S&T: How is it different than market making?
S&T: How is it different than market making?
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Market making is just one aspect of the trading side. There's agency trading, flow trading, and of course hedging risk alongside the various functions of sales.
this sounds like an investopedia copy paste
It is.. by and large, market making? This is kind of a non-question
S&T is literally market making. It shocks me how little is described about the S&T process.
Customer a comes in and says make me a market on a 20 year SOFR swap. Sales asks trading for the price. Trading gives sales the two way price.
Sales tries to read the customer and put markup on the correct side. Client deals or doesnt deal. Trading takes the opposite position as the client and now either has to get rid of his position in the broker market, hedge it completly, or find another custy on the opposite side. That process right there is called market making.
But... Guess what. Thats not all of tradings job. Trading can literally just buy whatever they want in the market and hold it for a day and call it pre-hedging. Its a hedgefund with less risk carried overnight and only one product + a risk manger making you not take too crazy of a position. Without taking directional risk trading desks will make no PNL
This is a good answer for the most part. One caveat I would add is that the split between pure market-making versus prop trading really depends on the desk. On an agency desk, the amount of prop risk will likely be low. But on a principal desk (most desks in FICC, especially derivs desks), every customer trade is essentially your prop risk. I've found if you want to be a great market maker, you really have to be a great prop trader, or more specifically, operate like you are at a fund. Positioning, anticipation of flow, and constant involvement and price discovery in the interdealer market is what separates the average from the great. So to answer your question, it's a mix of both.
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