- What's your investment objective?
- The Different Trading Desks of an Investment Bank
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- Sales and trading - Wikipedia
Because public capital markets play such a key role in the global economy, government regulators and policy makers continually monitor their health and pay heed to the signals they are sending. Investment Strategies is most directly applicable to students interested in pursuing careers in finance including mutual funds, hedge funds, pension funds, endowments, wealth management, financial consulting, marketing and client service, sales and trading, investment banking, private equity, venture capital, and corporate finance. However, many students have found that a thorough understanding of public capital markets and the business of investment management is valuable in a wider set of careers outside of finance and in managing their personal wealth.
The focus of Investment Strategies is financial markets, principally equity markets, taking the perspective of an institutional portfolio manager and considering the efficacy of value investing, growth investing, arbitrage, macroeconomic investing, and other active investment strategies. The goal of this course is for you to develop an investment philosophy , a set of guiding principles that shape your approach to understanding and investing in public capital markets. While this philosophy is directly applicable to professional investment management, it is also relevant for corporate finance, investment banking, and personal finance.
A cornerstone of any investment philosophy is a view on the efficiency of markets.
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An efficient market is one where prices reflect true fundamental values. In an efficient market, there is little value in the selection of individual securities. Higher returns come only from bearing greater risk. Investing in efficient markets means minimizing transaction costs and choosing maximally diversified portfolios that deliver an optimal tradeoff between risk and return. An inefficient market , by contrast, is one where prices differ - sometimes substantially - from fundamental values. Behavioral finance is a useful framework for understanding market inefficiencies.
The salesperson makes the call, and success, they want to buy the Tesla bonds you bought from Fidelity. You sell the bond and sell your ticket. You also unwind your hedges, you no longer need to pay for your credit default swap or your interest rate hedges. Your job is to facilitate trades from buyers and sellers and profit from the bid offer spread. The buyer and sellers choose the timing and which bank to trade with.
You can capture more of the trading flow, making sure more of the trades go through you versus a competing bank by showing a competitive price and bid-offer spread. Your role is to capture the trading flow, make the bid offer spread and limit your market risk. You need to highlight ideas and opportunities to institutional investors and encourage trading flows. One exception is large sized trades, called block trades typically happen off exchange and utilize a traditional flow trader.
The Investor decides on the trade they want and the Investment Bank sends the order to the exchange. Sales traders are part sales, and part agency traders. Sales traders advice asset managers on their execution strategy, how to buy or sell a large number of shares without moving markets.
What's your investment objective?
They also take orders from investors and send orders to the exchange. Vanguard wants to buy shares of Tesla. The Sales Trader enters that order into the exchange, and the exchange lets the Sales Trader know what price Vanguard bought the shares at. Morgan Stanley collects a per share commission on the trade. The commission is generally shared between execution the salestrader and for research to compensate equity research.
Here is one example, we just talked about Agency trading, trading as Agent versus Principal or Flow Trading.
The Different Trading Desks of an Investment Bank
They are flow traded as principal. Confusing enough? Electronic trading is all about removing human touch points from the trading process. Salespeople and traders are expensive, and trading in margins in certain asset classes are slim. McDonalds encourages you to use an App or a Kiosk such that your order of chicken nuggets goes straight through to the kitchen. Electronic trading works the same way, and instead of a McDonalds App or Kiosks, we call it a platform or an algorithm.
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Each bank has their own platform, just like Burger King and McDonalds have separate mobile applications. Electronic Trading develops, sells and supports and trading platform or algorithm. Investors can trade without a calling or a Bloomberg chatting with a salesperson. Electronic trading works best for simple liquid products where there is an electronic market that could be hedged.
If the platform or algorithm can connect to an exchange and trade equities or futures, electronic trading makes sense.
Sales and trading - Wikipedia
It also works outside an exchange such as in markets such as FX Spot where market participants have moved to an electronic platform and the algorithm can trade with other banks in an electronic basis to hedge the risk. In our flow trading example with Tesla, some banks will allow you to trade electronically in small size , but are a long way from trading a social size electronically. The difficulties of hedging the underlying corporate bond positions, including: there are a large number of bonds, each issuer can have hundreds of bonds, new bonds are issued, old bonds mature, not every bond ends up being traded each day.
Another trader owns the trading position and risk, while the Electronic Trading group acts as development, sales and support of the platform.
First, you need coders to build the platform. These can be desktop applications, web based application and even mobile applications. These systems are constantly changing so there is a constant maintenance and support system. The profit of electronic trading works the same way as Flow trading.
You are trying to cross the bid offers — the 43 and 46 pips shown in the screenshot above. Built into the algorithm is logic on how much risk you can take on and how it hedges. Depending on the system, you can have a traditional flow trader managing the risk position, or have hedging strategies built into the algorithm. The sales and support function is certainly necessary but the least glamorous part of it.
You need clients to sign-up for the platform and you need salespeople to demonstrate the platform to investors asset managers and hedge funds. You need an on-boarding team to create log-ins, run through internal know-your-client policies and credit system checks. All important parts of the overall business, but may not be immediately obvious to college students touring a trading floor. This is a three-day course designed to teach the economic skills, option theory, and bond math that you are expected to know before starting an internship or before moving from the mid-office to the front-office.
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