how banks manage their financial products

[sergio 0]

Hi,

We are doing a university job where we must investigate how banks manage their financial products that require trading, for example, they offer a fund, as they manage capital internally. Could you help me?

Thank you!

[aimhi 10]

They have a team of researchers, analysts, traders etc which manage those funds with extreme risk management.

[fxeconomist 11]

As far as I know commercial banks in the US can't participate into stock market trading so I guess they create separate facilities for that with separate balance sheet. I heard that my broker Hotforex has institutional clients, it could be banks also, so there may be a kind of special relationship between banks and fx brokers.

[aimhi 10]

I guess US has fund managers and investment banking institutions looking after the portfolios on behalf of their clients.

[RJo 10]

"[F]ull-service investment banks usually provide both advisory and financing banking services, as well as sales, market making, and research on a broad array of financial products, including equities, credit, rates, currency, commodities, and their derivatives" (List of investment banks - Wikipedia).

IMHO, there's nothing super special about "professional" traders except for the fact that they have access to boatloads of trading capital. Although this gives them access to pattern-day-trading and hedging, their annual percentage returns on investment are not very impressive. Put another way, it's easy to generate a billion dollars in profit per year if you have 50 billion on hand. Just imagine a retail trader having $5000 and earning $100 per year which is the same 2% proportional equivalent.

An investments bank's number 1 goal is to avoid risk. That goes for all of Wall Street as a whole. Whether they hedge six ways from Sunday or hire quants for high frequency trading, they're trying to turn trading into a sure thing rather than a risk-benefit. The underlying principle is that free money is free money no matter the annual rate of return. For example, an investment bank trader might hedge GBPJPY against S&P 500 index stocks because she/he knows that 401k/pension funds dump money into the S&P 500 index stocks every 2 weeks regardless of its price level. On a related note, Warren Buffet dumped money into the S&P 500 index and earned a higher return than an army of hedge funds over the course of 10 years. They paid Buffet a million dollars because he won the bet. As for quants, they algorithmically exploit volume-based order execution rebates and the exchange queue. This would earn pennies with small capital, but again they're using tens of billions.

As a side note, if you're retail trading forex, CFD's, equities, EFT's, or options, one or more of the big investment banks are likely getting a piece of every order executed as market makers or liquidity providers.

"Professional" traders are basically professional salespeople. There's nothing in a Series 7 Exam that ensures that these people have any special market analysis knowledge. It's essentially a great big business ethics law exam. In fact, given the pretentiousness and pressures of professional trading/sales, I often wonder whether retail traders are more likely to stick with trading in the long run.

 

Edited November 3, 2024 by RJo