How the Trading Floor Really Works PDF

How the Trading Floor Really Works

How the Trading Floor Really Works PDF reveals the key players on the floor, their roles and responsibilities, how they serve their clients, and how it all impacts the markets. It also explains important terminology, explains the world of trading both cash and derivatives, and much more.

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Category: Stock

Author: Terri Duhon 

Language: English

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A detailed look at what really happens in the front office of an investment bank and why

Trading floors have always fascinated people, but few understand the role they play in the world of finance today. Though markets rise and fall every day, the drivers of those are rarely explored. Those who understand the dynamics of trading floors will better understand the dynamics of global financial markets. This book reveals the key players on the floor, their roles and responsibilities, how they serve their clients, and how it all impacts the markets. It also explains important terminology, explains the world of trading both cash and derivatives, and much more.


What this Book Does and Does Not Do

What does it mean to make a market? What value do banks add to the financial markets? What risk do they take as a result? What really happens on the trading floor? What are the key roles and responsibilities on the bank trading floor? When does it all go wrong? These are the questions that this book answers. Because financial markets are continually evolving and there are so many unique financial products that are traded, this book does not attempt to burden the reader with too many technical details, nor does it try to address all the nuances of individual financial products. Instead, many financial products are simplified in order to use them as examples throughout the text. This book aims to establish a framework and some fundamental vocabulary for understanding how markets are made on trading floors and understanding the key roles and responsibilities of the
individuals who work there.

Who this Book Is For

For the pending or recent graduate who is looking for a job in financial markets, this book is a must. It is not theoretical; it is practical and easy to read and follow. It clearly explains how the financial markets work and what the purpose of the bank and the bank trading floor is, using clear examples. Anyone looking for a job in financial markets will be able to identify roles and responsibilities which are most appealing and best suited to their skillset.

This book starts with a foundation in basic financial products and participants then moves quickly into market making and risk taking. This book does not try to explain every product, nor does it try to teach financial math. It simplifies the financial market and makes it accessible to anyone who is interested. While the financial markets can be very technical, not every role on the trading floor requires a math degree. Most roles require an understanding of financial market dynamics and relationships between products, which this book provides.

For the financial market professional who is not sitting on the trading floor, this book is a crucial handbook. Many financial market professionals are familiar with financial products and financial market participants but still find the trading floor an opaque space. The people who work on trading floors often speak in shorthand and use a lot of vocabulary which is not easily decipherable. Even worse, people on the trading floor don’t have the time to help others really understand what’s going on. The current financial market professional may not need the first chapter of this book, which provides a financial market foundation, but instead might prefer to start at Chapter 2, “What role do banks play in financial markets?”

For everyone else, this book will put the bank’s role in the financial markets into context and explain what really happens on the fabled trading floor. Importantly, this book will help to decipher the conversations and the roles and responsibilities of the key players on the trading floor. The fact is that banks and their trading floors play a crucial role in the financial markets, but they don’t need to take as much risk as they have in the past. How to manage this without fundamentally changing or damaging the financial market dynamics is the key issue for everyone to consider.

Table of Contents- How the Trading Floor Really Works PDF


What Are Financial Markets? 1

Debt Markets 4

Equity Markets 11

Other Asset Classes 21

Derivative Markets 22

Conclusion 26

Discussion Questions 27


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


Which Part of the Bank Are We Talking About? 57

Corporate Finance 60

Global Financial Markets 63

viiWhere 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


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


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


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


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


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


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


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


Where Does Structuring Fit? 251

The Deal Origination 252

Deal Negotiation 255

Deal Closing 260

Conclusion 263

Discussion Questions 264


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

Contents ixConclusion 277

Discussion Questions 278


What Are the Risks? 279

Market Risk 281

Credit Risk 287

Other Risk 292

Conclusion 295

Discussion Questions 296


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


“How the Trading Floor Really Works is an invaluable resource for current MBAs, recent graduates and experienced financial market participants alike. For the novice about to join the trading floor ranks, it provides a base framework for understanding the world they are entering. For the investment banker, investor, portfolio manager or other financial expert who doesn’t work on the trading floor, it demystifies the “black box” of the trading floor in an entertaining yet informative way.”
Dr. Susan S. Fleming, Senior Lecturer, Johnson Graduate School of Management/School of Hotel Administration, Cornell University/Former Partner, Capital Z Partners, L.P.

“Written in a lively and digestible style, this clear and cogent book covers much more than the title suggests. In fact the book lays out much of the banking industry’s critical role in financial markets; the basic differences between various classes of financial instruments; and how trading businesses interact with other parts of a large complex financial institution. Not only for students and post-grads interested in financial markets, this book would be a great primer for anyone entering or working in a related field, such as clients, journalists, regulators, consultants and policy-makers. The vignettes and examples the author uses bring relevance and humour to this technical subject, as well as capturing the trading floor environment.”
Betsy Gile, Board Member, Deutsche Bank Trust Corporation/Board Member, Keycorp

“An easy and enjoyable read – even for somebody who has been on a trading floor for over 20 years. I learnt a lot reading it.  It has the balance of expertise written in an easy style with real examples – a valuable book for market professionals and also participants”
—Addy Loudiadis

About the author

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.

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