Trading risk vs market risk

I was wondering what's the difference between these two positions?

As far as I understand in a bank trading risk is more related to Greeks and hedging With more proximity to FO whilst market risk is broader and look more at reporting these as well as including VaR and more regulatory stuff? Correct me if wrong

Thx

Comments (12)

Most Helpful
Jan 17, 2020

As a trader, you look at risk in orders of derivatives, first, second, third order... or spread risk across the yield curve, for example you have a spread risk between the 10's and 30's, so how can I capture this risk? US and WN bucket, in between or look at risk in terms of DV01 / Delta. These are risk that effects your PnL due to trading. And there are different kind of risk such as delivery risk for commodities, pin risk for options... Pretty much, if you ever want to trade anything... You need to know all of your risk across the spectrum of what you're trading.

Market risk is more systematic risk across the books. What if scenarios, worst scenario, how much $ the desk can lose with a certain amount of confidence in x amount of days, etc. This is more for management. The reason why you need market risk is because banks trade a HUGE balance sheet. There arethousands of different positions across various desk, rates vol, inflation, agencies repo, treasuries, futures, credit, fx, etc..

    • 2
Jan 17, 2020

Hi mate thanks for replying

I understood that, but I think I formulated bad my question...
Basically In the bank I'm now there is - under market risk - a general market risk management and also trading risk, of which I am more interacting with for hedging and strategies

Also, I noticed a few job adverts of "trading risk" still under market risk
Ok is not FO but I missed something or is just another name for maybe more trading oriented people in market risk?

The name of the game, moving the money from the client's pocket to your pocket

Jan 17, 2020

Honestly mate - I'm not sure. Sorry I can't help more. Trading risk is such a vague terminology. Maybe it's a generic term for market risk, credit risk, liquidity risk, operational risk... Maybe someone else can add their input. "Trading risk" can go both way... Traders that take risk or risk group focused towards trading

    • 1
Jan 17, 2020

No worries and thanks for your help And inputs anyway , much appreciate

The name of the game, moving the money from the client's pocket to your pocket

Jan 17, 2020

at some banks, a risk manager sits on the trading floor and sees an aggregated picture of the entire firms risk...and then hedges the firm against large macro moves when the firm gets too concentrated in any one risk category. I saw the risk manager at one of my firms buy 2 bln 10yr notes because the firm was net short significantly more from various desk positions. This is a hybrid risk analysis/trading position...its not a typical position...but it exists.

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Jan 17, 2020

isn't that just the central risk book?

Jan 19, 2020
ironnchef:

at some banks, a risk manager sits on the trading floor and sees an aggregated picture of the entire firms risk.
This is a hybrid risk analysis/trading position...its not a typical position...but it exists.

Quote this. is the same at my bank.. these guys are usually former traders as far as I have seen with a very good market knowledge
I don't think they can be considered pure FO though

Jan 19, 2020

Brian Hunter as in Amaranth Brian Hunter...? The reason I ask is because I've seen your replies in a few natty postings...

Feb 2, 2020

Your understanding in the original post is correct. Trading risk are the ppl who interact with traders and have more say if positions are doing well in terms of desks' limits and if not how it can go wrong. Mkt risk are the ppl who generally look after the mkt risk infrastructure, production and also the ppl in the modeling group.

Take the firm that I'm working for as an example. Trading risk, mkt risk infrastructure and mkt risk production teams are under Capital Markets CRO.

Mkt risk modeling team is under HEAD of Enterprise Risk and Portfolio Management. The CRO and HEAD both report to Group CRO.

As you can see, trading risk team is in closer proximity to trading business and know more about trading to begin with and as a result. Infrastructure and production teams use the engine and produce risk metrics. Modeling team takes care of the risk engine(s).

Also trading risk team are called model users; infrastructure, production, modeling teams are/can be called model users and/or developers. To add a bit more color, derivatives pricing are ultimately consumed by traders; mkt risk models are ultimately consumed by traders AND trading risk team.

If possible and depending on your interest, you want to be in the trading risk team, or infra/production team, or the modeling team.

Don't hold me to the above opinions/narrow facts. If other ppl have different perspectives, I'm looking to be educated.

Quant is life.

Feb 2, 2020
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