Investment Banking Discussions (Part 3) – The Aspect of Trading
January 26, 2013 5 Comments
Trading also provides a vital role for the Investment Bank.
This article is the third of five editorials in a series entitled “Investment Banking Discussions” that I will compose in an effort to identify, explain, and/or discuss aspects of the subject of Investment Banking.
Of course, I would encourage all questions, insights, thoughts, and commentary as appropriate.
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The purpose and goal of this editorial is to discuss and explain:
- What is Investment Banking Trading?
- Typical Activities of an Investment Banking Trader
- Closing Thoughts
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What is Investment Banking Trading?
In simplistic terms, Investment Banking Trading is the process of buying and selling products.
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Typical Activities of an Investment Banking Trader
Many of the commonplace activities of an Investment Banking Trader include:
- Facilitating the purchase and selling of stocks; bonds; and/or securities – either by carrying an inventory of securities for sale or by executing a given trade for a client;
- Dealing with transactions (large or small) – providing liquidity (the ability to buy and sell securities) for a market. Often times, this is referred to as “Making a Market”;
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Closing Thoughts
Traders make money by purchasing securities and selling them at a slightly higher price. This price differential is called the “Bid-Ask Spread”.
Price fluctuations occur with respect to what is happening in the market – both in terms of the individual product and the wider economy. Trading is vital to the world economy, and it can be used to protect businesses and governments against such drastic price changes (such as the price of oil). Without trading, many companies and countries simply could not function.
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Peter Eavis has been a financial reporter for nearly 15 years, and the below listed editorial published in the New York Times, January 25th, discusses the trading revenue aspect on Wall Street.
He states, “At large banks, sales and trading is a major source of revenue, often dwarfing the fees that they earn from arranging deals or managing other people’s money. For instance, Goldman Sachs had sales and trading revenue of $18 billion last year, compared with $5 billion from activities like advising on mergers and handling initial public offerings.
Shareholders benefit from good disclosures because they can better assess what value to place on a bank’s business.
Trading revenue is not only large – it can also be extremely volatile, bolstering profits one quarter, then hurting them the next. With the right data, investors can do a better job of identifying what drives revenue up and down.”
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http://dealbook.nytimes.com/2013/01/25/making-sense-of-wall-streets-trading-revenue/
The below listed commentary, courtesy of Jérôme Fabre, provides a nice summarization of what the activities and duties of a Trader are. He discusses areas such as:
(*) Risk Management
(*) Speculation
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With respect to the Risk Management aspect of the Trader’s duties, he explains the areas of Credit; Fixed Income; Equity; Foreign Exchange; Commodities; and Securities as well as the speculative aspects of each of these risk factors.
He comments that, “…traders are expected to assume responsibilities that have more to do with hard work than raw talent. The paradox is that anyone can compete for the job, since it boils down to doing the work.
Human resources departments are now more exacting (diplomas, grades, internships, etc.), but the job seekers are scarcer in the decreasing number of areas requiring innate ability.
Salaries for newly hired traders have already been stagnating for the last five years, which shows that the trader’s job is better understood and that he is being monitored more closely. The new trader increasingly resembles a top executive and less that of the solitary free-wheeler.”
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http://www.fimarkets.com/pagesen/trader-job.php
This editorial is courtesy of the below listed individuals and sources who have contributed and published their work in the Investment section of Articlesbase.com.
This paper focuses on the investment banking trader career, investment banks will have several function in the market which include providing advice to investors which assist in the purchase of securities and also financial assets, investment banks will not accept deposits or even grant loans and this is the major difference with the commercial banks, advising on mergers and also acquisitions, helping corporations in issuing securities in the market and finally they act as intermediaries in trading for their clients.
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(*) Brian Snow (1997) Macroeconomics: Introduction to Macroeconomics, Rout ledge publishers, London
(*) Career overview (2008) Investment banking career, retrieved on 28th April
(*) Career information (2008) investment banks employment, retrieved on 28th April,
(*) Peffer J. and Velga J. (1999) Putting people first for organizational success, Harvard Business School Press, Harvard
(*) Philip Hardwick (2004) Introduction to Modern Economics, Pearson Press, New York
(*) Youndt A. And et al (1996) “Human Resource Management, Manufacturing Strategy”, Management Journal, 39 page 836 to 866
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http://www.articlesbase.com/investing-articles/investment-banking-trader-career-2218332.html
Nice write up Joe, always informative as always.
RJ
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