Friday, September 9, 2011

(ADP) agency^prop traders^dealer^broker^

See also http://www.mergersandinquisitions.com/what-you-do-in-fixed-income-sales-trading/
http://www.mergersandinquisitions.com/traders-vs-brokers/

-- AAAAAgency trader =~= broker (=?= flow trader) --
* ideally holds no position (therefore takes no risks), unlike other models.
* earns commission ie "transaction-fee" as a pre-defined percentage of the transaction amount.
** The stock exchange also earns a transaction fee on each trade. Same model
** inter-dealer broker too, like e-speed, taking no risk
* has a seat on the exchange. Sponsors client's trades but depends on clients to fulfill obligations. For a sell, client must quickly provide the stock to the broker, so broker can transfer it to the counter party. If client disappears, then broker is short and must buy on the open market for cover.
* eg: My OCBS broker was such an example, though she is subject to client risk

-- DDDDDealership --
* (defining feature) Keeps inventory.
* eg MTS traders
* like a car dealership.
* takes on the opposite side to the client
* Often buys for client's request. Could also buy without client request but it ties up massive capital.
* for our long positions, we maintain firm offers.
* Earns a bid/offer spread. Commission? Part of the spread.
* traders - Mostly PnL-based compensation
* Seldom shorts, and shorts only liquid securities.
* eg: I believe a bond trading desk is usually a dealership, just like a car dealership. When a client wants a bond we don't have, we buy them on the market under house's account, then sell to the client -- virtual trade.

-- PPPPPPProp trader --
* no "client" to serve, unlike other models.
* buys and holds for any length of time, but might tie up too much capital
* could accept client's money as in a mutual fund
* eg: Hedge fund is best example

~~ flow^prop indistinguishable
client A wants to sell ABC, you bid $50, trade is done. you decide to keep it on the book for a bit as you think it's got potential. you exit at $60 eventually. is it prop or flow? flow brought you the business, and you may not have paid as much attention to ABC company until the client brought it up. but you took a prop view...

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New York (Time Square), NY, United States
http://www.linkedin.com/in/tanbin