Prop trading at BB
Hello, I was curious if fixed Income market makers at BBs have the right to trade a prop book while they make markets? Thanks
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Yes..
Therefore, holding a position for few months is not infringing the Volcker Rule?
It depends on how liquid the product is. You probably couldn't get away with that for equities, but say illiquid credits you could reasonably say you are holding inventory for customers.
How about US Rates product?
If you trade macro, buy or sell side, it’s rare to hold positions for months. Prop trade horizons are from a day to a few weeks. Everyone in fx and rates trades prop on the sellside
Don't really understand the difference between these two. Aren't you making markets in both trading? But you are trading for clients in S&T and yourself in prop
Bank Traders (Sellside) provide a market to a client at prices they can make a profit and win businesses, in certain products, they can take prop views with the banks capital to make money.
most rates desks at the BBs have large books...and sit on positions for a long time. sometimes out of desire..sometimes because thats the only way to not guarantee a loss.
customer sells you 100mm of a security, for which there is no market....so you sell something similar to create a spread position with minimal market risk...and then wait for an opportunity to unwind the package. maybe that's in 10 minutes...maybe 10 years.
you could goto the inter-dealer broker screens and post an offer (hoping another dealer will post a bid)...but that has a risk.,.perhaps other dealers see your desperation to exit and they post even lower offers (forcing you to mark down the position).
you could post a 2 way market (both a bid ans ask) but then you take the risk of getting hit and buying even more of something you don't want. this has the advantage of not disclosing your position...but that comes with the risk of buying more.
so, if this is the role of a market maker...how do they avoid losing money?
answer: they prop trade...try to buy things that are cheap...and short things that are expensive...so that when customers run you over, you have a cushion.
Provided you can make a reasonable case that it is a hedge then yes.
Macro products hedge macro exposures, credit hedge credit exposures, equity to equity.
Harder to cross the product cross unless you have good logic.
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