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Please clarify some trading terminology

Shweta

Joined
10/15/12
Messages
71
Points
16
Hi,

I have been reading a lot of threads here about Trading, and found some of the terminology to be slightly confusing. I am posting what I understood; would be grateful if you could please confirm / clarify my understanding:-

A "trader" at an investment bank who executes trades on behalf of clients can be called ALL of the following:-

a) "Agency Trader"
b) "Execution Trader"
c) "Sales Trader"
d) "Market Maker"
e) "Broker"
f) "Dealer"
g) "Broker-Dealer"


Please confirm if this is true. If not, please correct me. Thanks !
 
 
Hi Andy Nguyen :

Thanks a lot for the links. I completely agree that a big picture understanding is better than a quick-fix solution; and I plan to go through all/most of the books you have suggested.

That being said, I've been reading a LOT about trading for the past few days on QuantNet & a no of other forums. I seem to have understood the basics, but the terminology is confusing me a bit. If you could answer my Qn above, I would feel a lot more confident about my understanding of S&T.

Thanks again for the book links !! :)
 
Andy Nguyen said:
Instead of trying to understand a few items of immediate interest to you, you will benefit from a board understanding of the finance market and how they are connected, "the big picture" so to speak.
https://www.quantnet.com/guide
http://www.amazon.com/Quantitative-Professionals-McGraw-Hill-Investment-ebook/dp/B005C3WUVC/
http://www.amazon.com/Monkey-Business-Swinging-Through-Street/dp/0446525561/
http://www.amazon.com/Dictionary-Finance-Investment-Terms-Downes/dp/0764143042/
http://www.amazon.com/Wall-Street-Lingo-Thousands-Investment/dp/1601380380/
Click to expand...
I always find that ur answers are helpful for newie

thank you for ur sharing XD
 
Shweta said:
Hi,

I have been reading a lot of threads here about Trading, and found some of the terminology to be slightly confusing. I am posting what I understood; would be grateful if you could please confirm / clarify my understanding:-

A "trader" at an investment bank who executes trades on behalf of clients can be called ALL of the following:-

a) "Agency Trader"
b) "Execution Trader"
c) "Sales Trader"
d) "Market Maker"
e) "Broker"
f) "Dealer"
g) "Broker-Dealer"


Please confirm if this is true. If not, please correct me. Thanks !
Click to expand...
where did u get this information? some of them don't exist now. they are replaced by software.
 
marina I got this information from QuantNet & a number of similar forums.

1. Could you tell me which of these are replaced by software now ?
2. Also, do ALL the above terms represent the same thing, ir-respective of whether done by human or computer ?

Thanks!
 
(a) Agency Trader: These are traders who take zero risk. When a buyer, or seller, calls one of these guys up to purchase a security, the agency trader executes the trade in the market and passes the trade onto the customer for a commission.
(b) Execution Trader: These are generally one of two things. On the sell side (i.e. at banks) these are agency traders. On the buy side (i.e. at hedge funds or institutional money managers, etc.) these are traders who execute trades as ordered by their portfolio managers with either banks or on exchanges. It is their job to minimize transaction costs while executing the trades that the portfolio managers (PMs) want to have on.
(c) Sales Trader: These are traders at investment banks who also have a mandate to deal directly with customers. Most commonly they are agency traders and are found in equities divisions, but they can also be market makers who also take positions.
(d) Market Maker: These are traders at banks who will quote you a price (bid and offer) on a given product. They can be agency traders, or they can run a book full of positions with varying degrees of risk.
(e) Broker: This is another person who takes zero risk, who matches buyers with sellers for a commission. When you talk of brokers, you generally mean one of three things: (1) agency traders, (2) individuals at brokerage firms like Tradition/ICAP, Tullett Prebon, GFI, and Cantors who broke transactions between traders from different investment banks, (3) sales and trading desks at investment banks (if you work for a hedge fund).
(f) Dealer: A market maker at an investment bank.
(g) Broker-Dealer: An organization that trades securities for itself or for customers. Usually this means an investment bank (as they sometimes deal for themselves and sometimes deal for customers). It's really more of a legal/regulatory term than anything else.
 
I also read somewhere that typically, at an investment bank, market making & prop-trading is performed by the same trader for any given security.

Is this true ?
 
Shweta said:
I also read somewhere that typically, at an investment bank, market making & prop-trading is performed by the same trader for any given security.

Is this true ?
Click to expand...
By law, investment banks won't be allowed to do prop anymore and anything that remotely smells like prop trading will attract a lot of scrutiny.

Market Making is shifting to computers for a lot of asset classes.
 
We discussed this on another thread. That's not really true. A lot of asset classes are exempt from these regulations. My desk is one of them. Equities are very institutionalized, fixed income is not really and there you can find people market making as well as prop trading more often.
 
Shweta said:
I also read somewhere that typically, at an investment bank, market making & prop-trading is performed by the same trader for any given security.

Is this true ?
Click to expand...

Their are some market makers who also trade prop, as a secondary mandate, depending on the asset class. This is quite common on the fixed income / FX side of things. There are some traders who only trade prop (yes, even they still exist). There aren't, as far as I've seen, traders whose primary mandate is to trade prop that also sometimes make markets. Hopefully that made sense to you.

Also, just because you're a market maker who doesn't trade a prop book on the side doesn't mean you're not taking risk. Much of the time, market making books run plenty of risk. Depending on the bank and group, these market making books can run very little or quite a lot of risk.

In these quant forums it appears the party line is that market making traders have been entirely replaced by machines. I'm not sure why everyone has come to that conclusion, but the truth is this is a very gradual process. Yes, there are a lot of markets for which banks now develop algos to make markets, but even in these markets, human traders manage the risk and control the flow of the algos. More importantly, there are a whole lot of markets in which algos are simply not used. Maybe they will be in 10 years, or whenever in the future, but they aren't right now and they won't be in the near term.
 
financeguy said:
Their are some market makers who also trade prop, as a secondary mandate, depending on the asset class. This is quite common on the fixed income / FX side of things. There are some traders who only trade prop (yes, even they still exist). There aren't, as far as I've seen, traders whose primary mandate is to trade prop that also sometimes make markets. Hopefully that made sense to you.

Also, just because you're a market maker who doesn't trade a prop book on the side doesn't mean you're not taking risk. Much of the time, market making books run plenty of risk. Depending on the bank and group, these market making books can run very little or quite a lot of risk.

In these quant forums it appears the party line is that market making traders have been entirely replaced by machines. I'm not sure why everyone has come to that conclusion, but the truth is this is a very gradual process. Yes, there are a lot of markets for which banks now develop algos to make markets, but even in these markets, human traders manage the risk and control the flow of the algos. More importantly, there are a whole lot of markets in which algos are simply not used. Maybe they will be in 10 years, or whenever in the future, but they aren't right now and they won't be in the near term.
Click to expand...


I agree with what you say. Few days back, I spoke to a friend who works as a Trader at Wells Fargo. She mentioned that she trades equity options, as a market maker, yet she has the job.

So I am assuming that means that equity options & other derivatives are markets where human traders are still present. Please correct me if wrong. Thnks !
 
Hi, I'd appreciate any comments or advice on my experience.
I've been working two years at a small firm that provides financial services to individual clients. Our firm provides an autotrading service - execute an investment newsletter's trade alerts in an investor's brokerage account. As an investment newsletter publishes email alerts to buy and sell stocks or options, the autotrading service receives those trade alerts directly and enters trades in each investor's account.
My main responsibilities can be summarized as the following:
  • Executing real-time stocks and various option strategy orders promptly and precisely (90% of my time)
  • Supervising our system and making sure all currently held positions are correct (indifferent from that of investment newsletter's)
  • Little tasks that my boss assign to me from time to time
Basically, my job involves a lot of checking, double-checking, and triple-checking :) to ensure that every order gets executed properly and the clients get good fill prices. So, I need to be very detail-oriented, fully awake, concentrated, and be able to take the pressure of processing multiple orders in a very short period of time. Also, I've developed through time "subconsciously" being aware of quite a bit of orders which help me to be in control.

Overall, I like my job and I learned so much about option combinations and managing individual clients' portfolios through this roll. One sad thing is that I do not make investment decisions, so it doesn't seem possible to use it towards qualifying for CFA work experience.

I'm wordering if there are any people who have or know of someone with a similar experience and how they maximized the experience. I also wonder, to which funcions in a bank would my experience appeal the most. From the posts above, the execution trader seem to be a close match. But, I find only few or no jobs under the search of execution trader. Are there many execution traders outthere and do they all not make investment decisions? General comments on any of the topics I mentioned would be very much appreciated.
 
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