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Soultrader

Advantages and Disadvantages of Insitutional Trading

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For those interested in learning what institutional trading is about, I will offer some details.

If you work for a bank or a securities firm, you will most likely be placed in a team of traders. Each team specializes in a certain methodology, style, timeframe, and market. For example, fixed income team will only trade fixed income markets. An equity team will focus primarily on stocks and may hedge with futures or options. A market making team will stick to market making and never holding a position on his own book.

 

A book is a each traders account. A team may be assigned a book but within this each trader will also hold his book. The book is simply the P&L for the trader and this is all that matters in insitutional trading.

 

There are many advantages of institutional trading.

 

  • You do not trade your own personal money. this is a huge benefit for most people. Many insitutional traders will never trade their own money.
     

  • Information is readily available to you. Assistant traders, economists, researchers, backtesters, etc... all provide traders will top notch information. An instustutional trader clearly has an edge in terms of information.
     

  • Number of markets one can access. Institutional traders usually use vendors like Bloomberg or Reuters. This allows one to monitor most global markets. The exchange data fees itself could be extremely costly for a retail trader.
     

  • Execution Platform. Many banks have their own in hous execution platform. If not, they use a more high end platform like Trading Technologies, Pats, GL Trade, etc.. Also since many banks have direct lines to the exchanges if they are FCM members youre speed of execution is most likely faster than the internet based retail trader.
     

  • Knowledge. You are working with other traders. As a result information can be discussed frequently before and after the markets. Thus, it gives you room to learn from better traders as well.
     

  • Strategies that involve capital. Institutional traders have access to high-end software and capital that they can apply strategies that would require deep pockets. In the retail world, you often hear do not average down. But in the insitutional world this is exactly what traders do to build a position. Also, strategies like arbitrage can be implemented which usually is a very low risk, consistent, and profitable strategy.

Some disadvantages of institutional trading.

 

 

  • As most banks have global contracts with various vendors, you are stuck with a designated trading platform. Both Bloomberg and Reuters have a 2 year contract and as a result a trader can be stuck with these platforms for his entire time. (sometimes a request can be made depending on the bank) Personally if you are a technical day trader Bloomberg and Reuters are the worst platform to use. As a result the retail trader has a variety of options for trading tools compared to the insitutional trader.
     

  • Management. There is not much flexibility with what you can do. If management requests you downsize your risk, you must. You may see opportunities in markets other than your own... but the bank will not let you trade it. You can be restricted to a select instrument they have assigned you to trade.
     

  • Frequency. Institutional trading requires a more high frequency style of trading. If you sit there the entire morning session waiting for a trade to happen management may get up in your face asking why you are not working.
     

  • Buy or sell side: If you are trading both buy and sell side, you also need to deal with client orders. So you can be half prop half sales trader. If you are used to retail trading only for yourself, this can be a big pain in the ass.Technology. Banks have strict policies on pc usage. As a result, you do not have the luxury to snagit charts or camstudio video clips of your trades for study and record keeping. All information must remain within the firm and you are not allowed to freely take home information on your own.

Remember, even within your own team you are competitors of one another. It is a game of the survival of the fittest and you can only win by taking money from other traders. This includes your trading buddy sitting next to you. Thus, always keep in mind that your trading buddy may be a friend but also an enemy. (what my boss used to tell me)

 

Anyways, that is all I can think of for now. But please feel free to add any inputs if you have insitutional experience! Thanks.

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Nice post James. I would say state of the art trading platforms/software are available to retail nowadays. TT is and pats I was using years and years ago. Also depending on brokerage number of markets is probablly similar too, mind you that's kind of academic if you are restricted to half a dozen by your institution. IB have hundreds if not 1000's of instruments.

 

I guess having your risk closely monitored can be an advantage as well as a disadvantage. Though of course there are high profile stories where individuals have brought large institutions to there knees because there risk was not adequately controlled.

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Ive seen a number of prop houses offering top notch platform and a variety of markets for traders. Prop houses function differently from country to country. I know in London traders had more flexibility compared to Tokyo.

 

TT has now become accessible to the retail trader as well like you mentioned. I recall Velocity Futures offering TT for $500 a month or so. Global Futures offers TT with the lowest execution fees that I know of. So you are right... retail traders are now able to play on the same playing field when it comes to tools.

 

But still, we have insitutions using vendors like Fidessa or Orc that would cost millions to implement. This is their edge.

 

Risk control is definitely a big difference. Insitutions usually have risk manager monitoring the traders. Or the FCM can actually input a position size limit nowadays to stop fat finger trades.

 

One more thing I want to mention is that insitutional traders usually work closely with the IT department. The only problem is that the IT people tend to select the platform for traders depending on system compatibility and costs. As a result traders do not get to choose their trading tools that often. This is where I have the biggest issue within insitutions. Why would they let an IT person select a trading platform? They usually have no clue regarding trading or financial markets. And they tend to only know 2 vendors: Bloomberg and Reuters.

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The more I think about it the more I think prop would have (probablly still would) have suited me. All but the very best traders have issues with over/under trading assuming too much (or not enough!) risk etc. It would be great to have a risk desk auditing you. These high profile disasters seem to happen when the guys who monitor risk un-shackle the traders that have 'proved' themselves. Greed at the management level I guess. Leesons case was different as he was falsifying the books to hide is over extended positions.

 

I think I'm probably quite competitive (or was) and that may have spurred me on some what. I am not sure you mentioned the social aspect, may not count for much with some of the loners, but that's one thing I really miss working at home. That all ties in with learning from your piers.

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  BlowFish said:
The more I think about it the more I think prop would have (probablly still would) have suited me. All but the very best traders have issues with over/under trading assuming too much (or not enough!) risk etc. It would be great to have a risk desk auditing you. These high profile disasters seem to happen when the guys who monitor risk un-shackle the traders that have 'proved' themselves. Greed at the management level I guess. Leesons case was different as he was falsifying the books to hide is over extended positions.

 

I think I'm probably quite competitive (or was) and that may have spurred me on some what. I am not sure you mentioned the social aspect, may not count for much with some of the loners, but that's one thing I really miss working at home. That all ties in with learning from your piers.

 

I loved prop trading, especially when i first started out and thought i knew it all. I was assigned a trading buddy who managed my limits and what markets i could trade and he dealt me a lot of tough love in the early days. I remember the day i went from 1 contract to 2 contracts in the bund, that was the day i knew i was gonna make it, and i never looked back.

 

I prop traded in london, and it was quite relaxing and layed back really (as long as you were making money), and the social aspect of things were great. I got set tick targets by the head of our team, i hit the targets and my clip size went up, simple as. If i lost X amount of ticks i went back down a clip size. At my peak i had a 1300 contract clip size in the bund, plus i traded the schatz and eurostoxx, and did various butterfly trades, but now days it's a different market and i don't know anyone who has a clip size bigger than 500. It's hard to unload size into the bund now because the volume isn't there anymore. Like i say 'back in the day' we were popping off 1000-1500 contracts on each trade and making about 6 trades a day. Now i'm only trading 100 lots and popping off the full 500 on figures and having 3 trades a day.

 

For me personally, prop trading did a lot for me, and i think that if i had never had done it, then i wouldn't be where i am today with my own fund. I had a great set of experienced traders around me, TT, CQG, Reuters and had a massive laugh along the way. Personally i owe a lot to two people from my prop days....

 

1. My trading buddy/mentor who was also the head of the fixed income team. Like i say he dealt a lot of tought love in the early days and wasn't afraid of being blunt with me, which helped me a lot. When i first started, and i hesitated, he used to shout 'get you're fu*king balls out and have a go, i don't give a sh't if it's a fu*king loosing trade as long as there's logic there' (used to hear that a lot from him when i first started lol)

 

2. Another trader in my team... When i started, i didn't exactly get off to a good start, and at one point it looked like i was gonna get the boot. This guy took me under his wing and showed me tips and tricks that really turned my trading around, and introduced me to his own strats in other markets. He really was a top guy and opened my eyes a lot.

 

Personally i think if you really want to go all the way in this game, then you have to do the whole city boy thing. The contacts you make, and the opportunies to learn from the best really push your trading to levels you'll never achieve just sat at home on your own.

 

Just my 2 cents...

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I don't really want to be the spoiler here, it is not me.

But here is a dose of reality, all the floor traders and large institutional traders/scalpers are going to be replaced by computers. The geeks will rule the landscape if they have not already.

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very true, and all the traders in the city know this. This is why many prop firms are packing up shop and calling it a day, because they can't compete with the computers, and it's getting harder and harder for new guys to get into a firm.

 

This is evident in the majority of markets as a lot of the volume has dropped off. Like i said in my above post, when i was prop trading european fixed income markets, on the bund alone i had a clip size of 1300 contracts and got to keep a 65% cut, and it was easy to fire that size off - everyone was making mega bucks. Now days the volume isn't there anymore because people are being squeezed out, max clip sizes knocking around for bund traders is around 500 lots, with 100 - 150 being traded technically and the full lot being unloaded when playing figures. I remember the days when if the schatz went bid 5ticks, you went bid 1000lots on the bund and took 20ticks as easy as that, but them days are long gone now

 

There are still people making a heck of a lot of money, but not as many as before. A lot of the prop trading will move to over the counter markets such as metals.

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  OAC said:
I don't really want to be the spoiler here, it is not me.

But here is a dose of reality, all the floor traders and large institutional traders/scalpers are going to be replaced by computers. The geeks will rule the landscape if they have not already.

 

Did you have too much to drink on New Year's Eve? There will always be someone behind those computers, perhaps not all the time, but some of the time.

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  86834 said:
Personally i think if you really want to go all the way in this game, then you have to do the whole city boy thing. The contacts you make, and the opportunies to learn from the best really push your trading to levels you'll never achieve just sat at home on your own.

 

So how do you get to do that today? And how did you get into that prop trading firm?

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  OAC said:
Forget institutions, even prop firms in the US are looking for traders to have PHD and traders assistants to be well-versed in Excel.

 

Very true, but personally I see this as a good thing. While it will be much harder to get a prop job, it should really make trading your own money from home easier from everyone doing the same thing and being able to pick up on that. Maybe its just a fad though, I wouldn't want a PhD trading my money just because they are too use to being nearly exactly correct in everything they have ever done in life.

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It seems the prop model has evolved and matured now. I remember the early days when the London arcades where happy to churn traders and simply take desk fees and commissions. It seems now that they are actually interested in making money in the markets. :)

 

The last person I know joined Futex about a year ago. That was largely based on performance in a spread bet account. Interestingly he is a pretty low frequency trader and while there was some early pressure to trade more he is well supported now.

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  BlowFish said:
It seems the prop model has evolved and matured now. I remember the early days when the London arcades where happy to churn traders and simply take desk fees and commissions. It seems now that they are actually interested in making money in the markets. :)

 

The last person I know joined Futex about a year ago. That was largely based on performance in a spread bet account. Interestingly he is a pretty low frequency trader and while there was some early pressure to trade more he is well supported now.

 

Very true, I visited Schneider on my trip to London a few months back and their training program looked pretty solid covering everything from tape reading, elliot waves, traditional TA, S&R, etc... Though only a select few make it on the desk, I was quite impressed by the way it was structured.

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I apologize for resurrecting an old thread, but I figured it would be better than starting a new one.

 

I am considering prop trading. I've been on the websites of several of the more "respected" U.S. firms such as First New York, Jane St., and Chicago Trading, and it seems that they are interested in people with degrees in finance, econ, or math fields. I do not have a background in anything like that (in fact, I'm pretty bad at math). If I'm simply a profitable futures trader, might I still appeal to these firms? I know there probably won't be a simple yes/no answer to this question, but I'm curious as I have no experience in any trading arena besides the one on my screen. I am not interested in the arcade type firms that require a deposit. The primary reason for my interest in a prop setting is so I can learn about trading from a different perspective. Thanks.

 

Edit: I should add that I would also be interested in trading at a hedge fund or investment bank, though I don't know who accessible that would be to someone like me who has no experience other than retail.

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  diablo272 said:
I apologize for resurrecting an old thread, but I figured it would be better than starting a new one.

 

I am considering prop trading. I've been on the websites of several of the more "respected" U.S. firms such as First New York, Jane St., and Chicago Trading, and it seems that they are interested in people with degrees in finance, econ, or math fields. I do not have a background in anything like that (in fact, I'm pretty bad at math). If I'm simply a profitable futures trader, might I still appeal to these firms? I know there probably won't be a simple yes/no answer to this question, but I'm curious as I have no experience in any trading arena besides the one on my screen. I am not interested in the arcade type firms that require a deposit. The primary reason for my interest in a prop setting is so I can learn about trading from a different perspective. Thanks.

 

Edit: I should add that I would also be interested in trading at a hedge fund or investment bank, though I don't know who accessible that would be to someone like me who has no experience other than retail.

 

I think the criteria for joining an institution differs from firm to firm and from country to country. In Japan, a track record is the resume of a trader and as long as you have a solid 3 years or so track record many firms are likely to bring you in. However, depending on the prop firm some may require an initial good faith deposit. One prop firm I dealt with in the past asked for a $10k deposit... this is a subsidiary of a major bank here locally. Some prop firms in Boston required a $30k deposit.

 

For investment banks, the hiring of traders has diminished severely. Many require 7+ yrs of experience in an institutional environment.... trading positions are rather scarce and only in a bull market are firms likely to expand and take in more less experienced traders. You should definitely talk to head hunters if this is your preferred path.... they have helped me land institutional positions. I tend to maintain good relationships with all my head hunters as well.

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Thank you James, that was exactly the kind of information I was looking for, especially the part about how a track record is the resume of a trader. I will look into what a head hunter is, and how I would contact one. I do not have 3+ years of profitability yet, but this is still valuable information to have. Thanks again.

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  diablo272 said:
Thank you James, that was exactly the kind of information I was looking for, especially the part about how a track record is the resume of a trader. I will look into what a head hunter is, and how I would contact one. I do not have 3+ years of profitability yet, but this is still valuable information to have. Thanks again.

 

The head hunters job is to find you a position within the area of your interest. They get paid commission... up to 3 months salary if you are hired by the hiring firm. Recruitment industry is big business and Japan is flooded with them.

 

Try registering with recruiting agencies especially those that specialize in the financial industry. You will end up meeting with them initially and then they will use their resources to find you a position based on your credentials. For example, I have found 2 trading positions in the past using a career recruitment website like Bilingual Jobs, Careers, Work & Employment in Japan : CareerCross (Japan only). I assume there must be sites like this in other countries as well.

 

Regarding educational degree.... I landed my first trading job without one so its really a case by case scenario.

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Interesting, I will investigate a possible equivalent of that here in the US. Coincidentally, I'll also check out that Career Cross site more thoroughly, because I am considering relocating to Japan after I finish school. Thanks again.

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Another question I just thought of: I know from your LinkedIn profile that you went to school in the US, and you're now in Japan. Is it realistic for me to be considering a move to Japan when my spoken and written Japanese would be sub par, considering the industry I'm in? I know I could trade retail while living in Japan, so I'm not exactly worried, but I'm just curious as to your experience since you have traded institutionally there, and I am also considering an institutional career. Sorry for asking so many questions, don't feel obliged to answer if you're too busy.

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  diablo272 said:
Another question I just thought of: I know from your LinkedIn profile that you went to school in the US, and you're now in Japan. Is it realistic for me to be considering a move to Japan when my spoken and written Japanese would be sub par, considering the industry I'm in? I know I could trade retail while living in Japan, so I'm not exactly worried, but I'm just curious as to your experience since you have traded institutionally there, and I am also considering an institutional career. Sorry for asking so many questions, don't feel obliged to answer if you're too busy.

 

Sure diablo, its definitely possible. You should know a good number of traders here are expats. What might work is to apply in your country and request to be sent to Japan which might be appealing for the firm. The base salary for expats are also higher than compared to locals.

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