Are retail trading skills also used on trading desks at big firms?

[xploring]

Hi, I'm just starting to learn about trading, but have informally traded my IRA portfolio for the last 10 years. I'm curious about a career as a trader and was wondering if the trading skills taught here are also used on the trading desks of bigger firms, like investment banks and hedge funds? If I perform well as a retail trader would, say, Goldman Sachs want to hire me to work on one of their trading desks?

 

[A Dashing Blade]

. . . If I perform well as a retail trader would, say, Goldman Sachs want to hire me to work on one of their trading desks?

Short answer . . . no.

 

[timsk]

Hi xploring,
I agree with ADB, not least because the general consensus of opinion these days is that IBs like Goldman Sachs don't tend to employ traders to take outright single direction positions in the way that most retail traders do. The banking crash of 2007/8, combined with the likes of Jérôme Kerviel, (the Societe Generale employee who lost $7.2 billion of the bank’s money trading stock index futures) has helped to put an end to all that. As I say, this is a consensus view - I don't know it to be a fact - but it makes sense.

However, proprietary trading firms and possibly even small hedge funds may be interested in your services, provided that you are able to produce a track record of consistent profitability.
Tim.

 

[xploring]

Thanks for the reply. What kind of trading do IBs do these days? I hear it's "flow trading"--some kind cross between agency and prop trading. And why do they have to hire so many programmers and mathematicians to do it?

How about big hedge funds? Aren't they the same as prop trading firms?

 

[random12345]

Traditional investment banking has been in structural decline for many years due to electronic trading - they used to make a lot of 'free' money from client commissions and these rates have come down significantly. Market making always represented a massive share of the business and trading the bank's money was a small slice. They use enormous amounts of technology to facilitate electronic trading both for themselves and clients concurrently in the present day (as well as manage risk), hence their preference for hiring computer scientists - see this Cisco poster for the reason why - http://www.cisco.com/web/strategy/docs/finance/highperftrade_poster.pdf

This is also represented in the ever declining wages at IBs, especially after bonuses (VPs these days after 10 years hard work generally earn less than associates used to only 10 years ago because the spot bonuses are so small). These days if someone wanted a top tier job in 'trading' (i.e. where the main source of income is from actual trading activities) then HFs are definitely the way to go, and even then you may have to consider emerging markets.

 

[xploring]

So, from the way I'm understanding it trading desks in IBs basically make money by creating markets for securities? Is it the bid offer "spread" of a stock where trading desks make most of their money? Thanks for clarifying, I'm a total beginner to all this.

What is quantitative trading? Is it the same as high frequency trading?

Are prop firms and hedge funds the same thing? If not, how do they differ?

 

[Giovan]

So, from the way I'm understanding it trading desks in IBs basically make money by creating markets for securities? Is it the bid offer "spread" of a stock where trading desks make most of their money? Thanks for clarifying, I'm a total beginner to all this.

What is quantitative trading? Is it the same as high frequency trading?

Are prop firms and hedge funds the same thing? If not, how do they differ?

'Quantitative Trading'
Trading strategies based on quantitative analysis which rely on mathematical computations and number crunching to identify trading opportunities.

Is it the same as high frequency trading? Yes it is

Are prop firms and hedge funds the same thing? If not, how do they differ?
'Proprietary Trading'
When a firm trades for direct gain instead of commission dollars. Essentially, the firm has decided to profit from the market rather than from commissions from processing trades.

"Hedge fund": A hedge fund is a pooled investment vehicle administered by a professional management firm, and often structured as a limited partnership, limited liability company, or similar vehicle.
Are they the same. NO

 

[random12345]

So, from the way I'm understanding it trading desks in IBs basically make money by creating markets for securities? Is it the bid offer "spread" of a stock where trading desks make most of their money? Thanks for clarifying, I'm a total beginner to all this.

What is quantitative trading? Is it the same as high frequency trading?

Are prop firms and hedge funds the same thing? If not, how do they differ?

IBs generate a lot of turnover from commissions on client orders, but these days the profit margin is low and margin has shifted somewhat to trading off their own balance sheet, though trading income as a whole has come down. IBs create markets in over the counter products using other Prime Brokers, smaller firms, retail traders as counterparties. Exchange traded products like futures and stocks are a bit different though they can still facilitate client orders, provide liquidity or create alternative markets that track these. I have heard that Schwager's book about market basics is a good read if you're interested in ground up mechanics, though I haven't read it myself.

Quant trading covers most mathematical principles and systems as applied to the markets - you could say that HFTs are a branch of quant trading.

Prop firms generally apply to firms that use staff to directly trade their own money in the markets or seed other traders to trade independently via their systems and accounts with a profit share agreement back to the firm. There are many prop firms in Chicago you could look up. Sometimes traders even provide their own money and simply make use of the prop firms systems for a desk fee.

Hedge funds can trade innumerable methods, styles and systems (the theory being they make money regardless of market conditions, hence the name) and they use investor money to do this, offering the investor a profit participation return at the end of the year (after costs and in exchange for a fee). Generally the overall style/systems are driven and controlled by a management team or single manager and so traders at HFs can often be less independent than at prop firms, though the money they trade is usually much larger.