Professional Traders?

[darrenf]

Hello all

Registered a week or so ago and have been browsing the boards ever since- very interesting.

I am relatively new to trading, have studied the markets/ trading for about three years now before finally opening a sb account with dealfree. Now the theory gets turned into practice. Not doing bad so far, breaking even after two months trading mainly indices end of day/ part time which have been pretty choppy the last couple of months. Not too bad for a newbie? Waiting for a nice trend to develop. Currently short for the last week or so.

Anyway, during the last few years I have often wondered how pro traders operate and I hope I have found a forum that can give me the answers. It cetainly seems there are a few city/ ex city traders on this site.

I would like to know:-

a) what sort of institutions employ traders in the UK
b) What exactly are they employed to do in the main (ie speculative/ arbitrage etc)
c) what are their objectives. Are they given a float of cash and expected to generate x% return per annum?
d) Is this to generate profits for the institution or their clients?
e) what are the main markets traded ie indices/ shares/ currencies etc?
f) If as often quoted, up to 95% of traders fail, why do institutions bother as if this is true only one out of 20 will make money which surely can't be profitable?

If anyone can shed any light on this, it would be much appreciated.

 

[FTSE Beater]

Hi DarrenF

Welcome to T2W

It depends what type of professionals your talking about. A private investor is very different to an industry trader

The industry trader:

a) what sort of institutions employ traders in the UK

Insurance companies and banks

b) What exactly are they employed to do in the main (ie speculative/ arbitrage etc)

Various, some to make as much money as possible. Some to track a certain index.

c) what are their objectives. Are they given a float of cash and expected to generate x% return per annum?

Varies from company to company, but a % return is the aim for most.

d) Is this to generate profits for the institution or their clients?

Usually both. The clients take a cut of the institutions profits.

e) what are the main markets traded ie indices/ shares/ currencies etc?

Depends on the company. Most trade shares.

f) If as often quoted, up to 95% of traders fail, why do institutions bother as if this is true only one out of 20 will make money which surely can't be profitable?

Not sure. Only that most people who invest in the markets aren't pro's, and they lose the money that the institutions make. Also they have to invest some where otherwise the public wouldn't give them the money to invest.

This is just my view and I may be completely wrong

 

[NickW]

There are two main bodies of professional trading institutions, known internaly as buy side and sell side.

Buy side traders work for Fund managers like Fidelity, Sell side traders work for Banks like Goldman Sachs. When people have an image of gungho City traders they usually think of the Golman Sachs type. In Goldmans Equities trading division you will have market makers, sales traders, equities sales and equities research teams.

At the fund manager you will have a dealing desk team and the fund managers team. It is this side of the street that is concerned with where the market is going. At Goldmans, they earn their money from trading commissions and fees from the business they get from the fund managers. Very little resources are devoted to proproriety trading - or speculative trading where the bank puts its own money at risk.

The relationships have some overlap but they are basically as follows, the fund managers pay for research and talk to sales people, the Fidelity dealing desk talks to the Sales Trader at Goldmans and places an order. The Sales Trader gets the prices from the MarketMaker, fills the trade and books it to the correct client account. The skill comes with large block trades from the client, where the Sales Trader in conjunction with the MarketMaker will look to fill the trade without moving the market too much against the direciton of the trade.

The MarketMakers job is to provide liquidity, they are required to provide a bid offer quote for each stock. They will take positions intraday but will look to close the day flat or fully hedged. They are not looking to make money on the positions they have, they make money on the spread. The idea being is that they provide the best execution possible for the orders coming in.

As you say 95% of speculative traders fail, hence the banks shy away from this, Goldmans earn their money from fees from the fund manager, who in turn earns management fees selling his funds to joe public, pension firms etc, that 95% of the time do worse than the market anyway!

 

[BenA1]

As I'm working on a trading floor, although not actually getting my hands dirty, as it were, I hope I can answer a couple of these..

b) What exactly are they employed to do in the main (ie speculative/ arbitrage etc)
Anything you can think(and everything else) is being done somewhere on a floor in the city...however the majority of Investment bank activity is angled towards taking money off clients or out of the market, through spreads or commissions as there is less risk involved by doing that.

c) what are their objectives. Are they given a float of cash and expected to generate x% return per annum?
Generally a trading book will have cash limits, but this is not too important as long and short positions will net off. More important is the Risk generated by the portfolio...ie if the market were to be hit by a "shock" such as the Russian crisis or LTCM how much would be lost.

d) Is this to generate profits for the institution or their clients?

Generate profits for Clients? Why would anyone want to do that? Unless they are paying you a percentage of course...

e) what are the main markets traded ie indices/ shares/ currencies etc?
Yes, and Commodities, Futures, Options, over the counter derivatives...

f) If as often quoted, up to 95% of traders fail, why do institutions bother as if this is true only one out of 20 will make money which surely can't be profitable?

I think this figure is based on Independent traders...the controls within the square mile are a bit more rigid...ie when, how and what you trade. Isn't self control one of the biggest factors in trading success...might it be a bit easier if the exposure was bigger and you might lose your job if you break the rules??

 

[Skimbleshanks]

Generate profits for Clients? Why would anyone want to do that? Unless they are paying you a percentage of course...

That is just so true - yet no-one has the common sense to believe it.

Remember too that IFAs get their percentage on the funds going in, not the profit generated. With no-one getting their cut on the profits generated, it's no surprise that there's no incentive for ANY fund to make money for clients.

 

[darrenf]

Many thanks all for your replies.

I'm pleased to see my first "thread" generating a bit of interest.

Nickw: Thanks for your comments. It has pretty much confirmed to me what I suspected. ie that the institutional traders are not speculating on short term market direction but are generating commissions/ fees/ spreads etc from the buying/ selling/ providing liquidity as you aptly explain.

BenA1: Thanks also. I understand that institutions don't make profits on behalf of clients unless they get a cut- I work for a bank myself. What I was trying to get at is do institutions manage client money in speculative trading accounts- to which the answer seems to be no?

Skimbleshanks: It's true that IFA's get a fee/commission on the way in to a fund/product, but also often will get a "trail" commission/ fee based on the value of the fund so there is a financial incentive if client's funds increase (The same applies to the fund manager as they charge a %pa). There is also the desire for both to do well for their clients in order to a) retain them and b) attract further business/ clients in the long term. I know this as I am an IFA. Having said that, it is also true that the IFA will get paid regardless of whether the clients fund goes up or down and it is also true that the majority of fund managers underperform their relative indices.

Anyway, does this mean that the only market participants (in equities) actually taking a short term speculative view on the market are self employed individual traders and hedge funds? (I exclude conventional funds as they are in the main LTBH funds).
If so, does anyone know roughly what percentage of volume relates to speculative trading? I expect it is higher in the US than UK.

I am trying to build a picture of who all the market participants are and what they are trying to achieve as I beleive this will help in my trading activities.

Thanks so far

 

[peto]

"am trying to build a picture of who all the market participants are and what they are trying to achieve as I beleive this will help in my trading activities."

Interesting question sorry don't know the answer. But I can see the relevance. If the major players are taking long term positions it leaves a more open playing field for short termers. If the majority of trades are short term speculative then the only winners will be those of above average ability (ignoring commissions) or those of well above average ability if you allow for commissions.

 

[warm_machine]

darrenf, institutions teach their traders to never take risks, but the simple fact of the matter is that if you do come a cropper on a particular trade, as long as you have a sound reason for making the trade in the first place, you will get away with nothing more than a talking to from your boss. As long as the words "unforseen, shock, unexpected" are thrown in then the matter often is taken no further. Of course you won't be flavour of the month with your team leader but that will only last till the end of the day. So straight away one big difference is that while the professional trader can get away with making errors to a certain extent, a private trader sitting at home will not, since every mistake effects his bottom line. Thus a being a city trader is much like buying an option - if you do very well you get big bonuses, but if you do badly and make losses, all that can happen is that you loose their job. This is why every now and again we get "rogue trader losses millions" headlining the financial pages.
Secondly, despite the best efforts of the regulators, institutions will always get hold of insider information of one sort or another. The clever bit is how they mask it. Say for example a trader within a working team finds out that company X is due to issue a soft trading statement. What does the trader do? Does he short the company overnight to his maximum limit? No. Often he will inform his team leader who will decide how much of a short position to take - ie. how big a position can be safely held without attracting the attention of the regulators. Thus only one or two members in the group will make the short trade despite the fact that much more could be made on the trade. Any such insider info isn't shared with other teams within the group, even other trading teams. Nothing is ever written down, not even on a scrap of paper since all bins go through compliance. That is how instituitions' trading opertaions make regular income - on the home bankers. Take out the bankers and on a general level you will find that the remainder of the trades made aren't that spectacular.

 

[Skimbleshanks]

Nothing is ever written down, not even on a scrap of paper since all bins go through compliance.

That's the proof for me that I should never work in a professional trading environment. Eeek! Just imagine how compliance would view the current state of my bin - dog biscuit crumbs, fur balls, orange peel, apple core, credit card slips. A fruit-eating shopaholic female dog perhaps?

 

[FTSE Beater]

Hi Skim

I didn't realise you were using the "dog biscuit crumbs, fur balls, orange peel, apple core, credit card slips" indicator.

Now any body searching through your bin, could figure out what quantities of each to use, and then you can't sell your method on

 

[gpegler]

Is it not common practice to enter trades when you see divergences between the orange peel and apple core?

If your trade fails and you get stopped out, simply give the bin a good shake and start again.

 

[warm_machine]

"fruit eating shopaholic female dog" Hmm, sounds like my friend's boss, though he would probably replace the last two words with something else