proprietary trading

Gambling Man

by Lionel Barber  · 3 Oct 2024  · 424pp  · 123,730 words

, he raked in £60m. Seven years on, life had become a lot more complicated – and a lot less interesting. New regulations curbed the high-risk proprietary trading which had earned the global investment banks billions before the global financial crisis. Right now, Misra was working at Fortress, a US asset management group

What Happened to Goldman Sachs: An Insider's Story of Organizational Drift and Its Unintended Consequences

by Steven G. Mandis  · 9 Sep 2013  · 413pp  · 117,782 words

in pretax profits, and fewer than three thousand employees. Steve Friedman and Bob Rubin, co-senior partners, had embarked on an aggressive growth plan—growing proprietary trading and principal investing, expanding internationally, and spreading into new businesses. John L. told me that his father had once fired him in the 1950s for

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in various areas of the firm—from being based in the United States to working outside the United States, from working in investment banking to proprietary trading, from being present pre- and post-IPO—combined with my academic training gives me a unique ability to gather and analyze data about the changes

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I had built enough goodwill to move internally and do what I was more interested in: being an investor. I hoped to ultimately move into proprietary trading or back to Principal Investment Area (PIA), Goldman’s private equity group. Many banking partners tried to dissuade me from moving out of M&A

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to make more money for the firm and yourself.” Today people ask me whether I saw the writing on the wall—that the shift to proprietary trading was well under way and would continue at Goldman—and whether that’s why I moved. To be honest, I didn’t give it as

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much about that, nor did I consider its consequences. One longtime colleague and investment banking partner pulled me aside to tell me that moving into proprietary trading was the smartest thing I could do and that he wished he could take my place. When I asked why, he said, “More money than

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and then a portfolio manager in Goldman’s FICC Special Situations Investing Group (SSG). We built it into one of the largest, most successful dedicated proprietary trading areas at Goldman and on Wall Street. Created during the late 1990s, SSG initially primarily invested Goldman’s money in the debt and equity of

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be in the business, you were out of a job, although it was likely many others would want to hire you. When I started in proprietary trading in FICC, I immediately noticed one big difference from the banking side. Although my new bosses were smart, sophisticated, and supportive, and as demanding as

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that the other firm had better people, ideas, coordination, relationships, or expertise, something that would negatively reflect on you or the firm (or both). In proprietary trading, there were no excuses for bad days of losses. We were expected to make money whether the markets went up or down. There was another

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profitable contributions. The fear of this transparency and the potential for failure kept many bankers from moving to trading. I later discovered that Goldman’s proprietary trading areas actually maintained a longer-term perspective than did most trading desks and hedge funds, where a daily, weekly, or (at most) monthly focus was

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of the largest asset managers are still Goldman’s clients. GSAM became a strategic priority, in part, because it was not as capital intensive as proprietary trading and it offered consistent fees, which were a percentage of assets under management. When Goldman went public, establishing the asset management business proved to have

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consistently underperformed Goldman’s proprietary traders, an outcome that has led some investors to suggest that the best investors and traders at Goldman went into proprietary trading to manage Goldman’s money and not that of clients—claiming that this is a classic example of Goldman putting its interests ahead of its

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or start their own, so exceptional traders began to make partner early. (One of the most notable exceptions was Eric Mindich, who ran equity arbitrage proprietary trading and made partner at the age of twenty-eight.) The new attitude began to seep into other areas and then into banking. The idea that

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Mix In its quest for growth and profits, Goldman also began to adjust its business mix. The prioritized opportunities for growth required more capital: trading, proprietary trading, merchant banking/principal investing, and international. Trading and principal investments grew 20 percent annually from 1996 to 2009, whereas investment banking grew 7 percent. The

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also played multiple roles, including proprietary investing and investing with clients, before he became CEO. His rise in the firm reflected the pressures and changes. Proprietary Trading Becomes a Larger Percentage of Revenues When one looks at the business principles that John Whitehead wrote in 1979, it is a particular challenge to

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reconcile the goals of proprietary trading with putting clients’ interests first, or the goal of being the leading adviser. Proprietary trading has one client: Goldman. As proprietary traders, we were walled off from client activity. We were not there

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too busy to have long conference calls to discuss it. But generally we were in our own silo. Proprietary trading at Goldman did not start in the 1990s. Bob Rubin joined the risk arbitrage proprietary trading area in the equities division in 1966, and by the 1980s it was considered one of the most

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own capital versus being a mere “market maker.” It was the size of the losses from proprietary trading in 1994 that caused many observers to think the firm would not survive. How big and important are proprietary trading and principal investing activities at Goldman? Glenn Schorr, a Nomura Securities equity research analyst covering Goldman

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stock, estimated that the Volcker Rule, which is intended to restrict proprietary trading and principal investing at investment banks, would impact 48 percent of Goldman’s total consolidated revenue. To put this into context, he estimated the impact

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percent of total consolidated revenues of Morgan Stanley, Bank of America, and J.P. Morgan, respectively. Certain Goldman client-oriented sales and trading desks had “proprietary trading” operations. They got to see client order flow, but theoretically they existed to provide liquidity or “facilitate client trades.” This was prevalent in less liquid

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have been easy to immediately match a buyer and a seller. It was also prevalent in relatively lightly regulated markets such as foreign exchange. Generally, proprietary trading on client-oriented sales and trading desks was less frequent in highly transparent and highly regulated areas such as equities. Merchant Banking and Private Equity

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partners also had to trust that it was for the greater good to have Americans and British flying in and out all of the time. Proprietary trading internationally was simpler, and it was seen as a high-margin business, because it was easily scalable—it took the same time for a trader

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no longer personally liable for covering losses, the constraints on risk-taking (not just financial but also reputational) were loosened. Those in areas such as proprietary trading had the opportunity to make more money than banking partners if they made the firm significant amounts of money. The incentive was to ask for

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, instead of Hank Paulson, and that may have contributed to Paulson’s decision to leave to become secretary of the Treasury. When I was in proprietary trading, one of the partners received a voicemail from Paulson, CEO at the time, on which I was copied. It related to risk. The partner forwarded

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opportunities. The firm reacted by significantly increasing compensation, becoming the highest-paying firm on Wall Street. Also, compensation per employee increased with the profits from proprietary trading and growth—and the changes. For example, in 2004 the average compensation per employee at Goldman was $445,390, compared with $279,755 and $199

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.11 As Lowenstein portrays it, when Rubin and Friedman took over in 1990, Goldman started getting over its previous inhibitions against using confidential information for proprietary trading. In effect, clients hadn’t fully realized that the public image of higher ethics was changing at the firm, and the firm slowly and covertly

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there was a boom in investment banking, stock market, and tech industry activity and the firm was growing at a rapid pace internationally and in proprietary trading. I had two voicemail boxes that could accept some seventy to one hundred voicemails each. I regularly went home at 2 or 3 a.m

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, “If both clients agree, or if the sophisticated client signs a big boy letter, then it is okay.” Because of Goldman’s market share and proprietary trading, and because Goldman’s growth coincided with a booming market, issues came up often. Eventually, the key senior person who reviewed conflicts and was seen

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its foreign exchange desk to handle the currency exchange for the purchase price. If Goldman missed the deal—meaning our bankers were not involved—then proprietary trading might possibly be involved in merger arbitrage (oftentimes, Goldman would make more money in proprietary merger arbitrage than if it had been hired to advise

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said the top executives neither had the capability nor dedicated the time to interpret, discuss, and debate risk. He said that Goldman’s focus on proprietary trading and its profits had caused the firm to invest in systems and groom future leaders who understand it. He explained that Goldman’s biggest advantage

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large, complex organizations. But he said if one firm could, it was probably Goldman, which seemed to prioritize risk management because of its dependence on proprietary trading and because it had the cultural heritage of teamwork, as well as its near-death experience in 1994. While some analysts of the crisis have

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, encourages the discussion and disagreement needed to arrive at the best answer. For example, when I was in proprietary trading in the early 2000s, I participated in meetings wherein the portfolio managers of proprietary trading groups presented their ideas and strategies to other proprietary portfolio managers in other groups. Once, a manager presented a

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precisely what outside boards of directors at banks typically lack. Blankfein’s background in trading made him a wholehearted supporter of a strategic move toward proprietary trading. He acknowledged the challenges of balancing agency business with a growing proprietary business but viewed the move as not only a “momentous strategic opportunity” but

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still lived up to its core values and business principles after the rapid growth and shift in Goldman’s business mix toward proprietary trading. Management had been enthusiastic about the proprietary trading business since the early 1990s but approached it carefully, with top talent and “attentive management,” and, financially, it was an “unqualified success

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has remained true to its traditional values and business principles given changes to the firm’s size, business mix and perception about the role of proprietary trading. Clients said that, in some circumstances, the firm weighs its interests and short-term incentives too heavily.”43 Clearly, Goldman knows that it has a

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Steve Friedman take charge as co-senior partners and co-chairs of the management committee, expanding global operations and seeking other opportunities for growth, including proprietary trading (O, C). They make partners’ compensation more dependent on performance than on tenure, and they initiate the firm’s first lateral hiring initiatives (O, C

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department that invested the firm’s own capital, becomes, at age twenty-seven, the youngest partner in the firm’s history, signaling the importance of proprietary trading (O, C). Restrictions are put on the withdrawal of partners’ capital (O). Goldman opens a Beijing office (O). 1995: Corzine replaces the twelve-member management

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December, anticipating a housing crisis, Goldman takes a negative stance on the mortgage market but does not announce this publicly. Head of the Special Situations proprietary trading area in FICC, who reportedly was paid a $70 million bonus (larger than the CEO’s reported $53 million), leaves Goldman—supposedly because he was

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time had more than $10 billion in assets from clients, tumbles significantly, as do similar hedge funds. Half of the members of the Principal Strategies proprietary trading team in the equities division create a fund called GSIP in GSAM. Blackstone, an alternative asset manager and financial advisory firm, goes public, adding to

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in Rolling Stone, which includes the often-quoted “vampire squid” analogy.4 A Goldman subsidiary settles with the SEC for $1.2 million over improper proprietary trading by employees. The SEC charges a former Goldman trader and his brother with insider trading based on information the trader obtained while at Goldman (R

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should have disclosed and that the SEC did not show that he acted with the intention of defrauding investors. Goldman starts to shut down several proprietary trading groups, and many proprietary traders begin to leave as the SEC fines Goldman $225,000 for violating a rule aimed at regulating short selling (R

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Rule, a section of the Dodd–Frank Wall Street Reform and Consumer Protection Act, is slated to go into effect in August (R). It mandates proprietary trading restrictions, with the goal of preventing US banks from exposing customers to excessive risk through speculative investments. The rule would bar banks from trading for

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each and every day. About the Author STEVEN G. MANDIS worked at Goldman Sachs from 1992 to 2004 in the investment banking, private equity, and proprietary trading areas. He assisted Hank Paulson and other senior executives on special projects and was a portfolio manager in one of the largest and most successful

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proprietary trading areas at Goldman. After leaving Goldman, he cofounded a multibillion-dollar global alternative asset management firm that was a trading and investment banking client of

The Crisis of Crowding: Quant Copycats, Ugly Models, and the New Crash Normal

by Ludwig B. Chincarini  · 29 Jul 2012  · 701pp  · 199,010 words

large pension funds by a number of investment advisors. Putting together a portfolio of convergence trades in fixed income, as was carefully crafted on the proprietary trading desks of Salomon Brothers in the early 1980s and later by the hedge fund LTCM, was another good idea. Carefully identifying characteristics of equities that

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Salomon Brothers to sublime perfection. They were the new financial juggernauts, and everyone wanted a piece of their amazing performance. Soon other institutions, including the proprietary trading desks of Goldman Sachs, Morgan Stanley, Lehman Brothers, and multiple new hedge funds, began to reverse engineer LTCM’s strategies, all of which involved leverage

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the profit and losses (P/L) of the Meriwether trading group and the rest of Salomon Brothers.3 FIGURE 2.1 Profits of Meriwether’s Proprietary Trading Group at Salomon versus the Rest of the Firm Note: For 1998, the LTCM P/L is computed as the –92.04% year-to-date

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,159 million. Figures from after 1993 compare Salomon with LTCM. Remember that some members of the Meriwether group had remained at Salomon to run that proprietary trading group. In 1988, the team’s success propelled Meriwether to a perch as Salomon’s vice chairman. His traders were fiercely loyal to Meriwether, in

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, making it the largest start-up hedge fund to date. More than $100 million came from the partners themselves, especially those who came from the proprietary trading operation that Meriwether had headed at Salomon Brothers. Meriwether and Rosenfeld originally asked Warren Buffett to invest. After all, Buffett was familiar with Meriwether’s

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President Bill Clinton. 3. From 1990 to September 1995, Salomon Brothers separated out the pretax profits from its proprietary trading business. Although Meriwether left Salomon in 1991, his entire trading team kept operating the proprietary trading group, so we use this as a performance proxy. In Figure 1.1, LTCM's profits from 1994

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his boys had left behind, was the first copycat in line. But there were others, including Goldman Sachs Asset Management internal proprietary trading, Convergence Asset Management, which launched in January 19985 , other proprietary trading groups at other major investment banks, and hedge funds. The second group is the puppies. These are small traders in

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the expensive security, and waits for the two prices to converge. LTCM had a portfolio of these trades, as did many other hedge funds, including proprietary trading desks such as the Salomon Arb group. A typical relative-value trade might involve companies whose operating assets were held by two distinct, publicly traded

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firm’s new CEO, was in the midst of merging the new firm, Salomon Smith Barney, with Citicorp and wanted to scale back Salomon’s proprietary trading arm. On July 7, 1998, Salomon officially shut down its U.S. bond-trading group. The co-chiefs of Salomon Smith Barney, Jamie Dimon and

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lending model. Larger firms may also naturally diversify into many businesses. A large investment or commercial banking firm might have an investment banking division, a proprietary trading division, a hedge fund business, a client brokerage business, a private equity business, a private wealth management business, and so forth. The sheer number of

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been a larger, more diversified firm. If LTCM had had an investment banking department and an asset management department, these divisions might have buffered the proprietary trading group’s losses. It is also important to separate the distinction between size and systemic risk. LTCM’s specific risk created systemic risk, not so

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equity strategies slowly tempted more and more copycat funds to enter the space. The new arrivals included hedge funds, hedge fund groups, and investment banks’ proprietary trading desks. The space was gradually getting crowded, but the quants underestimated the significance of this crowding. The Erratic Behavior of Quant Factors Quantitative equity funds

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market and investing it in the longer end. Interest and dividends from investing, less interest paid on borrowing, netted the firm about $2 billion. The proprietary trading group made about $8 billion, and commissions made about $2 billion. The firm got 69% of its capital markets net revenues from

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proprietary trading. From 2006 to 2007, Lehman’s equity net revenues grew. Its fixed-income net revenues fell by 29%, though they were still large and positive.

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Morgan Stanley saw their profits balloon. In 2009, Goldman Sachs had the highest profits in their history: a whopping $13.39 billion after taxes. The proprietary trading and investment division generated $17.3 billion of these profits. By the third quarter of 2010, Goldman Sachs reported profits of $5.967 billion. Of

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that, $8.6 billion came from the proprietary trading and investment division. Morgan Stanley did not do as well as Goldman Sachs in 2009, partly because it was still writing off bad real estate

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, including working as managing director at Morgan Stanley. At Morgan Stanley, he created and oversaw the capital structure arbitrage group and a long/short equity proprietary trading group, both of which focused on exploiting market-neutral trading opportunities across and within the fixed-income, credit, and equity markets. He was also extensively

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to fail. It wasn't the mixing of their businesses. Even a standard bank might decide to hedge its real estate exposure, which is not proprietary trading. If this hedge goes wrong, the plain vanilla bank could still lose lots of money. We must think carefully about the Volker rule. 7. The

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brokerage operations handle clearing and trade settlement, as well as other back-office operations, for hedge funds and other money managers. Arbitrage (Proprietary Trading) An arbitrage group, sometimes called the proprietary trading group, is the part of any investment bank that most closely resembles a hedge fund. Investors in this very diverse area look

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these mortgage pools—especially subprime mortgage pools—and sold them to investors. They also traded mortgage-backed securities on behalf of clients and for their proprietary trading groups. At Lehman, this group was also heavily involved in securitizing and trading asset-backed securities (ABS). An asset-backed security, not surprisingly, is any

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Volcker rule. The first rule prohibits the banking entity from engaging in proprietary trading. The second rule places a limit on a bank’s involvement in hedge funds and private equity. Proprietary trading provides a large amount of profits for investment banks. Proprietary trading means that the bank is buying and selling securities with its own

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Goldman Sachs was the principal owner of the funds. These would no longer be allowed under the new rule. Goldman Sachs also had a large proprietary trading desk generating almost 50% of the firm’s profits. For example, in 2007, the trading and principal investments group made 64% of Goldman Sach’s

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revenues.8 This proprietary trading desk would have to be shut down. In fact, Morgan Stanley has already begun preparing for these new rules and the head of their quantitative

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rule is to prevent banks that are protected by the public sector safety net from having risks due to investments in hedge funds and/or proprietary trading desks which can increase their risk substantially. For example, take MF Global, which was a successful broker-dealer. The firm went bankrupt because of

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kept the profits, and when they went poorly, they were bailed out. It might also be that assessing the risk of companies that engage in proprietary trading is harder for outsiders. For the most part, these proprietary activities played a small role in the financial crisis. Although one could argue that the

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LTCM that one of the advantages they had when they were at Salomon was the diversification of business lines. That is, a bad year in proprietary trading could be buffered by a good year in investment banking. Similarly, a bad year in investment banking could be buffered by a bad year in

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proprietary trading. During the financial crisis, it was the good performance of the prop trading desks of many investment banks that offset the massive losses from the

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bank’s real estate exposure. A more plausible reason for removing proprietary trading from the banks would be due to conflicts of interest. That is, people have believed for years that Goldman, as well as other banks, use

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their client trading desks as information sources for their own proprietary trading activities and thus have an unfair advantage. From this perspective, the rule might make some sense. However, there are potential problems with the separation of

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proprietary trading. First, short-term proprietary trading has become a particular target, which was not a central problem with investment banks. Many sovereign nations are also worried that restricting investment banks

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might also cause excessive volatility, less liquidity, and higher costs for governments issuing debt. Maybe the rule should restrict its scope to just not allowing proprietary trading from traditional banks that take customer deposits. The overall danger is that various new problems will be introduced with this legistlation. The second part of

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or hedging activities, buying and selling securities in the context of an insurance business, transactions in U.S. government or government-sponsored enterprise activities, and proprietary trading by a non-U.S.-controlled banking entity trading outside the United States. 7. See Enrich and Stevens (2012). 8. This group made a total

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-dealer that is permitted to trade directly with the Federal Reserve. These firms are required to participate regularly in auctions of U.S. government debt. proprietary trading group A group within a company devoted to trading the bank's capital to make profits for the bank. put option The right, not obligation

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rule The rule proposed under Dodd-Frank to limit investment bank activities, including limited ownership of hedge funds and private equity, and the absence of proprietary trading. Bibliography “A Guide to FRB/US. A Macroeconomic Model of the United States.” Macroeconomic and Quantitative Studies Federal Reserve Note, October 1996. “Bear Stearns’ Jimmy

The Greed Merchants: How the Investment Banks Exploited the System

by Philip Augar  · 20 Apr 2005  · 290pp  · 83,248 words

powerhouse offers investment banking services to corporates and governments, and sales and trading services to institutional investors in virtually every financial instrument, and also includes proprietary trading. The conflicts of interest this range of activities creates were clearly set out by Morgan Stanley’s then chairman, Philip Purcell, in a speech at

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, real estate financing, and prime brokerage services – such as stock lending and financing, clearing and settling – for investors. Using the firm’s own money for proprietary trading in markets and for principal investing in funds and other assets is also considered essential to making the profit numbers meet the expectations of staff

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too – and fast.’4 Analysts of the investment banks speak of ‘the information they gain from looking at the flow going through their desk. The proprietary trading profits of the big investment banks are testimony to that.’5 In most countries, dealing ahead of client orders – known as front running – is illegal

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, it is a heady brew. This is an industry taking a great deal of trouble to join up the dots at every conceivable permitted level. Proprietary Trading Money gets made in trading by taking a turn out of client business and from deliberately taking positions in the hope of making a profit

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. Both ways involve proprietary trading. Lisa Endlich’s insider–outsider account of Goldman Sachs published in 1999 shows how it worked in the nineties: ‘Goldman Sachs’s service to its

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of its client relationships, the firm also had a unique window on global capital movements.’13 It’s unusual to get such a full account: ‘Proprietary trading went forward because it provides the firm with a sizable and diversified stream of revenue and can be complementary to its client businesses. When market

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conditions are inhospitable to underwriting and sales activities (for example in a bear market for bonds and stocks) proprietary trading can be a source of substantial profits for the firm… As Goldman Sachs provided clients with more innovative products and investment opportunities, it invested its

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’ – although in the post-Spitzer era not many firms would have been quite so ‘refreshingly candid’ in their hours of interviews with Lisa Endlich.15 Proprietary trading went underground in 1998 at many firms: ‘By the late 1990s, almost every investment bank on Wall Street had, to some degree, gotten into the

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every nook and cranny of the business.’16 However, the Long-Term Capital Management crisis of that year persuaded many of the banks that specialist proprietary trading units were dangerous and they wound them down. Most dramatically, Citigroup’s Sandy Weil, having just bought Salomon Brothers, kings of the trading jungle, ordered

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the firm. However, the closure of some arbitrage desks on Wall Street and ring fencing at others did not mean that proprietary trading went away: it is embedded into customer market-making by the very nature of the business. Whether in equities, bonds or commodities, derivatives or cash,

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for about 32 per cent of all the shares traded.’17 When market makers pre-position their books, the boundaries between customer facilitation, hedging and proprietary trading are fluid and difficult to define. At what point does loading up ahead of expected demand move from being client facilitation to taking a view

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firm’s own account? When does leveraging up to play the yield curve because you know that’s what your customers will do become a proprietary trade? No outsider, and perhaps no insider either, can really tell, making it very difficult to divide trading profits into customer and proprietary. A survey of

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a group of banks operating in London in 2003 found that several made no distinction in their management accounts between client and proprietary trading.18 It was either an unimportant distinction or, more likely, it was just too difficult to separate out. One side effect of the closure of

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the specialist arbitrage desks in the late nineties was to give shareholders the impression that proprietary trading had gone away. Investors like to hear this, for they regard it as a high risk and unreliable business. They would not give the investment

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banks a high share price if they thought that too much profit came from proprietary trading. The investment banks disclose that they do proprietary trading and admit that it is managed alongside client business, but they tuck such news away in quiet corners of the financial

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takes proprietary positions based on expectations of future market movements’.19 However, you have to look pretty hard to find this and other references to proprietary trading in Morgan Stanley’s Form 10-K, a technical document that is heavy reading even for financial specialists. There was no explicit mention of

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the glossy, more commonly used version of the annual report.20 Morgan Stanley is not untypical. Every other large investment bank carries out proprietary trading, and every one gives a full disclosure, but rarely, if ever, in a prominent place in the financial reports. Numbers are few and far between.

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-at-risk – and of course from the Edge, which substantially reduces the real risk. In the absence of profit numbers, qualitative comments are made about proprietary trading and, like Lehman’s in 2002, annual reports tend to play down the activity: ‘Instead of using a high percentage of the firm’s capital

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for proprietary trading, we held strong to our well-defined risk appetite and remained committed to our customer flow business model.’22 Other firms liked to under-emphasize

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this business: ‘To a lesser degree, Merrill Lynch also maintains proprietary trading inventory in seeking to profit from existing or projected market opportunities.’23 Because most proprietary trading actually occurs as an integral part of customer trading, Goldman Sachs, believed to be the most aggressive proprietary

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in’.24 However, a former member of the management committee at one of these firms told me: ‘The investment banks have made a fortune from proprietary trading, especially in fixed income and mortgage-backed securities. A desk of about twenty-five people gave us 60 per cent of group profits one year

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.’25 The embedded nature of proprietary trading is illustrated by the fact that the top investment banks rarely have a designated head of proprietary trading. Within each product area proprietary and customer business are so mutually dependent that they are seamless and

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but it is as a manager and proprietary trader betting the firm’s own capital that Mr Blankfein really made his name.’26 Where specialist proprietary trading desks did still exist, mainly in fixed income, currency and commodity trading, proprietary and customer traders often sat together on dealing floors; they saw and

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, facilitation traders and salespeople. In the post-Spitzer clean-up, many firms tackled the conflict of interest issues that arose from integrating customer-facing and proprietary trading staff by separating the two sides. In equities it is now rare for specialist proprietary traders to sit with market makers who are working for

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customers (although, as we have already discussed, market makers themselves carry out proprietary trading as part of their function). Some banks have gone even further. Morgan Stanley, for example, ring-fenced its bond analysts from the rest of the

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?27 An advertisement placed in the financial press in 2004 by an agency broker spelled out the kind of games that are possible: ‘Not done. Proprietary trading/Front Running/Back Room Dealing/Whispers/Smoke and Mirrors/Preferential Treatment/Conflicted interests/Secret handshakes/Ethical Shenanigans/Trading Against Our Clients’ Order Flow’.28 In

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at Salomon Brothers. The source of the profits in some areas remained a mystery: ‘Is it from making markets for customers? Or is it from proprietary trading? No outsider really knows. According to the principal market makers in financial derivatives, they are in the business of helping their clients meet their perceived

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firm, insurance company or finance company. Few dealers have revealed precisely how much of their profits come from market making activities and how much from proprietary trading.’29 In the absence of disclosure we have to try to work it out for ourselves. There are some clues in our earlier discussion of

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, straightforward customer business is unlikely to be the whole answer. That leaves IPOs, certainly a factor at the top of the cycle, and derivatives, including proprietary trading, a highly significant and profitable activity that forms an accepted and legal part of an investment bank’s business. It depends crucially on the Edge

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smarter than clients, trading counterparties and any competitors in a less privileged position. It is difficult to quantify the effects. In the same way that proprietary trading is inevitably embedded into customer market making, the integration of product areas is so much part of the investment banks’ fabric that it is impossible

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. On the other hand by cutting commission rates and squeezing market-making spreads they drove the investment banks to commit more and more capital to proprietary trading in order to keep up profits. This combination of increased customer demands and more own-account trading meant that the amount of capital tied up

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were there in a flash, pitching new bond and bond derivatives issues and selling them to fund managers. The yield curve was steep and the proprietary trading departments were able to borrow short, invest long and pick up a huge interest carry. Fixed income people, out of the limelight during the equities

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best to track market impact but it is a difficult job and they rarely object to proprietary trading by brokers, which is an important but deeply hidden charge on the cost of transacting. Brokers staunchly defend proprietary trading, arguing that it is an important source of liquidity. Clients and fund managers value the depth

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above all else when it comes to execution so are reluctant to prompt changes in a system that is very liquid. They back off challenging proprietary trading and are reassured that competition is working by the sight of falling commissions and spreads; in changing the system, they see only risk. One wonders

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addressing them’.20 Other firms followed a similar line in voluntarily extending conflict of interest controls into areas that deal with trading. They moved their proprietary trading desks away from the customer trading business, cut the electronic links between them and stopped proprietary traders from speaking to the firm’s analysts, market

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makers and traders. Proprietary trading by customer market makers remains, of course, embedded in the trading floors, but even sceptics are impressed by how far the investment banks have gone

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is advantageous to the end clients, leading as it can to portfolio churn, this is nothing more than self-justifying marketing babble: to argue that proprietary trading is there to help the client insults everyone’s intelligence. The strengthening of independent specialist trading and jobbing firms, such as exist in the New

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conflict of interest between trading and advising. Such firms would be able to transact on-exchange or off-exchange and be able to carry out proprietary trading. They would not be allowed to advise investors or to be owned by firms that advise investors. They would not be able to deal directly

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Brandeis, Louis D. 6 brokers 15–16, 66–7, 69, 133, 165 fees 191, 192, 194 and fund managers 190–91, 192, 204, 209 and proprietary trading 192 and structural reform 211–14 Brown, Edgar D. 7 Brown, Tom 143–4 bubble 12–13, 158–60 Buffett, Warren 41, 79, 201 ‘bulge

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/malpractice 41–2, 150–51 and Enron 42, 82–3, 182–3 and Parmalat 84 class actions 20, 21 client analysis 163 client trading, and proprietary trading 115–16, 117–19, 211–12 Coffee, Professor John 181 collusion, and free markets 171–2 commercial banks 121, 127 compensation 51, 58–60, 99

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, 37–8, 111, 148 and conflict of interest 206 earnings, recent 61 and emerging markets crisis, 1998 130 narcissism 198 political contributions 181 prices 86 proprietary trading 114, 117 risk management 112–13 value-at-risk 117 Google IPO 44, 90, 203 governments 180–84 Gramm, Phil 183 Gramm, Wendy 183 Grasso

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46–8, 98–9, 103, 109–11 market positions of 36–7 overview of 29–32 Leeson, Nick 128 Lehman Brothers 30, 34, 37, 40 proprietary trading 117 return on equity (ROE) 54 risk management 112 team ethos 124–5 leveraged buy-outs 10, 76 Levin, Senator Carl 202 Levitt, Arthur 115

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) Meriwether, John 130 Merrill Lynch 20, 30, 32, 36, 37, 39, 61, 207 cost control 136 and Enron 82–3 narcissism 198 and Parmalat 84 proprietary trading 117 risk management 112 Milken, Michael 10 monopoly 102 Morgan Stanley 25, 30, 34, 35–6, 37, 38–9, 113, 206–7 conflict of interest

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22, 24, 144, 191, 205–6 cross-subsidization 147–8 integration 22 narcissism 198 and Parmalat 84 political contributions 181 proprietary trading 116, 118 return on equity (ROE) 54, 61 risk management 112 Mozer, Paul 41 Muhlemann, Lukas 137 Murray, Judge Brenda 210 Myners, Paul 209 N

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209–10 identification of 192–3 outlook for 209–10 return on equity (ROE) 54–7, 58 source of 166–7 programme trades 87, 88 proprietary trading 114–19, 192, 206, 211–12 prospect theory 180 Prudential-Bache Securities 11 Prudential plc 82 Public Company Accounting Oversight Board 200 Purcell, Philip 14

Trading and Exchanges: Market Microstructure for Practitioners

by Larry Harris  · 2 Jan 2003  · 1,164pp  · 309,327 words

accounts, and brokers arrange trades as agents for their clients. Brokers are also called agency traders, commission traders, or commission merchants. Proprietary traders engage in proprietary trading, and brokers engage in agency trading. Traders have long positions when they own something. Traders with long positions profit when prices rise. They try to

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from market feeds. Some data vendors sell software programs that allow users to run their own data servers. Traders use these programs when their electronic proprietary trading systems require extremely fast query services. TABLE 5-2. Monthly Exchange Fees for Real-time Data for Nonprofessional Subscribers Data vendors such as Bloomberg, Bridge

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the prices at which they trade. Traders most commonly use QuantEX to manage large trading programs. Some traders also use it to implement high-frequency proprietary trading strategies. ◀ Source: www.itginc.com/products/clientsite/index.html. * * * Traders use many technologies to transmit orders. They now send most orders by electronic data transmission

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an open protocol for real-time, electronic communication between industry participants, while complementing industry standards.” ◀ Source: www.fixprotocol.org. * * * 7.2.3 Proprietary Operations The proprietary trading operations of a brokerage firm include all trading activities that the firm conducts for its house account. For pure brokers, these activities primarily include cash

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management and the borrowing and lending of securities. If the firm also engages in principal trading as a dealer, speculator, or arbitrageur, the proprietary trading operations of the firm include these activities. * * * ▶ Graduated College and Thought You’d Never Have to Take an Exam Again? Some brokerage firms give their

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problem when you want to buy a used computer advertised by an individual in an eBay Internet auction? • What is the difference, if any, between proprietary trading and dealing? Should we allow brokers or dealers to sell information about their order flows and their limit order books to proprietary traders? Should we

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to process this information for their own benefit? • What obligations do brokers have to their clients when they send orders to dealers who have large proprietary trading operations? • Most people obtain advice about investments and about financial planning from brokers. The brokers usually do not charge them specific fees for these services

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or very risk-averse individuals? • Are preferencing arrangements good for brokerage customers? • How can dealers control the risk of trading with informed traders? • Could a proprietary trading firm program a computer to trade profitably as a dealer? What risks would such a trading operation encounter? In what markets would such systems be

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form of the ValueLine Index. The reformulated contract never obtained any significant market share. This is an unusual story about the analytic risks associated with proprietary trading. In this story, the market was wrong but Goldman Sachs was right. More commonly, a few traders are wrong and the market is right. Goldman

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from trading indexes. Chapter 24 examines the specialist trading system. Specialists are broker-dealers who supply liquidity and arrange trades at exchanges and at some proprietary trading firms. Exchanges, regulators, and their business models sometimes compel specialists to supply liquidity when they otherwise would not want to do so. To encourage them

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institutions that have no research staffs, and that trade only to invest and disinvest rather than to speculate. They often refuse to trade with the proprietary trading groups of investment banks for fear of losing to them. Large traders can issue these instructions to their brokers because they can afford the significant

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, 208 profit-motivated traders, 177, 194–97, 198, 205, 206 ProFunds Ultra OTC Fund, 447 program trading, 368, 489 proprietary orders, 70 proprietary traders, 32 proprietary trading, 32, 149 pro rata allocation, 117, 134, 447 proxies asymmetric information, 314–15 for utilitarian trading interest, 316–17 volatility, 315–16 proxy variables, 312

A Demon of Our Own Design: Markets, Hedge Funds, and the Perils of Financial Innovation

by Richard Bookstaber  · 5 Apr 2007  · 289pp  · 113,211 words

funds have grown over sixfold from $300 billion to more than $2 trillion. And this does not include the operation of the quasi-hedge fund proprietary trading desks at firms like Goldman Sachs or Deutsche Bank. It’s a zero-sum game, though, so if hedge funds are able to extract differentially

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PhDs and experience with derivatives. The decision to take this position was a difficult one for me, because I had just started running my own proprietary trading book and I was also looking to establish my own trading operation at Paloma Partners Management Company, a firm that set up portfolio managers and

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fixed income research into a cottage industry for creating a new and improved version of the language. Joel Kaplan, who moved over from the Analytical Proprietary Trading (APT) group to run fixed income re- 44 ccc_demon_033-050_ch03.qxd 7/13/07 2:42 PM Page 45 A NEW SHERIFF

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others about the fledgling 51 ccc_demon_051-076_ch04.qxd 7/13/07 2:43 PM Page 52 A DEMON OF OUR OWN DESIGN proprietary trading group that would be the fabulously successful precursor to Long-Term Capital Management—an opportunity that for yet some other stupid reason I did not

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by a Treasury-auction scandal that had cost the jobs of Gutfreund, John Meriwether, and several others in senior management. The high-powered, big-brained proprietary trading group had become the envy of Wall Street. John Meriwether and the bulk of his team had just headed off to start LTCM, but the

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that sounds Pollyanna-ish, but I saw it happen regularly. At one risk management committee meeting, I watched Rob Stavis, who headed the U.S. proprietary trading group, suggest that the solution to a derivatives problem was to have that particular trading book moved from the client desk to his group. After

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OVER TOKYO Global companies transfer their know-how far and wide, and Salomon was no different. Spurred by the early successes of its U.S. proprietary trading operation, Salomon created similar units in Europe and then in Japan. During the 10 years of its existence, from 1988 to its closing in 1998

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conspicuous spending was emulated by others in the arb group. He fostered an interest in golf and initiated a Ferrari fetish that flashed through the proprietary trading management team. By 1997, though, with the business disintegrating, Myojin had other problems than the prying Japanese press. The CB/warrant position inexplicably started to

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growing, all we could do was watch as the ship foundered. The firm sent me to Tokyo with the senior members of the U.S. proprietary trading group, Rob Stavis, Dennis Keegan, and Andy Fisher as a SWAT team to try to understand the source of the mounting losses. What almost immediately

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, soon to be joined (by phone or in person) by the key traders of the firm: Rob Stavis, head of the U.S. fixed income proprietary trading group; Andy Hall, head of Phibro, the commodities trading arm of Salomon, who was conferenced in from Westport, Connecticut; Costas Kaplanis, Rob’s European counterpart

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yet, each profitable trade should be discounted by the expected value of the yet-to-be-realized loss. Whether viewed in the perspective of the proprietary trading profit and loss (P&L) swings or those of Parets’s group, the MCI/BT loss was the first of a wave of shortfalls and

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arbitrage and equity options books—to provide an ongoing revenue cushion to moderate the losses. And now—as does happen from time to time with proprietary trading—these two businesses were in the red. One point that was not well appreciated about the arb units was that if the business did not

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DEMON 1:45 PM OF Page 78 OUR OWN DESIGN Despite his assurances to the contrary, Sandy Weill was not enamored with the high-stakes proprietary trading embodied by this group. That antipathy did not stop him from buying Salomon, the biggest trading house in the world—a firm that, even after

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many attempts to broaden its revenue base, still made all of its earnings through proprietary trading. To try to control the unit, he first pushed to have both the head of U.S. fixed income arb, Rob Stavis, and his European

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to become more comfortable with the arbitrage unit’s business approach, trading strategies, and risk management controls. Over the course of the sessions, the three proprietary trading heads—Stavis for the U.S. unit, Sugar Myojin for Japan, and Costas for Europe—were summoned. Maughan and I were the other Salomon representatives

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called me shortly after receiving her copy of the report. Her questions made it apparent that she was gathering ammunition in her hunt to bag proprietary trading. I recounted for her the tracking error problems that had been the target of what was thus far an unsuccessful analysis, to which she simply

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the decision was made to close down the unit. This was not the first time the sights of the firm had been drawn to the proprietary trading unit. Warren Buffett had occasional thoughts of getting rid of the arb unit, depicting the proprietary/client setup at Salomon as “a casino with a

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the arb unit made half the firm’s revenue and pretty much all of its earnings. Travelers, however, could take such thoughts more seriously, because proprietary trading represented only about 10 percent of its revenues. By July, with the Citibank merger looming on the horizon, it would not be long before the

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_ch05.qxd 2/13/07 A DEMON 1:45 PM OF Page 92 OUR OWN DESIGN Bought Salomon, Then They Killed It.” The spirit of proprietary trading had been exorcised from the body of Salomon Smith Barney, but ultimately at a huge cost. Back at work, dumbfounded and guilt-ridden, I did

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disappeared can be traced to a single event: the public announcement on July 6 that Salomon Smith Barney was closing its U.S. fixed income proprietary trading unit. If the Russian default was the match that set off the conflagration that consumed LTCM, the tinder was dried and stacked over the July

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of the first trade. Who wants to buy the first $100 million of $10 billion of inventory knowing another $9.9 billion will follow? Japanese proprietary trading held huge convertible bond and warrant positions and, at times, had $20+ billion in swap spreads. European fixed income arb held positions that closely mirrored

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to the north. Both Maughan and I were housed at Salomon, while Dimon retained his office in the Travelers building. Fixed income and U.S. proprietary trading were at Salomon’s building, while equity trading was at Smith Barney’s. As part of the bridge-building process, the meeting alternated between the

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be dismantled, along with the trading floors below it. Television monitors dotting the periphery of the room tied in Costas Kaplanis, the head of European proprietary trading, from London. 99 ccc_demon_097-124_ch06.qxd 7/13/07 2:43 PM Page 100 A DEMON OF OUR OWN DESIGN But for

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over to the client desk, where it would be put in inventory or unloaded without anyone knowing whether the position was from the firm’s proprietary trading desk or from outside clients. In the freewheeling Gutfreund days, no one ever kept score on how much capital Meriwether’s arb unit used. If

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those of LTCM. For Salomon, this was understandable, because all of the LTCM principals came from Salomon’s proprietary trading group. Losses mounted for hedge funds, brokers, and banks across the world. While other proprietary trading desks found themselves with market losses, the implications for LTCM’s major creditors were disastrous. Some of the

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made it the hedge fund’s largest investor, piled onto other senior management missteps, forcing the venerable institution into a merger with Swiss Bank. The proprietary trading business at Salomon lost $1.2 billion in August and September, more than it had made the previous year. The bulk of the loss was

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in the way of counterparty commitments and related credit overhang to LTCM, and had limited its exposure with a decision to close the U.S. proprietary trading group in early July. Had those decisions been different, the losses might have doubled or tripled. Nonetheless, the political carnage did not bypass Salomon Smith

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host of other hedge funds and investment banks were converging on convergence and spread trades, slicing into the returns for both LTCM and Salomon’s proprietary trading. LTCM had earned upwards of 40 percent in both 1995 and 1996, saw its returns cut by more than half in 1997, and by the

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at Seven World Trade Center and the Smith Barney building at 388 Greenwich Street quickened its pace. The meetings were spent enumerating most of our proprietary trading losses and what had been done to reduce our exposure. One of these was a U.S. Treasury spread position, an on-the-run versus

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market’s perception is that your assets not only might fail to deliver but also might walk out the door at any time.) Salomon Brothers’ proprietary trading revenue amounted to nearly half the firm’s revenue (and almost all of the earnings); once Travelers bought Salomon, it was part of a much

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matched Bamberger’s revenue of $6 million the year after he took over the strategy. He started a new department at Morgan Stanley christened Analytical Proprietary Trading (APT). He automated Bamberger’s techniques, linked them to the SuperDOT network that had been developed for program trading and index arbitrage, and applied them

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had squandered his political capital by keeping the entire firm at arm’s length, was out of the firm and APT was closed down. Analytical Proprietary Trading died a quick death but spawned a thousand children. One was David Shaw, a Tartaglia recruit. A faculty member at Columbia with a PhD in

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the outcome, and the group died less than a year after I joined. I then moved to the Treasury trading desk, where I continued my proprietary trading. Each night I commandeered six of the firm’s most powerful computers, IBM RISC workstations. Considered powerful at the time, they likely wouldn’t even

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Wall Street was research in the mathematically elegant realm of option theory and related derivatives, including yield curve and mortgage models. My first foray into proprietary trading involved crunching gigabytes of tick data for various financial instruments on an array of workstations that was close to having a supercomputer at my fingertips

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Adverse selection, 191–192 American depositary receipts (ADRs), 68 America Online (AOL), 139 Amex Major Market Index (XMI) futures, 12 Analytically driven funds, 248 Analytical Proprietary Trading (APT), 44–45 initiation, 189 remnant, form, 190 A Programming Language (APL), 43–47 asset, problem, 45 Armstrong, Michael, 130 Arthur Andersen, failure, 135 Artificial

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, trader involvement, 73 risk arbitrage group, mortgage position, 80–81 Travelers purchase, 77 Salomon North, 81, 100, 199 Salomon Smith Barney convergence trades, 120–124 proprietary trading, reduction, 92 risk management committee, 98–101 risk measuring/monitoring, 126 Travelers, interaction, 125 U.S. fixed income arbitrage group, 91–93 U.S. Treasury

Quantitative Trading: How to Build Your Own Algorithmic Trading Business

by Ernie Chan  · 17 Nov 2008

Transaction Costs 60 Strategy Refinement 65 Summary 66 CHAPTER 4 Setting Up Your Business 69 Business Structure: Retail or Proprietary? 69 Choosing a Brokerage or Proprietary Trading Firm 71 Physical Infrastructure 75 Summary 77 CHAPTER 5 Execution Systems 79 What an Automated Trading System Can Do for You 79 Building a Semiautomated

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venture capitalist to borrow more capital for your business. The brokerages stand ready and willing to do that. If you are a member of a proprietary trading firm (more on this later in Chapter 4 on setting up a business), you may even be able to obtain a leverage far exceeding that

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allowed by Securities and Exchange Commission (SEC) Regulation T. It is not unheard of for a proprietary trading firm to let you trade a portfolio worth $2 million intraday even if you have only $50,000 equity in your account (a ×40 leverage

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- versus low-capital account is $100,000. Capital availability affects many choices; the first is whether you should open a retail brokerage account or a proprietary trading account (more on this in Chapter 4 on setting up your business). For now, I will consider this constraint with strategy choices in mind. With

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a set of hard-and-fast rules, just some issues to consider. For example, if you have low capital but opened an account at a proprietary trading firm, then you will be free of many of the considerations above (though not expenditure on infrastructure). I started my life as an independent quantitative

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. But when I developed a strategy that sometimes requires much more leverage in order to be profitable, I signed up as a member of a proprietary trading firm as well. (Yes, you can have both, or more, accounts simultaneously. In fact, there are good reasons to do so if only for the

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sake of comparing their execution speeds and access to liquidity. See “Choosing a Brokerage or Proprietary Trading Firm” in Chapter 4.) Despite my frequent admonitions here and elsewhere to beware of historical data with survivorship bias, when I first started I downloaded

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only the split-and-dividend-adjusted Yahoo! Finance data TABLE 2.2 How Capital Availability Affects Your Many Choices Low Capital High Capital Proprietary trading firm’s membership Futures, currencies, options Intraday Directional Small stock universe for intraday trading Daily historical data with survivorship bias Low-coverage or delayed news

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business structure for trading is important. The main choice you have to make is whether to open a retail brokerage account or to join a proprietary trading firm. The next step is to determine what features of the brokerage or trading firm are important to you. Finally, you have to decide what

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if you hold overnight positions. Naturally, all the profits and losses will accrue to you. However, you can choose to join what is called a “proprietary trading firm” such as Bright Trading, ECHOtrade, or Genesis Securities, and become a member of their firm. In order to become a member of such firms

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can also receive training from the firm, perhaps at an extra cost. You will also be subject to the various rules and regulations that the proprietary trading firm chooses to impose on its members, in addition to rules imposed by the SEC or NASD. I made them sound like bad things when

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I spoke of rules and regulations imposed by proprietary trading firms. But, actually, some of these rules (such as the prohibition from trading penny stocks or the prohibition from carrying short positions overnight) are actually

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come to regret this unfettered freedom. (The teenager in us has never left after all.) The decision whether to go retail or to join a proprietary trading firm is generally based on your need of capital, the style of your strategy, and your skill level. For example, if you run a low

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unique, highly profitable strategies. In this situation, you may prefer to open a retail trading account, because if you trade through a proprietary account, your proprietary trading firm is going to find out about your highly profitable strategy and may “piggyback” on your strategy with a lot of its own capital. In

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4.1 summarizes the pros and cons for each choice. One final note: Some may think that there is a tax advantage in joining a proprietary trading firm because any trading loss can be deducted from current income instead of as capital loss. Actually, you can choose to apply for trader tax

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tax considerations of a trading business, you can visit, for example, www.greencompany.com. CHOOSING A BROKERAGE OR PROPRIETARY TRADING FIRM Many traders use only one criterion to choose their brokerage or a proprietary trading firm to join: the commission rate. This is clearly an important criterion because if a trading strategy has a

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“dark-pool” P1: JYS c04 JWBK321-Chan September 24, 2008 13:53 Printer: Yet to come 72 QUANTITATIVE TRADING TABLE 4.1 Retail versus Proprietary Trading Issue Retail Trading Proprietary Trading Legal requirement to open account. None. Initial capital requirement. Available leverage or buying power. Substantial. Determined by SEC Regulation T. Generally 2x leverage

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risk of brokerage. Training, mentoring, guidance. Disclosure of trade secrets. Restrictions on trading style. Little or no risk, especially if retail brokerage does not have proprietary trading unit. No restrictions, as long as it is allowed by SEC. Risk management. Mostly self-imposed. Limited to initial investment. Higher commissions and significant monthly

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on Interactive Brokers: more than enough to offset its higher commissions. Another consideration is the range of products you can trade. Many retail brokerages or proprietary trading firms do not allow you to trade futures or foreign currencies. This would be a serious limitation to your trading business’s growth. Following these

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can trade against these quotes at any time of the day in order to debug the program. Finally, the reputation and financial strength of the proprietary trading firm you are considering is also important. This does not matter to the choice of a retail brokerage because, as noted in Table 4.1

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, retail accounts are insured by the SIPC whereas proprietary accounts are not. Hence, it is important that a proprietary trading firm has a strong balance sheet and good risk management practices to prevent the firm from collapsing because of bad trades made by its fellow

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a brokerdealer registered with an exchange, so that it is regularly audited by the exchange and the SEC. (As of this writing, non-broker-dealer proprietary trading firms may all get shut down by the SEC anyway, starting with Tuco Trading in March 2008.) Furthermore, even if times are good for the

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reputation for easy redemption of your capital should you choose to do so? It is, of course, difficult for an outsider to assess whether a proprietary trading firm has such good attributes, but you can read about the firm’s reputation based on their current or ex-members’ opinions at the online

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, or which retail brokerage or proprietary firm to use, you can in fact do both, or open multiple accounts. Unlike finding full-time employment in proprietary trading firms, just joining them as a member, especially a remote-access member, does not usually compel you to sign a noncompete agreement. You are free

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member of more than one proprietary firm, or have both proprietary and retail trading accounts, as long as this fact is fully disclosed to the proprietary trading firms involved and to the NASD as “outside business activities” and prior permissions obtained. With multiple accounts, it should be easier for you decide which

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legal and administrative structure of your trading business, it is time to consider the physical infrastructure. This applies to both retail and proprietary traders: Many proprietary trading firms allow their members to trade remotely in their homes. If you are a proprietary trader who requires minimal coaching from your account manager and

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the research phase and the execution phase of your trading business. I have covered the pros and cons of retail trading versus proprietary trading and the issues to consider in choosing a brokerage or proprietary trading firm. In a nutshell, retail brokerages give you complete freedom and better capital protection but smaller leverage, while

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proprietary trading firms give you less freedom and less capital protection but much high leverage. Finding a suitable retail brokerage is relatively easy. It took me less

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than a month to research and settle on one and I have not found a reason to switch yet. Finding a suitable proprietary trading firm is much more involved, since there are contracts to sign and an exam (Series 7) to pass. It took me several months to get

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24, 2008 13:53 Printer: Yet to come QUANTITATIVE TRADING Regardless of whether you have chosen to trade in a retail brokerage or join a proprietary trading firm, you need to make sure their trading account and systems have these features: r r r r Relatively low commissions. Trade a good variety

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brokerages that cater to serious traders provide such DDE links. Interactive Brokers, Genesis Securities, and Goldman Sachs’s REDIPlus are some of the examples. Many proprietary trading firms use one of these brokerages for execution; hence, you would have access to the full menu of these brokerages’ real-time data and order

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your strategy. MINIMIZING TRANSACTION COSTS We saw in Chapter 3 how transaction costs can impact a strategy’s actual return. Besides changing your brokerage or proprietary trading firm to one that charges a lower commission, there are a few things you can do in your execution method to minimize the transaction costs

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Bloomberg, 14, 36, 75 Bollinger bands, 23 Brett Steenbarger Trading Psychology, 10 Bright Trading, 70 Business, setting up a, 69–78 choosing a brokerage or proprietary trading firm, 71–75 physical infrastructure, 75–77 structure, 69–71 175 P1: JYS ind JWBK321-Chan October 2, 2008 14:7 176 C C#, 80

Electronic and Algorithmic Trading Technology: The Complete Guide

by Kendall Kim  · 31 May 2007  · 224pp  · 13,238 words

agency brokers also see algorithms as a way to level the playing field and infringe on the bigger bulge-bracket firms. Algorithmic trading originated on proprietary trading desks of investment banking firms. It began to expand executing client orders because of new markets and the need to remain in line with new

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an advantage in providing nonproprietary services that service the customer alone. A bulge-bracket firm may utilize client flow analyzing the data for their own proprietary trading desk. The large broker-dealers still dominate the algorithm market, but agency brokers are gaining momentum due to their neutral stance.7 7 Daniel Safarik

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execution while limiting risk. Throughout the 1990s, the financial community assumed that the only effective way to trade electronically with clients is by building a proprietary trading platform. This assumption gave control for the owner in terms of dealing logic, instrument specification, customization, and enhancements. It was critical for large broker-dealers

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-side execution (see Exhibit 13.3). Agency-only brokers may pose less of a risk than large broker-dealers, given that many do not have proprietary trading desks trading firm capital on behalf of the bank. In the end, the buyside trader needs to trust the avenue in which he/she chooses

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access is really coming down. Technology providers who are focused on algorithmic trading face increasing competition with one another as well as with brokers using proprietary trading platforms (see Exhibit 15.2). Technology providers can also simultaneously serve the sell and buy side but also provide cross-asset capability on one platform

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key features and functionality: 1. Full integration with BRASS. 2. FIX API enables clients to link their OMS, front-office GUI, program trading systems, and proprietary trading engines. Profiling the Leading Vendors 173 3. The ViewTrader feature allows centralized management of trading among groups of traders, enabling a team of traders to

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symbol ADVS. Antares Antares (see www.ssctech.com) is marketed and sold to buy-side money managers including hedge funds, family offices, institutional asset managers, proprietary trading desks, short-term (money market) desks, pension funds, and mutual funds. The range of assets under management for an Antares client is from $100 million

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, 134 Prime Broker, 34, 153, 154, 155, 156, 158, 159, 160, 162 Program Trading, 8, 10, 12, 29, 30, 32, 33, 34, 80, 81, 100 Proprietary trading, 62 Putnam Investments, 92 Sales trader, 26 Salomon Brothers, 3 S&P 500, 10, 11, 12 Sarbanes-Oxley, 44 Security Exchange Act of 1934, 43

The Devil's Derivatives: The Untold Story of the Slick Traders and Hapless Regulators Who Almost Blew Up Wall Street . . . And Are Ready to Do It Again

by Nicholas Dunbar  · 11 Jul 2011  · 350pp  · 103,270 words

Street. Trained to spot and replicate mispriced options across all financial markets, they became trading superstars. By the time Meriwether left Salomon in 1992, its proprietary trading group was bringing in revenues of over $1 billion a year. He set up his own highly lucrative hedge fund, LTCM, which made $5 billion

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pounded by his boss for not having kept up with the innovations of their competitors. The idea of running the CDO money machine like a proprietary trading desk was being implemented at UBS. “Why are they making all this money?” Diamond railed. “Why can’t you do the same thing? Everyone tells

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the $15 billion portfolio that Usi managed on Barclays’ behalf was mostly speculative grade, ranging from double- to triple-B in quality. That earned his proprietary trading desk a nice yield of around 2 or 3 percent above government bonds, but it was too risky for the Germans. However, if they could

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call a correlation trader. Correlation trading is all about selling just a few slices of a CDO to investors and replicating the rest by doing proprietary trading in the underlying default swaps, with the help of a model such as the Gaussian copula. Sparks was skeptical about using models to extract money

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he was selling, leaving his trading book lopsided on the short side. In the pre-2008 unregulated era of derivatives, separating client-facing business from proprietary trading was not something large banks made a big fuss about. But why stop there? Lippmann began to bypass the Deutsche CDO primary group in order

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of super-senior CDO losses and fires Stan O’Neal (November) Citigroup discloses $55 billion of subprime exposure and fires Chuck Prince Morgan Stanley discloses proprietary trading CDO losses Goldman Sachs reports record annual trading revenues of $31 billion; Dan Sparks, Josh Birnbaum, and other Goldman mortgage traders receive bonuses of $15

Inside the House of Money: Top Hedge Fund Traders on Profiting in a Global Market

by Steven Drobny  · 31 Mar 2006  · 385pp  · 128,358 words

players from the early days of the strategy, as well as those T 31 32 INSIDE THE HOUSE OF MONEY from the global macro–oriented proprietary trading desks at Bankers Trust, Goldman Sachs, and Credit Suisse First Boston, who compete with a varied and diverse field.While there are no longer global

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of this currency or that currency. The importance of his implosion was that it led me to believe that Bankers needed to get away from proprietary trading as such an important revenue source. Because we were an FDIC-insured institution, I also believed that regulators would someday restrict our ability to take

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new opportunities into the macro world and allowing us to grow a fantastic business. CHAPTER 5 The Prop Trader Christian Siva-Jothy Former Head of Proprietary Trading, Goldman Sachs SemperMacro London hat began as a means to get free drinks turned into quite a career for Christian Siva-Jothy. Formerly one of

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desk at Citibank was the day of the stock market crash in 1987. Rather than taking it as an inauspicious sign, Siva-Jothy immediately knew proprietary trading was what he was meant to do. He moved to Goldman Sachs (GS) a few years later, where he eventually became the partner in charge

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of fixed income and currency proprietary trading. Goldman Sachs in the early 1990s hardly lived up to its century-old image as a staid investment bank making money through old-line relationships

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bets with firm capital in global fixed income, foreign exchange (FX), commodities, and derivatives. I first met Siva-Jothy when he was still head of proprietary trading at W 71 72 INSIDE THE HOUSE OF MONEY Goldman Sachs. A friend suggested I contact him, after dubbing him “the man.” Soon thereafter, I

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for well over an hour. A few months after this initial meeting, Siva-Jothy retired from his partnership at Goldman Sachs, where he had run proprietary trading for the previous 10 years. Over that time, his trades, the size of his bets, the consistency of his annual profits for the bank, and

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markets started tanking. I actually ended up making about 35 percent of my loss back being short fixed income. After 1994, they dramatically changed the proprietary trading structure of the firm. A lot of people left, and a lot of people were let go.The prop group went from 20-plus pure

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prop traders down to 3 by mid 1995.They asked me to run the European proprietary trading group and rebuild it but with a very different risk mandate. That was the birth of what I call the “new

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proprietary trading group.” What lessons did you learn from the sterling/yen loss? Confidence is a very, very dangerous thing. Simply because you’ve had a good

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is the single most important thing to me in hiring. What advice would you give someone who wants to be the head of Goldman Sachs proprietary trading someday? A lot of this is luck, but humility is probably the most important thing. If you’re not humble, you’re not going to

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an allocation to global macro for the first time? I would say to think of it just like we did at CSFB when building the proprietary trading desk. You want to diversify. The simplest version is you want a carry trader, a fund that earns regular income; and you want a gamma

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Vanities, Market Wizards, Money Masters—anything I could get my hands on. My game plan was to go to business school; get a job in proprietary trading; work 10 years on the sell side developing my knowledge, experience, contacts, and track record; and then make a move to the buy side. I

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best research services in the world—all these people and experts who focus on our industries send us research and teach us. I went into proprietary trading to assemble information into a coherent thesis and test it. I will always do that, whether it’s with Ospraie or my own personal account

…

-cash flow ratio, 60 Price-to-earnings ratio, 60 Procter & Gamble, 17 Profit and loss (P&L), 73–74, 81, 84, 95–96, 175, 186 Proprietary trading/trades, 71–101, 118–119, 262. See also Siva-Jothy, Christian Protectionism, 44 Putin,Vladimir, 237–238 Put options, 63–64, 77, 85, 236, 331

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