after being wined and dined the day before. Sales asks trading for their prices. Trader answers 9-10. Client can then buy from BB Trader at 10 or sell to him at 9.
A good BB trader will know his market, anticipate supply and demand, and know what is the """fair""" value of the product, to always give bid/asks that are around that value, he will be more or less agressive on the bid or offer depending on his current inventory, which he usually tries to minimize and to lock the margin.
If everyone thinks product is worth 10, and you give shitty prices like 5-7, everyone is going to buy from you at 7, and you'll end up with a Big Short position at a very bad price, losing money.
As for the whole prop trading thing, every trader is taking risk one way or another by being on the other side of the trade. It is up to the trader to decide where to hedge out his newly established position so that he can make the most money out of it. For instance you can wait to scalp out the trade or buy/sell a different product that has a high correlation with the original product you have traded. Or you can simply decide not to hedge if you have a strong view on the market direction, or if the trade actually reduces risk of your overall portfolio. By continually making these decisions the trader generates pnl.
Who says nobody knows what traders do? It seems only you don't. Client executed trades at major banks certainly make up a big part of trading, but there is a lot more than that. First of all, all the bb's still prop trade. They've just cut things back and reduced the amount of risk they take. Separately from client executed trades, there are more complex trades that need to be made, such as an interest rate swap where the bank executes for the company but then also needs to take a position in the opposite direction. Banks don't sit there and just take bets against their clients, they hedge the risk of each trade in the market, with some room for their own decision making.
Brokers are not the same as investment banks because they can't offer a full service suite of products to their clients. Often times a company may come in, lets say ExxonMobil, who may use the investment bank for advisory on M&A, structuring new project financing deals, their debt capital markets offerings, their line(s) of credit, as well as trading to hedge the commodities in which they produce. The investment bank can service all of this, and because companies don't want to have the entirety of their risk to one single bank, multiple major banks will split the business, thus splitting the fees, and as a result diversifying the company's exposure in the market. Trading is just another arm of the bank that goes into assisting customers in every way they can. Major companies aren't going to go around looking for individual brokers to execute trades whenever, they will go to the major banks that handle all of their financial business. There they have research analysts who explicitly scour the markets for ideas and analyze strategies that company's may want to use. The sales team pitches new ideas and works directly with the client as the face of the bank to ensure all their needs are being met. The traders execute those ideas when the companies need to make something happen.
Given that it doesn't appear like you even know what market making is, there's no need to get into it. You can research that separately as its quite a simple concept.
A trader takes the other side of the trade, whereas a broker matches buyers and sellers. The broker takes no risk.
Does anyone know what's the difference between market making in prop shops and BBs? will appreciate any responses.
There isn't a difference really. I guess the most simple explanation is that you don't need to have a buyer/seller ready instantaneously to be a market maker, just one of those. A BB with lots and lots of institutional clients won't have this problem much, whereas prop shops can still execute large quantities in 1 direction for an institution if they're looking to take a side against the trade that is being made and can't go on the open market and make a huge buy or sell without moving the market. Prop shops execute for institutions even on smaller trades in general. Market making is just providing liquidity, any company can do it whether they're a prop shop, hedge fund, or bb. There is risk involved, but smart market makers can do pretty well.
Most prop shops trade exchange-listed products (mostly electronic), while banks mostly deal with OTC products and have a regular client base. Some products that used to trade strictly OTC (swaps, swaptions, NDFs, CDS, etc) are moving towards a more exchange-type platform though (SEFs, exchanged-listed swap futures come to mind) because of Dodd-Frank and what not. Will be interesting to see how this whole thing develops.
My Z$2c...
A lot of things people do in the mkt is, in fact, mkt-making, even though it's not called that directly. For instance, most relative value trading is, for all effects and purposes, "liquidity provision of last resort". As a result, the difference you're referring to is a matter of degree, if you will. A BB flow desk is mkt-making explicitly and its mandate is to provide an actual two-way on stuff they get asked to price. A prop shop or a HF, for that matter, isn't mandated to make a px and has the luxury of choosing the level and side where they wanna be involved.
If all you traders say you make markets then why did NYSE say the flash crash occurred when they lost contact with the other exchange? You just think you make the market.
I think he had a stroke. He was posting all kinds of gibberish last night.
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