How the Trading Floor Really Works

Foreword xi Preface xiii Why I Wrote this Book xiii What this Book Does and Does Not Do xiv Who this Book Is For xiv Finally, Some Key People in the Process of Writing this Book xv All Feedback Welcome! xv Women on the Trading Floor . . . Really? xvii CHAPTER 1 What Are Financial Markets? 1 Debt Markets 4 Equity Markets 11 Other Asset Classes 21 Derivative Markets 22 Conclusion 26 Discussion Questions 27 CHAPTER 2 What Role Do Banks Play in Financial Markets? 29 What It Means to Provide Liquidity 31 Central Market Platforms 37 Who Are the Clients and What Are They Doing? 45 Conclusion 54 Discussion Questions 56 CHAPTER 3 Which Part of the Bank Are We Talking About? 57 Corporate Finance 60 Global Financial Markets 63 Where Are these Trading Floors? 73 The Trading Floor's Relationship with Clients 75 The Loan Portfolio and the Funding Department 76 Conclusion 80 Discussion Questions 81 CHAPTER 4 What Does It Mean to Trade? 83 PACAM Treasury Trade 85 Supermart Interest Rate Swap Trade 94 A Structured Equity Product 108 Conclusion 118 Discussion Questions 119 CHAPTER 5 What Is the Market and Why Does It Move? 121 What Is the Market? 123 Price Fundamentals: Macroeconomics 128 Price Fundamentals: Company Specific News 135 Supply and Demand 140 Conclusion 142 Discussion Questions 143 CHAPTER 6 How Do Traders Make a Market? 145 PACAM Treasury Trade 148 Supermart Interest Rate Swap Trade 158 Equity Structured Product Trade 163 A Typical Trader Day 166 Conclusion 168 Discussion Questions 169 CHAPTER 7 How Is Proprietary Trading Different from Market Making? 171 Proprietary Trading Desk Overview 173 Proprietary Desk Liquidity 176 How Market Makers Are Similar to Proprietary Traders 180 Trading Book Accounting 186 Trader Capital Allocation 187 Conclusion 188 Discussion Questions 189 CHAPTER 8 What Is the Relationship Between Sales and Trading? 191 A Day in the Life 195 Know Your Client 199 Managing the Client Relationship 201 Sales Person Stereotypes 209 Conclusion 211 Discussion Questions 211 CHAPTER 9 What Role Does the Research Analyst Play? 213 The Role of a Credit or Equity Analyst 215 Conflict of Interest 221 The Economists and Strategists 222 Desk Analysts 225 Conclusion 226 Discussion Questions 227 CHAPTER 10 What's So Special About Trading Derivatives? 229 Bond Intermediation 231 Derivative Intermediation 234 Counterparty Credit Risk 241 Illiquid Derivatives Intermediation 246 Conclusion 248 Discussion Questions 249 CHAPTER 11 Where Does Structuring Fit? 251 The Deal Origination 252 Deal Negotiation 255 Deal Closing 260 Conclusion 263 Discussion Questions 264 CHAPTER 12 Where Are the Quants? 265 Pricing Models and What They Do 266 Risk Management Models and What They Do 271 Financial Market Evolution 274 Quants' Relationship with the Trading Floor 275 Conclusion 277 Discussion Questions 278 CHAPTER 13 What Are the Risks? 279 Market Risk 281 Credit Risk 287 Other Risk 292 Conclusion 295 Discussion Questions 296 CHAPTER 14 How Do We Manage These Risks? 297 New Product Approval Process 299 Market Risk Limits 304 Credit Risk Limits 307 Learn from Experience 309 Conclusion 312 Discussion Questions 313 Epilogue 315 Glossary 317 Index 341