Monday, May 27, 2013

private bank trade/order/quote/execution flow

Remember -- Most non-exchange traded products are voice executed. Only a few very dominant, high volume products are electronically executed. Perhaps 1% of the products account for 99% of the trades -- by number of trades. By dollar amount, IRS alone is probably 50% of all the trades, and IRS is probably voice-executed, given the large notional amounts.

The products traded between the bank and its clients (not interbank) are often customized private offerings, unavailable from any other bank. (Remember the BofA puttable floats.)

RM / PWA would get live quotes from dealer and give to a client. Sometimes dealer publishes quotes on an internal network, but RFQ is more common. Any time the quote could be executed between RM and client. RM would book the new position into the bank's database. As soon as as executed (before the booking), the bank has a position but dealer knows the position only after the booking, and would hedge quickly.

Dealer initially only responds to RFQ. It's usually executed without her knowledge, just like an ECN flow.

I think in BofA's wealth management platform, many non-equity products (muni bonds are largely sold to retail clients) trade in the same way. Dealer publishes quotes on an intranet website. RM negotiates with client and executes over the phone. During trade booking, the price and quantity would be validated. Occasionally (volatile market), trade fails to go through and RM must inform client to retry. Perhaps requote. Fundamentally, the dealer gets a last look, unlike the exchange flow.

I believe structured products (traded between bank and clients) are usually not fast and volatile -- less requote. However, when dealer hedges the position, I think she often uses vanilla instruments.

Terminology warning -- some places use "trade" to mean many things including orders. I think in exchange flow, "order" is a precise word.

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