Is the trading floor really the Wild West? Do banks’ trading floors have a purpose or are they relics of the past in the brave new world of finance post crisis? Trading floors have always fascinated people, but few understand the role they play in the world of finance today. The dynamics of the trading floor are a microcosm of the global markets. Understand these dynamics and better understand the dynamics of global financial markets.
The book is the perfect starting place for anyone who wants to understand financial markets. It clearly explains how the financial markets work and what the purpose of the bank and the bank trading floor is, using clear examples. The book puts the bank’s role in the financial markets in context, explains what really happens on the fabled trading floor and helps to interpret the conversations and the roles and responsibilities of the key players. It is also the ideal companion for any financial market professional not sat on the trading floor, with chapters detailing the roles of quants, risk managers and clients and going into the details of prop trading, market making and derivative trading.
How The Trading Floor Really Works covers what most academic books don’t by focusing on key individuals on the trading floor and walking through some common financial markets transactions. It also clarifies the role of the trading floor itself and sheds light on the opaque terminology. In this book, Terri Duhon uses her personal experience of the trading floor to decipher and translate the world of financial markets.
Important questions this book answers include:
Terri Duhon is a financial market expert with almost 18 years of experience in financial markets. She graduated from MIT in Math in 1994 and immediately joined JPMorgan as a derivatives trader on Wall Street. While at JPMorgan, she was instrumental in developing the credit derivative market globally. Her time on the trading floor has been documented in the book Fool’s Gold as well as by PBS’s Frontline. In 2004, after 10 years on the trading floor in New York and London, Terri founded B&B Structured Finance Ltd, which provides expert consulting and financial markets training. She has led expert witness teams for financial litigation in both NY and London, assisted asset managers in assessing financial market risks as well as given hundreds of training programs globally for thousands of participants. She is also retained by a major financial regulator as an expert consultant on financial markets. Terri gives university lectures, speaks at conferences and is often quoted in the financial press. She sits on the board of two charities and lives with her family in Oxford, England.
Preface xiii
Why I Wrote this Book xiii
What this Book Does and Does Not Do xiv
Who this Book Is For xiv
Finally, Some Key People in the Process of Writing this Book xv
All Feedback Welcome! xv
Women on the Trading Floor . . . Really? xvii
CHAPTER 1
What Are Financial Markets? 1
Debt Markets 4
Equity Markets 11
Other Asset Classes 21
Derivative Markets 22
Conclusion 26
Discussion Questions 27
CHAPTER 2
What Role Do Banks Play in Financial Markets? 29
What It Means to Provide Liquidity 31
Central Market Platforms 37
Who Are the Clients and What Are They Doing? 45
Conclusion 54
Discussion Questions 56
CHAPTER 3
Which Part of the Bank Are We Talking About? 57
Corporate Finance 60
Global Financial Markets 63
Where Are these Trading Floors? 73
The Trading Floor’s Relationship with Clients 75
The Loan Portfolio and the Funding Department 76
Conclusion 80
Discussion Questions 81
CHAPTER 4
What Does It Mean to Trade? 83
PACAM Treasury Trade 85
Supermart Interest Rate Swap Trade 94
A Structured Equity Product 108
Conclusion 118
Discussion Questions 119
CHAPTER 5
What Is the Market and Why Does It Move? 121
What Is the Market? 123
Price Fundamentals: Macroeconomics 128
Price Fundamentals: Company Specific News 135
Supply and Demand 140
Conclusion 142
Discussion Questions 143
CHAPTER 6
How Do Traders Make a Market? 145
PACAM Treasury Trade 148
Supermart Interest Rate Swap Trade 158
Equity Structured Product Trade 163
A Typical Trader Day 166
Conclusion 168
Discussion Questions 169
CHAPTER 7
How Is Proprietary Trading Different
from Market Making? 171
Proprietary Trading Desk Overview 173
Proprietary Desk Liquidity 176
How Market Makers Are Similar to Proprietary Traders 180
Trading Book Accounting 186
Trader Capital Allocation 187
Conclusion 188
Discussion Questions 189
CHAPTER 8
What Is the Relationship Between Sales and Trading? 191
A Day in the Life 195
Know Your Client 199
Managing the Client Relationship 201
Sales Person Stereotypes 209
Conclusion 211
Discussion Questions 211
CHAPTER 9
What Role Does the Research Analyst Play? 213
The Role of a Credit or Equity Analyst 215
Conflict of Interest 221
The Economists and Strategists 222
Desk Analysts 225
Conclusion 226
Discussion Questions 227
CHAPTER 10
What’s So Special About Trading Derivatives? 229
Bond Intermediation 231
Derivative Intermediation 234
Counterparty Credit Risk 241
Illiquid Derivatives Intermediation 246
Conclusion 248
Discussion Questions 249
CHAPTER 11
Where Does Structuring Fit? 251
The Deal Origination 252
Deal Negotiation 255
Deal Closing 260
Conclusion 263
Discussion Questions 264
CHAPTER 12
Where Are the Quants? 265
Pricing Models and What They Do 266
Risk Management Models and What They Do 271
Financial Market Evolution 274
Quants’ Relationship with the Trading Floor 275
Conclusion 277
Discussion Questions 278
CHAPTER 13
What Are the Risks? 279
Market Risk 281
Credit Risk 287
Other Risk 292
Conclusion 295
Discussion Questions 296
CHAPTER 14
How Do We Manage These Risks? 297
New Product Approval Process 299
Market Risk Limits 304
Credit Risk Limits 307
Learn from Experience 309
Conclusion 312
Discussion Questions 313
Epilogue 315
Glossary 317
Index 341
