Sunday, November 27, 2011

flow ^ prop trading - according to a young quant

Consider a typical flow trader Fay and a prop trader Peng in an investment bank.

Fay only trades with the registered clients of the bank, typically institutional clients, but also some ultra-rich individuals. Peng seldom trades against the clients of the bank. Peng has an unfair information advantage over those clients. Peng typically trades against other counterparties.

Peng doesn't have to hedge, whereas Fay needs to hedge every trade. Each trade with a client creates a position with a risk. At COB those will contribute to VaR. If it exceeds the VaR limit for Fay, then manager will require Fay to hedge or liquidate. Sometimes Fay's trade creates no position at all.

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http://www.linkedin.com/in/tanbin