Trader, the title makes some people dream. But from Epinal images to reality there is often a big step. It is however possible to demystify certain beliefs about this extraordinary profession, which is nonetheless that of a bank employee. How do you become a trader? What is his role ? How does he work on a daily basis?
Trader: the job
To understand the trade of a trader, you must first know what a trading room is. Remember that originally, the role of a bank called “disintermediation” was to make its expertise available, a priori free of charge, to serve its customers. So how does it make profits? At the same time, a bank uses its expertise for its own account. All profits come from the volatility of financial assets, more simply called risk. It is by taking risks that the bank earns (or sometimes loses) money. The role of the trader is there. It has two main functions, which it can perform simultaneously or not: manage risk and speculate. These two roles run through his entire profession and according to the respective dosage of one or the other,
Credit risk : the risk arises from the probability of a company or a State to default on its debt. The product treated is similar to an insurance which protects its buyer from a possible default, that is to say from an event which would make the company or the State unable to honor its debt. . The purchaser of this insurance is therefore a person who has a claim on the company or the State concerned. The trader gives a price to this insurance according to the risk incurred. For example, Russia is more likely to default than the USA, so debt insurance is more expensive. Then, depending on economic or political conditions, the price of insurance varies. It is said that “credit quality” varies. And depending on the price at which the insurance was sold or purchased, the trader makes a loss or a gain. These products are the newest on the market and are the fastest growing. They are also the ones with the most future.
Interest rate risk (“ fixed income ”) : the risk arises from the movement of interest rates, which are decided by the central banks. If you borrow at 5% today for a year and suddenly the central bank decides to lower its rates to 4% per annum, you will only be able to re-lend your money at 4%. So you will have lost money. It is the second largest market in the world in terms of volume. A contract with a nominal value of several hundred million dollars does not pose any problems. It is called the “ fixed income ” or debt market. This market deals mainly with swaps and bonds. This is the most mathematically technical market and where engineers are generally found.
Equity risk : this is the best-known risk. It is related to business activities.
Foreign exchange risk (FX) : this is the risk linked to exchange rates. It is the most important market in the world with a daily volume of 2,000 billion dollars, in constant increase.The risk of raw materials : small market compared to foreign exchange or debt, but also in full expansion, the risk is linked to the price of raw materials.Horizontally, the room is separated into four main branches, which separate functions between traders.Two main categories distinguish the subsidiary of structured products from that of basic products (swaps, shares, foreign exchange,
The structured products trader : structured products are the most fashionable at the moment and the profits they represent have risen sharply in recent years. These products often offer a complex indexation of profitability on different vanilla products. The profits generated then come from the margins taken by the bank during the transaction. Since it is generally difficult to price exotic products with certainty (since they generally do not yet exist), and there is no liquidity in the market to cover them perfectly (they are often issued at unity), these margins are significant, even monumental.
he does not rate clients. A high-risk job but one of the best paid in the world, it entitles you to a percentage of earnings. If the structured products trader can generate 50 million euros per year, he must share the profits with the structuring, sales and research teams. The prop trader easily generates this profit but does not share it with anyone. His position is very coveted, but represents an exception in terms of age within the room since the prop traders are the most experienced traders. A prior experience of 10 years in thetrading is the norm.