How the Trading Floor Really Works
Terri Duhon


Contents
Foreword by Gillian Tett xi
Preface xv
Why I Wrote this Book xv
What this Book Does and Does Not Do xvi
Who this Book Is For xvi
Finally, Some Key People in the Process of Writing this Book xvii
All Feedback Welcome! xvii
Women on the Trading Floor . . . Really? xix
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
vii
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
viii Contents
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
Contents ix
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 34