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How the Trading Floor Really Works

How the Trading Floor Really Works

Terri Duhon

ISBN: 978-1-118-53215-7 September 2012 368 Pages

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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.

Includes a foreword by Gillian Tett, author of Fool's Gold: How Unrestrained Greed Corrupted a Dream, Shattered Global Markets and Unleashed a Catastrophe.

Terri Duhon ( is a financial market expert who in 2004 founded B&B Structured Finance Ltd, which provides expert consulting and financial markets training . Her time on the trading floor has been documented in the book Fool's Gold as well as by PBS's Frontline.

Foreword xi

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