Hi, I feel like WSO was an invaluable resource to me when I was a bit younger, and I'd like to give something back. I thought I would do a Q&A from a flow rates trader's perspective. The industry is probably a bit different than it was even 5 years ago and it might help to have a refreshed view on what it's like to be a market maker/trader at a bank. Feel free to ask any questions you'd like and i'd be happy to answer any questions asked over the next week.
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0) how many years have you been trading? 1) what part of the curve do you trade? 2) what are your bread and butter trades? (off the run RV, butterflies, curve, outright, cash vs futures basis, etc..) 3) whats your P&L history? 4) what are your risk limits (what are they, and how are they structured)? 5) what is customer flow like (the desk...your part of the curve....now vs 5 years ago)? 6) do you participate in the newer liquidity platforms (liquidity edge, etc...)? What has your experience been like? 7) do you consider yourself a HFT scalper...or are you playing for larger moves? 8) do you try to be involved in the screens all day long...or do you try to sit back and pick your spots? 9) do you think with the tax advantage of buying for pension funds going away after Sept 15th, will the 10/30yr curve steepen beyond current levels...or is it a non-event? 10) have you seen any large program flows recently (SAFE, PIMCO, etc...)? 11) how many 1st year analysts does your desk hire per year?
Jesus ok, that's a start! I'll answer the few that I think are relevant to all.
0) ˜2yrs, but i've been in the business longer (as an analyst/grad) 1) Across the curve 2) Well I trade swaps. Anything works, forward fly RV, interest rate futures. I'm lucky that beyond what I market make (swaps), I can trade other interest rate futures or swaps if I/the desk has a view. Currently our market making and hedge books have various trades across RV, Macro and basis in different currencies. 3) All I'll say is it's been a decent year. 4) We have delta/basis/spread risk limits across all products. They are large enough that they don't matter that much. 5) Customer flow can be tricky. At certain flow houses it is pretty good business. But there is decent two way across the market that there is still reason to be in the business. Over time though, it is clear that a lot of flow has gone from being more "macro"to more "RV". I hear back in the day you would get decent "no competition" business from accounts that you had relationships with but now a lot of accounts are a lot more price sensitive.
6) Don't even know what liquidity edge is, but the proportion of flow being dealt on electronic platforms is growing. 7) Nowhere near HFT, but a bit of intraday trading in futures/running delta risk from flow + structural or medium term risk 8) We tend to be more reactive than active in the inter-dealer market. That said, if something is off in the markets we will be active in helping the market realize the "true mid" 9) The USD curve is a bit tricky, sure, it can steepen more in the short-term. But I think with ISM near decade highs, unemployment near lows, and with growth almost at 5%, the fed can keep at its path. Obviously there is some geopol/EM contagion risk, but the US front end is very conservatively priced in my opinion. 10) Rather not comment on flows in my space 11) Not hiring at the moment, but we take a couple grads just to do our part.
In general our market making and prop books are "co-mingled" as you say so it's all a team effort. But everyone is aware who put what trades in the book or who pushed for a certain risk profile.
I think in SOFR liquidity is not as deep yet (I'm Europe based so less involved in USD basis from a market maker's standpoint), but the SONIA market is very liquid and actively traded by all types of counterparties. A lot of ASW in fact is traded vs. SONIA these days.
1) This is hard to measure like I said as the books are co-mingled and we are a very flow heavy desk. That said, I think I've been doing a decent job and my risk taking has scaled over time, both in the market making role and on the side. 2) One was italy... this was one of my first "big" trades, and was initially meant to be just a punt. It "got bigger" because italy vol spiked which "increased the VaR"of the position. I wasn't alone but I got long 10yr italy when it was 30bps away from the tights over germany (I had scaled in in small size but it accumulated to a decent size). I eventually stopped out 10-15bp later (you have to understand at the time the vol of this spread was quite low). What happened? It went on to cheapen another 150bps. Now, what did I do wrong? I fomo'd into the trade. At the start of the year/late last year, a lot of people made money just from being limit long periphery as it tightened aggressively. When I saw it cheapen from the tights, despite my better judgement, I decided to get long. At this time all the strategists were very bullish periphery and European convergence in general. I learned a lot from this trade and now that I look back, I feel like a bit of an idiot. My trade process since has become considerably more robust. What did I do right? I'm glad I scaled into it so it wasn't like I was long at the tights. I'm also relieved that I decided I was in the trade for the wrong reasons, stopped out, and left it alone after. You have no idea how many times traders do a trade, stop out, and re-enter almost instantly. What's the point? If I'm not wrong a lot of bank desks and hedge funds blew up on the Italy move.