It was previously possible for traders working in investment banks to trade with the bank’s own money. They cannot do this anymore due to the ban in proprietary trading. They now just bring buyers and sellers together. Their work is however not easier. According to Anton Kreil, a former Goldman Sachs trader, now a trainer, investment bank jobs are boring. He claims that up to 80% of the banks’ business involves merely matching up buyers with sellers. Only 20% involves actual trading which, he claims, is mostly automated and no human skill is required.
Not all traders agree with Kreil. David Hesketh, formerly a Merill Lynch trader for Bank of America says junior traders at investment banks require as much skill as they did before. In addition to acting as agencies who match buyers to sellers, they are market makers, buying securities in anticipation of later selling to customers. This requires accurate judgment to know how much the client wants, and how much he can pay.
Hesketh says that when a trader is making a market, he will first have to work out the amount he would be willing to buy or sell the security at. He would then need to determine how much he would be ready to buy or sell at the given prices. “Bids” and “Offers” are the terms which market-makers use. An “Offer level” is also known as an “Ask level”. A “bid” is the money a trader is ready to pay for a security. The offer is what he is willing to get for the security. A person in the market is said to “hit” the trader’s bid when he wants to sell to a market-maker. One is said to “lift” an offer when he wants to buy from a market-maker. To run a “risk” or “position” occurs when a market maker buys from a market player in the hope that another person will lift his offer later.
Traders can decide when to release a position to the market. It is not always sensible to offload a position on acquisition. It is uncommon to have two clients hitting your bid and lifting your offer simultaneously so one might have to hold on to the risk. The duration you hold the risk depends on liquidity and complexity of the security. Highly liquid products such as currency pairs can be held for seconds while complex securities may take weeks.
Regulations such as the Volcker rule complicate matters. The rule defines what is proprietary trading (Betting with banks’ money), and market-making (assisting the bank’s clients to buy and sell assets). The rule sometimes forces traders to close their position at a loss. To succeed as a market-maker, one needs to always have an opinion on price and demand of a product and understand how it is traded, its liquidity, and how long he has to hold it. This is said by Will De Lucy, co-founder at Amplify Trading, trainers and trade simulators run for big banks. De Lucy adds that, while as a trader you only have to know how and why a product price is moving, as a market-maker you have to understand the extra complexity of how to unwind the trade. Hesketh concludes that it’s incorrect to say no skills are required at banks. He claims that if possible, banks would prefer robots since they do not require desks, computers, and pensions.