Risk allocation on a BB desk

I was wondering how exactly risk was set for individual traders on a BB desk. And I know that this will likely change depending on the specific product being traded but I just wanted to get a general sense.

So I know there will be a separate risk department who'll likely set the exposure for the entire desk/product. This will be given to the person running the desk and then he'll divide it out among the traders.

Though, in practice, how is this implemented. Do traders have an exact figure which they know they can't break through? What happens if a client needs to trade a larger volume than the desk is designed to handle? What happens if a trader wants to make a very large hedge/prop position? And how have these procedures changed in the last 10 years?

 
Best Response

this will be different for every desk, and also for every firm.

in general, every trader has:

-a yearly P&L stop (lose this much, and we'll probably fire you..or at the least, clip your wings and reduce the amount of risk you can take) -a daily P&L stop (lose this much and you must flatten positions...no more risk taking for the day, try again tomorrow) -daily risk limits (max outright market exposure, and some kind of max var risk, for example spreads, ect..)

the last BB flow desk i worked at, a "vanilla" desk trading a liquid product, junior traders had 1-2mm annual P&L stop, 200k daily P&L stop, and 50k-100k daily DV01 risk limit

Senior traders at that firm/desk had 20mm annual P&L stop, 4mm daily stop, and 2mm DV01 limits. These are all "soft numbers"....but they give traders an idea of how much risk the firm is comfortable with each trader taking...but if you hit your risk limit, you usually had time before you got the tap on the shoulder...but you knew that you were being watched at these levels.

For some firms / desks, these numbers are "small" and for others, these numbers are large.

The above desk had an annual total expected P&L of 100mm for a group of 8-10 traders....you can't make that without taking a commensurate amount of risk.

 

depends on the firm...some have increased risk limits, most have decreased. Mgmt fears trading losses. "Agent Trading", Advisory Investment banking & wealth management are seen as more desirable because there is usually less risk of losing money..where with trading, the risk of losing money is relatively higher.

Some firms have a risk taking culture (goldman, ect...) while others ebb and flow with the tide of mkt sentiment.

At the end of the day, the only way to make more money is to take more risk.

 

all the IB's have a Risk Mgmt desk that aggregates risk across the firm...and if the firm leans too far in any one direction, the risk mgmt desk will hedge that risk by taking the other side. for example, i've seen the head of risk mgmt walk over to the US Treasury desk and ask the 10yr trader to buy for him 10,000 10yr futures contracts (1 bln of underlying).

in other words, that desk has the authority to trade in size. It may be that other traders in the firm wanted to be short treasuries...but theoretically, this desk seeing all the aggregated positions and risk rolled up in realtime gives that desk an ability to manage risk better. These guys are still traders.

 

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