IB desk revenue

[globalarbtrader]

Here you don't talk about simple analysis of non marketable client orders the banks have on its brokerage book and front running , right? You are talking about deeper analysis of the client needs in order to offer them what they want ( with an edge for the bank...). I guess for most people on this site, bank customer flow trading is simply for example, when an IB trader sees a large HF client posting a limit order on XYZ stock and the trader gets a bit of it before the HF...

No,it's usually a bit more complicated than that.

Take a desk trading corporate bonds. They'd be paid for bookrunning (essentially taking pricing risk away from the issuer). They'd be paid for market making (essentially taking liquidity risk out of the market, for a price). They'd be able to make some money creating demand by knowing what customers were holding which bonds.

And a lot of the time what you're buying and selling to the customer is different from what you're trading in the market. i.e. in my case I was trading exotic interest rate options.

Typically we'd offer a structured product to an institution (corporate or public sector). This would have an embedded derivative within it, which often you couldn't perfectly hedge (eg you'd often have to do a swap plus a european straddle, when the optimal hedge would be selling a bermudan call). So you'd make a trading profit on the mark to market difference between those; essentially charging a premium for taking on the hedging risk, and for access to the interbank market where the hedging can be done.

At the other extreme you might do a pure back to back deal with a hedge fund, which you hedged completely in the interbank market. Essentially the HF is renting your credit rating, and your access to the interbank market. At the time (early 2000's) we didn't use proper discount curves so the credit spread within the deal would look like profit.

So in an IB sometimes you're being paid for information, sometimes for having acces (oligopoly?) , sometimes for having a good credit rating, sometimes for taking certain kinds of risk... 'positioning' isn't really a big part of it except in very vanilla stuff like spot FX.

GAT

 

[garachen]

S

No,it's usually a bit more complicated than that.

Take a desk trading corporate bonds. They'd be paid for bookrunning (essentially taking pricing risk away from the issuer). They'd be paid for market making (essentially taking liquidity risk out of the market, for a price). They'd be able to make some money creating demand by knowing what customers were holding which bonds.

And a lot of the time what you're buying and selling to the customer is different from what you're trading in the market. i.e. in my case I was trading exotic interest rate options.

Typically we'd offer a structured product to an institution (corporate or public sector). This would have an embedded derivative within it, which often you couldn't perfectly hedge (eg you'd often have to do a swap plus a european straddle, when the optimal hedge would be selling a bermudan call). So you'd make a trading profit on the mark to market difference between those; essentially charging a premium for taking on the hedging risk, and for access to the interbank market where the hedging can be done.

At the other extreme you might do a pure back to back deal with a hedge fund, which you hedged completely in the interbank market. Essentially the HF is renting your credit rating, and your access to the interbank market. At the time (early 2000's) we didn't use proper discount curves so the credit spread within the deal would look like profit.

So in an IB sometimes you're being paid for information, sometimes for having acces (oligopoly?) , sometimes for having a good credit rating, sometimes for taking certain kinds of risk... 'positioning' isn't really a big part of it except in very vanilla stuff like spot FX.

GAT

Same thing. Rates trading. It was quite lucrative in the late 90s before pricing models and the computing power to calculate then became more commoditized.

Even vanilla swaps were ok. I remember a portfolio with over 30,000 swaps in it.

 

[marketsurfer]

I am not sure it is wise to use any IB desk revenue figures as motivation. The reason being that traditionally a lot of these desks trade off customer flow which gives them a huge edge that is not available to anyone not privy to that information. In addition if trading commodities they will likely have 'inside' knowledge of inventory, storage and transport etc again giving them a huge edge not available out of this environment.

GL

I was invested in a copper fund that owned the entire supply chain and was run by the workds greatest copper trader. Still lost about 80% on that one. A huge edge doesn't aleays translate to profits.

 

[londonkid]

I was invested in a copper fund that owned the entire supply chain and was run by the workds greatest copper trader. Still lost about 80% on that one. A huge edge doesn't aleays translate to profits.

That would never have happened at an IB desk though. The tap on the shoulder from risk would have happened way before any of that.

 

[londonkid]

Mostly programmers. Maybe 20 in sales and 20 in some type of trade support middle office role.

Worst losses I saw approached 10m a day during 9/11 aftermath. Minimal.

Most of the volatility was in the few spec positions but probably 90% of profit was customer flow. Nothing insidious about that. Banks have customers and make money selling them stuff. Trading is more about positioning your portfolio at opportune times when you can anticipate what your customers are going to want in order to be able to offer it to them at a 'reasonable' price.

It's a different view of the business which doesn't apply directly but has interesting implications for retail traders that, ideally, would be more of what is seen on this site.

If a serious conversation gains traction I'll put down some of my thoughts.

that's interesting. It would be interesting to know if the IB you worked for also had a prop division that used the customer flow to milk profits.

 

[aquarian1]

I don't work/ haven't worked/ at IB, I'm a retail trader (ES).

IB's president was interviewed and was boasting that their internalization of trades wasn't as high as some other companies. This is where they trade on customer against another not routing the trade to the floor.

So if A is selling 2097.75 and B is buying 2097.50 they can fill B at the bid and A at the ask making 0.25
Naturally if these are market orders with the computer can be programmed to fill B at 2097.25 and A at 2098.00 making 0.25 off each side or 0.50.

Customers can't complain (with any success) as IB reserves the right to trade against the customer taking the other side of the trade. Also if you call to complain on a fill IB says that the datafeed they use to settle disputes is not the datafeed they give to customers.

This happens a lot.
The reason I know is that I track the HOD and LOD. So for example if I am short at 2093 with a stop at 2098 they will often fill the stop at the 2098 even if the HOD is 2097.75.

That is they will fill me higher than the HOD.

While this is very annoying - you can't effectively argue against the house. They make and break the rules and the CME doesn't care.

As a victim of The MF Global "theft" (ah improper taking of money) from customer segregated accounts I know the CFC and CME don't give a hoot about their much ballyhoo ed real time matching of margins to CME levels.

----millions of internalized trades at 0.50 per trade is a lot of money---
Of course, this the the trading prg and nothing to do with the trading desk.

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the OP of the thread asked about movitation.
Schwartz made 20% per month for years - that should be enough motivation and more applicable.