Difference between a IB Trader & a broker

[abhi248]

Hi all,

i tried looking for something but didnt find much on this......there are two things i am looking for clarification on --

1)
A trader in an investment bank (flow trader not prop) assists the banks institutional clients in their buy/sell transactions.

Isnt that what a stock broker too does?........may we assume that we are referring to those who deal with quality investments only and are not into penny stocks (lest that be brought as a difference)

where does the difference lie then? Do the IB traders trade more exotic products? or do they cater to a different market segment from a broker?

2)
besides, in case the big inter dealer brokers......like ICAP, BGC.....do they require you to cold call or just serve the institutional base they already have in place?.......or do they get you to call people who have requested one? (appears more likely to me)

apologize if my doubts are primitive........any thoughts will be much appreciated

 

[Intro]

My understanding of it is that a trader takes positions in the market i.e actually buys and sells whereas a broker (in the icap/bgc sense of the word you refer to) matches traders looking to sel and buy the same thing.

Not sure about cold calling. You would be expected to build your own client base but may end up getting a client given to you, especially if it's one no-one else on your desk could get on with! I think it depends on the market you're in as well. some markets can be really quite small so there won't be that many traders in it.

 

[abhi248]

hey Intro,

thanks for that!

Quoting u --
My understanding of it is that a trader takes positions in the market i.e actually buys and sells whereas a broker (in the icap/bgc sense of the word you refer to) matches traders looking to sel and buy the same thing.

from what i understand -- The IB (flow) trader u mentioned about takes positions for his clients and hence aims at maintaing a balance of buy/sell, ie remain neutral ........... same as a stock broker from a brokerage or even an IDB ...................unless hes at the prop desk of the bank.........n, like i mentioned on my qn, we are talking only flow traders here

isnt that how it is?...........can anyone confirm/rule that out pls?

N just so that we are clear ......... in part (1) i talk about Stockbrokers ... in part (2) IDBs

thanks

 

[gooseman]

a flow trader at a bank will gove u a 2-way price on which to trade. he will give himself enough edge on the trade to (hopefully) make a profit. the more exotic the product, the mroe edge you can have. especialy if it is otc.

a broker will speak to paper and match them with a market maker. a broker doesn't take on a position.

 

[abhi248]

hey gooseman,

thanks

ill need some more clarification............by edge u mean spread right?

also, say a flow trader has got this on his books --
a. bought 100 shares of stock a for client a
b. bought 200 shares of stock b for client b

now, for his coming trades, he will be looking to balance those above..........is that right?

 

[gooseman]

how do you mean balance?

if he is long stocks he'll use the options/futures markets to try an hedge himself fully and lock in the spread. ideally h goes long the stock and then somebody comes in and he sells it out straight away to make the spread.

in real terms yes. edge is spread. edge really means the amount over/under value you can sell/buy a security.

 

[abhi248]

so the trader stays market neutral............... same as the broker ............ isnt it?

im sorry but i cudnt spot the difference...........where is it?

thanks!

 

[A Dashing Blade]

A flow IB trader executes order from institutional clients or the firm's sales-force. They attempt to match supply with demand and so take the bid-ask spread.

 

[abhi248]

yes DB, thats wat i too understand but then how are they different from a Broker?

all i want to know is the difference, if any, between wat a broker does compared to an I bank Flow trader

thanks!

 

[gooseman]

a broker matches a flow trader and the client of the broker. the flow trader takes on risk. he won't generally be 100% hedged or if it is options there will be volatility risk etc.

 

[si1503]

A broker is not a trader, he does not make any orders buy/sell or whatever, his job is to sell products/financial instruments/transactions to clients, as well as take orders from them, but he does not make the order.

There are dozens of different IB trader roles, from prop traders to execution only to those that hedge the risk, private client/institutional... etc. The trader does not talk to the client, certainly not in the larger IB's, the trader will get a quote and on confirmation from the broker execute the deal, looking to make himself a margin in the process, and if/where necessary hedge the risk from the order - this is not always the opposite trade, but something likely to protect the trader against any loss and create a win/win scenario for them.

 

[toadley]

From my understanding, the order flow can look as follows:

___<------ Flow Trader / Market Maker <-----Broker <--------Buy Side Client
IDB
___ <------ Flow Trader / Market Maker <-----Big Institutions

So, the broker gets orders off his clients. The broker could buy/sell the securities himself (the dealer part of broker-dealer) , but typically would want to find a buyer / seller to match the order and will just charge commission (the broker part of broker-dealer). Assuming the broker doesn't have another client willing to be that buyer / seller he will go to a flow trader at a IB or market maker firm. That trader will quote a bid / ask price that allows himself enough of a spread between the two to make money, and will adjust the prices to try and ensure he can sell what he buys and vice versa. Big Institutions will also be dealing with the flow traders at IBs, rather than through a broker.

Sometimes the market maker might not be able to shift his position, so he can go through an IDB (Inter-dealer broker) to trade his position with another IB / Market Maker who might be in the opposite position, but can do so anonymously so it doesn't let the market know he's holding the big position.

This is as best as I understand it so please feel free to correct / tear apart the above and please excuse the crap text digram, never was any good at art!

 

[mmone]

abhi

the best way i can explain it is the analogy of property

broker=real estate agent
trader=property investor

brokers really have no care at what price something trades (a few more factors to consider i know but just to keep it simple we will assume this is the case) as he will get paid based on a commission normally from both counterparties for 'arranging' the trade..the more trades he can execute the better and he really does not care if market goes up, down or sideways

a trader obviously cares very much what price somethig trades because he is the one who is buying or selling the underlying in question..one the trade takes place he has a position that he needs to monitor and over time has a book or portfolio that he needs to manage - he is is not buying or selling on behalf of someone like a broker - he or his book becomes the holder or seller of the asset..exactly the same as a property investor, whose balls are very much on the line and they have a vested interest into what is going on in the market

brokers and traders will interact by virtue of the business they are in but they are obviously very different

 

[gooseman]

In most (but not all) cases, the brokers will be far less well versed in the intricacies of trading these instruments than the traders they servic (in my personal experience).

GJ

Au contraire GJ-in my experience the (better) brokers are very well versed in the maerkets-from expiries/settlemetns/patterns than a lot of traders. Plenty of the guys on the front end are surprisingly ignorant of their markets-in my experience of course.

I don't know how many times I have heard "when do these expire gain?"

 

[gooseman]

Been a while since I was in the FX business my friend so I shall take your informed word on things. Perhaps that's the difference between a broker and a good broker