Institutional trader makes 100mil/year, what does it mean?

http://money.cnn.com/2008/04/16/news/companies/Bo…

"Goldman Sachs (GS, Fortune 500) happily snapped up Bear (BSC, Fortune 500) mortgage derivatives trading veteran Peeyush Misra and several of his colleagues, according to a colleague and senior Bear executive. The expectation is that Misra will be a nice profit center for trading-oriented Goldman, given his annual production of between $50 million and $100 million in revenue for Bear."

does that mean he made that much money each year from his own trades/orders? or does it mean his desk made that much money, of which might have been the head? or does it mean his ideas helped generate that much money?

there's something funny about leveraging your entire year's salary every single trading day

 
Best Response

He handles a book of business that brings in btwn 50 and 100 mil in commisions per year. Read the Wiki ( http://en.wikipedia.org/wiki/Institutional_investor ) to figure out what an Institutional Investor is. How institutional trading works, just like any other kind of intermediary trading, is that the Trader makes a commission off the trade because it is being executed at a broker/dealer. It is rare that an institution is also a broker/dealer based around the sheer size of the institutional market, so all of these instutions need traders to do the buying and selling for them. Insitutional traders make their money on the commission they charge, which is a volume game, not a value game. If you take a look at wealth management RMs, they can charge up to 5% of the total cost of the trade as a commission. For an institutional trader, the margins on commission are between 2 and 5 cents across the street. He makes up for the small commission 2 ways, 1st is in volume, and the 2nd is in frequency. The more he trades for his clients, the more he gets in commission, and the larger the block, the more he makes per trade. So, this guy is making a ton on comission for his trading. Now, this doesn't include international trading, as a seperate fee may be charged on that due to the fact that you are settling non-US securities (No, I'm not talking about ADRs).

Hope this helps. If you have any more questions about this or need clarification, just ask.

 

Someone really should post an explanation of agency vs principal within a flow desk. Obviously prop trading is self explanatory.

"Oh - the ladies ever tell you that you look like a fucking optical illusion?"

"Oh the ladies ever tell you that you look like a fucking optical illusion" - Frank Slaughtery 25th Hour.
 

"So are you're saying that the typical trader at Bear or GS is not one who is deriving most of his profit from straight proprietary positions?"

Correct. and the same is true of the other dealers. money is made off of customer biz.

 

Because there is a skill in execution. Thats the traditional role of the sell side, not commiting capital.

"Oh - the ladies ever tell you that you look like a fucking optical illusion?"

"Oh the ladies ever tell you that you look like a fucking optical illusion" - Frank Slaughtery 25th Hour.
 

Unfortunately the term trader has become more and more convoluted. Brokers that use a somewhat descretionary execution will call himself a sales-trader. Obviously in FICC its a little different but in equity land everthing i have said is accurate.

"Oh - the ladies ever tell you that you look like a fucking optical illusion?"

"Oh the ladies ever tell you that you look like a fucking optical illusion" - Frank Slaughtery 25th Hour.
 

just to add to this, a lot of the money that desk made was based on flow but Bear allowed a decent amount of prop risk to be taken by their senior traders. im sure a good portion of that was prop/directional trading. another thing is there is still risk involved in a flow book. its not like the book remains flat (no risk if markets move). you still have to have the book positioned for what you expect to occur in the market (in FI: curve steepen/flatten, spread positions and a variety of other things)

 

so an institutional trader for a BB, ie Misra, simply makes commission on the volume of the trades that pass through his desk? Meaning the position that he is entering the trade (long/short) is irrelevant because that is his "customer"'s problem and he is merely the middleman to execute that. The more trades he gets to play the middleman for, the more money he makes?

So how does one become an institutional trader? enter BB through S&T or FixedIncome? or am i off the right track right now.

 

I just came back to this thread and I'm so confused. Sorry analyst, I did read your post but it's not quite clear to someone who's just grasping the basics. What do you mean by "its not like the book remains flat?" isn't there risk if markets move, since if theres volatility, you have the chance of being on the wrong side of it?

Also, going back to a couple posts above where Ficcster said Misra is a trader and not a broker, what did he mean to convey in that comment? Was trade4size saying that what Misra is actually doing is a broker's role but in today's age, many brokers' are considered traders, so Misra is simply categorized as a trader for this reason?

 

Looking back at my previous responce Im not using it in the proper context. Disregard what i said about brokering.

In mortgage trading the bank is acting as a principal and taking the other side of this trade. They then have to find the other side of their trade either from If the bank likes the trade they may hold it in inventory. Whenever they have not totally offset the trade in a hedge they are exposed to risk.

"Oh - the ladies ever tell you that you look like a fucking optical illusion?"

"Oh the ladies ever tell you that you look like a fucking optical illusion" - Frank Slaughtery 25th Hour.
 

"Meaning the position that he is entering the trade (long/short) is irrelevant because that is his "customer"'s problem and he is merely the middleman to execute that. The more trades he gets to play the middleman for, the more money he makes?"

my comment was meant to shed light on your misunderstanding of a flow trader. the position the trader is entering into is not irrelevant bc you are taking risk, its not like you do a trade and have an immediate buyer/seller available. maybe you get stuck with some illiquid piece of garbage that has no perfect hedge. you have to take that into your book and manage the risk

saying the book is flat means there is no risk. which is not the case in a flow book. the book is positioned to make/lose money depending on certain movements in the market. so your idea that the more trades a guy sees = more money is an incorrect assumption bc there are a ton of other things that go into it. for one you dont make money on every trade, so in some instances the more trades you see the more money you can lose especially if the market goes the other way on you.

 

" for one you dont make money on every trade, so in some instances the more trades you see the more money you can lose especially if the market goes the other way on you."

just for clarification, this is in regards to the firm's position from being on the other side of the client's trade right? (ie, client wants to sell short a liquid security, so you as a principal trader, buy the liquid security?) Also, as you say that you don't make money on every trade, in the broad view you are making money off their commission though, right? Although I think i understand the risk involved in a flow book because of market conditions, liquidity, etc.

 

flow traders dont make commissions, brokers make commissions by matching buyers and sellers. For instance in swaps, you want to receive on a 5yr rate of xx, you tell the broker, they find someone looking to pay 5yr rate of xx and match the buyer/seller. they earn a commission to do this.

as a flow trader you are there to make a market on all customer business, regardless of which way the market is going. an example could be the stock market is selling off big, your customer wants to sell his stock in whatever name it is, as a market maker on a flow desk you have to give him a price. if he says he wants to transact at that price you now own a bunch of stock in a tanking market.

 

analyst26 - in equities thats not entirely accurate. As I have said repeatedly equities are going the route of agency trading. On an equity flow desk, they do both agency (commission) and principal (taking the other side of the trade). The majority of trades in equities are done via agency. That means the "trader" is earning a commission to work the order for a client.

Again this is where the definnition of trader vs broker gets really cloudy. In something like swaps a broker is doing exactly what you said, but in equityland they are usually acting as an agent.

If you want me to clarify I will because I have this relationship down pat for equity. In fixed income you are entirely right.

"Oh - the ladies ever tell you that you look like a fucking optical illusion?"

"Oh the ladies ever tell you that you look like a fucking optical illusion" - Frank Slaughtery 25th Hour.
 

THIS RESPONSE IS STIRCTLY FOR EQUITY TRADING. I DO NOT CLAIM TO HAVE ANY KNOWLEDGE OF HOW FIXED INCOME WORKS.

Equity traders use both agency and principal transactions to fill orders for client. Both of these are considered flow trading.

Agency trading means you are going out into the open market and buying/selling the security for the client. You charge a fee to do this. This fee is the commission. There is no risk. A trader's "PnL" is his volume.

ATLEAST 50% of equity trading is filled using agency transaction. Traders, sales-traders, and brokers all do agency transactions.

Principal transactions (not to be confused with principal investments) are when a trader makes a market for a client. They give a price they are willing to buy and price they are willing to sell. When a client wants to buy, you are selling to them from either your inventory or you short sell the security. When a client wants to sell you are buying for them and adding to your inventory. The bottom line is in principal trading you are exposed to risk.

"Oh - the ladies ever tell you that you look like a fucking optical illusion?"

"Oh the ladies ever tell you that you look like a fucking optical illusion" - Frank Slaughtery 25th Hour.
 

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"Oh the ladies ever tell you that you look like a fucking optical illusion" - Frank Slaughtery 25th Hour.

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