Ten years ago, traders were allowed to use their own money to the banks. In contrast, today the proprietary trading at banks is frowned upon. Instead, traders act now only on behalf of customers – it is said, at least. Does this mean that trading is much easier today than in the past? Not necessarily.
If you have attended one of the seminars of former Goldman Sachs trader Anton Kreil, they might even steals the impression that trading would be a bit boring today. According Kreil currently has 80 percent of the trading business in mere buying and selling of securities on behalf of customers and the remaining 20 percent would be performed with a low risk of computers and algorithms. Thus, the incumbent traders only to monitor the algorithms. “Today, for trading in an investment bank very little expertise required because of the implementation simply no man more is needed,” says Kreil. But some traders see this is still different.
These include David Hesketh, who formerly worked as a trader at Bank of America Merrill Lynch and today the company Financial Skills leads, which develops software for trading simulations. Hesketh believes that traders need to bring as much expertise as in the past now. It was not just about the handling of trading orders for customers, but the trader would act as market makers. So buy securities with the intent to sell them a little later to customers. For this to work, they need to bring a good sense of how much his customers of the relevant securities buy and how much they will pay for it.
“Market making traders make two things,” said Hesketh. “First, the trader must develop to the price they want to buy or sell an investment. Second, they must determine the amount they wish to buy or sell at these prices “Among themselves speak the market maker of” bids “and” offers “-. So of supply and demand. A “bid” is the price at which a trader would buy the securities in the market and an “offer” to which he would sell it. If someone is willing securities to the issue price for sale of “hit (the offer)” is spoken. As soon as someone is willing to buy the securities at the price, it is called “lift (the offer)”. If a market maker a security in the hope of buying someone raises his offer later (lift the offer), then by “running a position” or “running a risk” spoken.
“Trader treat it confidentially, at which time they put in their market position,” said Hesketh. “Often it makes no sense to accommodate the position immediately in the market – it requires a good judgment. Sometimes you have to stand the risk. It is very rare that two customers at the same time and yours. ”
“How long will you thus hold the security A in your books? That depends on what it is exactly. “If there is a highly liquid currency pair – such as EUR / USD, then maybe it is just a matter of seconds,” said Hesketh. “If it is a complex securities are structured as credit derivatives, it may be weeks, because it simply fewer buyers and sellers in this market are (ie there is less liquidity).
But the matter has become more complicated with the growing regulation of the financial crisis. So the US Volcker Rule prohibits example, proprietary trading by investment banks. Strictly speaking, would thus also the market making excluded, since the banks securities – hold on their books – even if in the short term. Latest at a loss, the banks would therefore have to sell shares. “Then you have to bite the bullet and repel the position,” said Hesketh.
Will also De Lucy, founder of Amplify Trading, believes that successful trading is more difficult than ever. De Lucy forms Trader offers trading simulations for large banks. “To make a market to be successful, you have to form an opinion about the price and the demand of the product and they also need to know how trading takes place with the product. How liquid is it? How long you need to keep your position? ”
“As a proprietary trader you need to know how to move the price of the product and why. As a market maker you need to know it and you must also know how to handle the trade. There is a higher level of complexity, “adds De Lucy.
“It is wrong to believe that trading today no longer requiring expertise,” said Hesketh. “The banks would like to use for trade-loving computer instead of people. People need to pensions, jobs and computer. However, the computer market makers do not remove the entire work, especially in illiquid markets. ”