Prop trader vs. trader @ major IBs

[FredBloggs]

Quote from pdicartery:

What is the difference between them? What do traders at major IBs do? Do they also trade for the firm or do they mainly execute customer's trades? I am just not too sure what those traders at IBs do that make them so much money...

Do they generally have larger capital allocated to them to trade so their bonuses are bigger?

Do they require higher or more sophisticated math (like stochastic calculus, a lot more modeling and quant analysis) than prop trading business?

Why is it hard to go from working as a prop trader to a trader at major IBs? or more generally, why do they look down on us (if any) ?

basically, i think its something like this:

at a bank, they trade off of 4 things - fundamentals, some technicals & news/events, customer order flow, and market making (mostly automated now).

positions tend to be built and held for the longer periods based upon the fundamental view, using the other 3 pillars of opportunity.

no bank trades the same as someone else. each have their own ways of dividing up departments, job definitions etc - also depending on market.

what all these et blow hards fail to realise is that most banks money comes from trading the otc markets, where as the average et blow hard has no knowledge of the otc market - yet alone understanding - and assumes everyone trades at an exchange.

so in a bank a trader may be a broker and a market maker at the same time. or, he may be building a position based on his fundamental view and horizon of a few months based off the opportunities he has from the knowledge of customer order flows.

a lot (not all) of what batman says is actually quite true. most is not as sophisticated as most think. i believe his story of the old school dude. not sure about long only!

now lets look at the screen monkey in a 'prop shop' he is only trading off news and technicals probably. he has little awareness of fundamental (he doesnt need to). he has no access to customer order flow - because there are no customers where he works. his main job whether he realise it or not in the market is to provide liquidity - sometimes he may also make money doing this. he probably has little awareness of otc markets. often, his time frame to hold is minutes, not months.

in other words, his skills required are a million miles off those of a bank trader.

im not saying the screen monkeys skills are any less hard to acquire (probably harder in fact), or he is any less down on the food chain - just that its a different job requiring different skill sets.

a pilot of a cruise liner may make as much $$$ as a commercial aircraft pilot. they are both called a pilot, but neither one can do the others job. the problem is, that many traders at prop shops (especially on et) are pilots of tug boats in the harbour, not cruise liners like they talk themselves up to be!

 

[rosy]

Quote from pdicartery:

What is the difference between them? What do traders at major IBs do? Do they also trade for the firm or do they mainly execute customer's trades? I am just not too sure what those traders at IBs do that make them so much money...

Do they generally have larger capital allocated to them to trade so their bonuses are bigger?

Do they require higher or more sophisticated math (like stochastic calculus, a lot more modeling and quant analysis) than prop trading business?

Why is it hard to go from working as a prop trader to a trader at major IBs? or more generally, why do they look down on us (if any) ?

traders at IB are generally marketmakers making money on the bid/offer spread from the order flow coming in. They do not make money on exchnage traded securities. For example, an FX spot trader at a large bank bids currency X at 19 and offers it at 20 while the prop trader trades through hotspotFX buys at 20 and sells at 19. The more complex the derivative the wider the spread and higher the fees for the bank.

As far as math, try pricing a SBB 25 delta payer with quarterly lookbacks in some illiquid market

 

[Cutten]

Lots of ways to trade at IBs. Here are some of the main ones I'm aware of:

1) Dealing. Basically facilitating customer order flow, i.e. market-making. Profit comes from bid-offer spread, having greater price-knowledge than customers, and knowing customer order flow & positions better than customers. Examples - FX trading; block trading of stocks; government bond trading.

2) "Arbitrage". There are very few true arbitrages, but many semi-arbs around in the market. Basically this involves calculating the true value of an asset as precisely as possible, then trying to acquire another version of the asset for a different price, and pocketing the difference. The necessity of using leverage to get a decent return in arbitrage is what prevents the vast majority of these trades from being risk free (in addition to the usual problems of execution failure and counterparty risk). Examples: options/volatility arbitrage; basis trading; cash/futures arbitrage; convertible arbitrage. Newer products like credit derivatives, swaps, exotic options etc often provide fertile ground for arbing.

3) Speculation. Basically punting on asset price changes. Examples: global macro bets; "risk arbitrage" (punting on takeovers); long/short equity investment; statistical "arbitrage"/pairs trading.

Dealing usually requires having a serious institutional presence in the market, because most products dealt are not traded on exchanges. You need to be credible, and credit-worth enough for people to trust you to be able to handle large size orders and not default or play silly buggers.

Arbitrage usually requires either a very efficient execution setup, or (more often) advanced quantitative modelling and valuation skills. Cargill can arb grain cash/futures much cheaper and faster than you. Goldman's team of quants can work out the implied value of an exotic FX swaption portfolio more accurately than some daytrader.

With speculation, there is nothing stopping you or I from having better ideas than the prop desk at Goldman Sachs. It's one of the few level playing fields in terms of outright edge. However, they get large base salaries, and are paid a call on their performance. Whereas an independent trader takes 100% of his losses and gets no salary. On the flip side, an independent trader has no pressure from management, and has more fleibility than any IB trader.

 

[Cutten]

Quote from illiquid:

Aren't the skills most individual screen traders develop and use that are suitable for their personal trading good for that and that alone, esp from institutional point of view? Sure you can show them a steady track record, but if it all comes down to years of "tape feel", jumping on a few contracts or few hundred shares at a time for even a decent income, it would seem like no one would take you seriously. Not that I would know anything beyond what I do, but I'm assuming the type of trading an individual does when risking his own capital is probably alot further away from those who trade institutional BP than most would tend to believe, not just difference in position sizing etc.

The hidden risk for those younger ppl who have a chance to somehow start straight out trading their own capital is that what you know/will learn really doesn't have much application beyond your own account. What happens when what you know stops working, or for some reason or another you're forced to look for a paid position in the industry? You're pretty much stuck. "Read the tape pretty well for five years" doesn't really impress anyone, does it?

I pretty much agree with this.

 

[minitrade]

Quote from frank grimes:

This place has gone real quick to unreadable. I have traded buy side, sell side, specialist, etc.. now everyone here knows everything? I trade on my own now, and still do 99% of my trades through the floor. I laugh and gag at most of the "pro traders" that post here. This place has become the Chappelle Show

No, the Chappelle show's got more humor than this forum, and I'm sure quite a few of the quotes apply to some posters of this board


Tyrone Biggums: Remember what the Bible says: He who is without sin, cast the first rock. And I shall smoketh it.

Tyrone Biggums: That's impossible, Rhonda. How can you sleep when you're high on crack? Chinese riddle for you.

Mark-ass marks, trick-ass marks, punk bitches and skip-skap-skanks and scallywags. Hoes, heifers, hee-ha's and hoolihoos.

 

[meskhot]

Quote from pdicartery:

Why is it hard to go from working as a prop trader to a trader at major IBs?

Well I have done the exact opposite...
I left a trader position in a IB to join a prop firm to daytrade...

I was a prop trader at a bank for 6 years, trading HY, EM bonds and currencies. I had decent limits (up to EUR 60 million, to simplify), and a limited but decent freedom in my trading.
I was doing arbitrage (CDS VS bonds) but must of the positions were purely directional and speculative.

To trade, I had to call Market makers, who made their living mostly taking the other side of client flow.

In theory, you can expect to take home 6-7% of your profits as a yearly bonus. (Of course it depens on the banks, the higher your credit limits, the lower your %age)

However, I was fed up by 2 things :
* Corporate politics. A losing trader can get a bonus with a good lobbying.
*I was not one of the top dogs, but I made reasonable money consistently. However, I think I NEVER had my expected bonus... There always was a good reason not to fully pay us... Another desk having a bad year, etc...

For those reasons I decided to have a go at daytrading in a prop shop. And I can tell you after a few months that I found it EXTREMELY more difficultthan what I was doing... So believe me, don't let anybody look down on you!

 

[fader]

Quote from FredBloggs:
basically, i think its something like this:
at a bank, they trade off of 4 things - fundamentals, some technicals & news/events, customer order flow, and market making (mostly automated now).

Quote from Cutten:
Lots of ways to trade at IBs. Here are some of the main ones I'm aware of:

Quote from meskhot:
Well I have done the exact opposite...
I left a trader position in a IB to join a prop firm to daytrade...
I was a prop trader at a bank for 6 years, trading HY, EM bonds and currencies.

excellent thread - can one of you folks or anyone else speculate as to which area of trading was the largest contributor to Goldman's $16 billion in net prop. trading revenues (the figure from one of the earlier posts in the thread) - i am guessing it's not marketing making? - i haven't verified this number, but i suspected their prop. trading profits were significant, however, this is a staggeringly large number, almost on par with government's own money printing press...thanks in advance, all the best.

 

[meskhot]

The biggest part of these revenues are not coming from "pure speculative trading, but mostly on safer businesses

IMO, these are the best contributor to the revenues :

* Underwriting Bonds & Equities.
For ex when Goldman leads the underwriting of a $1B issuance of an EM or HY bond, you can imagine the size of the fees... On top of that, they keep a part of the issuance in their books, and most credit did extremely well this year.

* Mergers & Aquisitions, and all sort of corporate events. The fees are huge

* Underwriting CDOs (Collateral Debt Obligations) and all sort of securitizations. It is an extremely profitable business with no risk

* Market making of Bonds, Swaps, CDS, currencies, options, repos etc...
It is extremely profitable. On a $10M CDS (regular size) on a credit trading at lets say 200bp, the bid offer can be 10 bps... Just imagine knowing they do a n enormous volume every day.

* Last, the "risky part", trading...

And this is not exhaustive

 

[squadron leader]

genius fred bloggs....genius.

i think that is one of the most coherent comments i've ever read on et.

now lets look at the screen monkey in a 'prop shop' he is only trading off news and technicals probably. he has little awareness of fundamental (he doesnt need to). he has no access to customer order flow - because there are no customers where he works. his main job whether he realise it or not in the market is to provide liquidity - sometimes he may also make money doing this. he probably has little awareness of otc markets. often, his time frame to hold is minutes, not months.

in other words, his skills required are a million miles off those of a bank trader.

im not saying the screen monkeys skills are any less hard to acquire (probably harder in fact), or he is any less down on the food chain - just that its a different job requiring different skill sets.

a pilot of a cruise liner may make as much $$$ as a commercial aircraft pilot. they are both called a pilot, but neither one can do the others job. the problem is, that many traders at prop shops (especially on et) are pilots of tug boats in the harbour, not cruise liners like they talk themselves up to be! [/B][/QUOTE]

 

[MichaelJ]

This is fascinating, meskhot. I currently work in an institution, somewhat associated with the credit trading side (though I am not a trader).

I have a question. You state, first: "most of the positions were purely directional and speculative" and you did this in high yield, emerging mkt bonds and FX.

Then, you found later daytrading in a prop shop extremely difficult (which I agree, it is darn difficult).

So my question is, why was it easier to make money at your bank in HY, EM and FX trading speculatively than at the prop shop? Could one not do the same instruments in the same way you did at the bank?

Now I'm suspecting the reason is, being at the bank gave you the ability to actually trade in HY and EM - which maybe have not everyone in the world watching them, thus more inefficiencies - whereas most individual traders couldn't deal with banks unless they had a lot of capital (like a hedge fund) and thus other dealers could treat them as a valid counterparty? For example, I think I would need at least $25 million (probably even 50 or more, do you think?) capital to start doing relative value credit trading, just to get dealers' attention.

I ask this because I view two alternatives: a) putting my nose to the grindstone, enduring the politics as you say, and trying to get a trading position - ideally prop, not market making - where it is - maybe - "easier" (relative to being an independent trader) to take money out of the markets, vs b) the high risk prop shop (or independent retail) type of venture.

Quote from meskhot:

Well I have done the exact opposite...
I left a trader position in a IB to join a prop firm to daytrade...

I was a prop trader at a bank for 6 years, trading HY, EM bonds and currencies. I had decent limits (up to EUR 60 million, to simplify), and a limited but decent freedom in my trading.
I was doing arbitrage (CDS VS bonds) but must of the positions were purely directional and speculative.

To trade, I had to call Market makers, who made their living mostly taking the other side of client flow.

In theory, you can expect to take home 6-7% of your profits as a yearly bonus. (Of course it depens on the banks, the higher your credit limits, the lower your %age)

However, I was fed up by 2 things :
* Corporate politics. A losing trader can get a bonus with a good lobbying.
*I was not one of the top dogs, but I made reasonable money consistently. However, I think I NEVER had my expected bonus... There always was a good reason not to fully pay us... Another desk having a bad year, etc...

For those reasons I decided to have a go at daytrading in a prop shop. And I can tell you after a few months that I found it EXTREMELY more difficultthan what I was doing... So believe me, don't let anybody look down on you!