Question from trader to trader: From time to time my boss passes by and asks for more revenues. I tell him to focus on our customer business and to be patient and not to exceed risks. He expects us to make money every day and gets nervous when we had a 0 month. He is looking for riskless revenues. As I am trader for years I know this is not possible. I always say to him: Look, the big IBs sourced out their punting (today I go long because it feels good) business into hedge funds and try to make money from their customer flows. Is this correct? Are the big institutions still agressive risk takers (punters) or do they try to make money from structured products and customer requests?

intersting ... do you really expect an honest answer , a person who is not from "big IBs" will just blurt out his (possibly the best) guess, and if one is from "big IBs", well... not everyone enjoys explaninig their pnl to everyone else . general rules: 1. nobody says no to custy flows, ever 2. nobody says no to trading pnl, especially if the weather is good and 3. "standard" structured products prices were squeezed to cents before the bust, and now the volumes may be, but then again everyone tries to constantly find "new" ones instead of "standard", they call it innovation

QuoteOriginally posted by: royalflushI always say to him: Look, the big IBs sourced out their punting (today I go long because it feels good) business into hedge fundsMy understanding, from reading news stories and reading job postings, is that investment banks are trying to integrate their prop trading into their flow business, in response to new financial regulations. So suppose a punter wants to go long bonds. They will somehow translate this into a bid, or a buying bias, in an electronic system on their flow desk, and accumulate out of customer flow. I don't know if in the past they accumulated from other dealers or exchanges or what.Prop trading is like owning a car. It may end up costing you a lot. You may go on Sunday drives spending thousands on gas, you may crash into someone and owe him $100,000, you may get arrested for DUI. But nobody wants to be without a car, because opportunities come up which you need a car to take advantage of.

All about flow... Punting is being made increasingly more difficult for the big institutions and there's only so much prop trading you can hide within the flow context.

QuoteOriginally posted by: Martinghoulthere's only so much prop trading you can hide within the flow context.This job was posted a minute ago:QuoteOur client is a Tier 1 Investment Bank who is looking for someone with a stats / machine learning background to join their High Frequency FX quant research and trading team.The team is responsible for electronic market making and generating alpha from the banks FX flow both internal and from their large franchise business. This quant trading role will involve work on the FX spot pricing engine and auto hedging algorithms to support the banks e-trading business.The bank has a strong franchise business with a large, high quality flow. The team has some of the best technologists in the City, specialising in high frequency / low latency. They are looking for someone with out of the box ideas to utilise this technology platform and large client flow to generate alpha.I guess the most you can hide in this situation is by not hedging. And then you can presumably increase the amount not hedged by offering favorable terms to large orders.If I tell everyone I will fill any Microsoft sell order, up to 100 million shares, at the bid, I will accumulate a lot of Microsoft in flow trading. I can say the same thing for the bid, and the offer, and then place my offer 10 points above the market.

I am not entirely sure what your point is, farmer, sorry...You can do all sorts of things, but, unless you make sure you're flat at the end of the day, you're gonna get penalized, 'cause you're going to be using up scarce balance sheet. So prop trade (within the flow context or otherwise) all you like, but prepare to face increasingly difficult times. That's why, as far as I am aware, prop traders are slowly abandoning the banks.

Im a trader in a 'big IB' and can say first hand that they have reigned the risk limits in on prop trading for all but the really top guys on the floor since the crisis. Having said that I do about 30% client flow and 70% prop but it is one of those things management really try to avoid talking about directly. It is kind of assumed that everyone will keep on doing it (we all need to make our bonus somehow), but there is no more official prop trading desks as such - everyone just trades away and mixes the client stuff into the book as it comes along. The heads of desk still have big risk limits but most of them now trade the big rate books (inflation and swaptions etc) or run the exotics books (dispersion etc) which gives the bank an excuse to give them a massive risk profile which they use to trade as they always would have anyway. These are the few and far between now though and i think its fair to say the majority of the serious prop guys have migrated to pastures out of the reach of government regulation.

all hedging is prop trading at the same time. if a client trades some exotic option that requires dynamic hedging, there is no way you can statically replicate it, and let's not even talk about trading costs.even simple things like callable libor range accruals require you to carry digital risk on high and illiquid strikes on your book. there is simply no way to be "hedged" perfectly, so you have to make a proprietary decision on how much of the risk to hedge and when to rebalance. certain customer markets (cms for example) are always one sided and require the desk to absorb the risk in a non-perfect way.volcker is a complete idiot for thinking he can actually regulate this, and that it is to be regulated to begin with. all desks are prop desks. every tiny loan a bank grants is a prop trade. every normal business out there, think pump manufacturer, that buys metals to sell a finished product is prop trading in its own particular way.every homeowner that buys a house and "securitizes" his future income, is a big overleveraged prop trader. i am going to stop now...this shit is making me very upset.

QuoteOriginally posted by: Gmike2000all hedging is prop trading at the same time. if a client trades some exotic option that requires dynamic hedging, there is no way you can statically replicate it, and let's not even talk about trading costs.even simple things like callable libor range accruals require you to carry digital risk on high and illiquid strikes on your book. there is simply no way to be "hedged" perfectly, so you have to make a proprietary decision on how much of the risk to hedge and when to rebalance. certain customer markets (cms for example) are always one sided and require the desk to absorb the risk in a non-perfect way.volcker is a complete idiot for thinking he can actually regulate this, and that it is to be regulated to begin with. all desks are prop desks. every tiny loan a bank grants is a prop trade. every normal business out there, think pump manufacturer, that buys metals to sell a finished product is prop trading in its own particular way.every homeowner that buys a house and "securitizes" his future income, is a big overleveraged prop trader. i am going to stop now...this shit is making me very upset.With all due respect, I strongly disagree.Commercial banks that grant loans have restrictions on how much they can lend. Homeowners have restrictions on the size/value of house they can buy. Moreover, both categories of punters can fail, if their prop trades go sour.Large banks that enjoy a government backstop should either be broken up or, failing that, discouraged from risky activities. Personally, even though I benefit from all the balance sheet large banks offer me, I'd rather give it up than be short the blowup option again. As to how to implement this, I suppose it has to be arbitrary, to a degree, but it doesn't mean it shouldn't be done.

All in the defintion of "Prop Trading"You are going to make PL from any opportunity, how you hedge your book and how you unwind you customer order in the market.My defintion of prop trading is more along the lines of Quote (today I go long because it feels good) or more accurately there are opportunties in the market that are not being made by customer flows. Every desk I know has had a bit of sideline in some "prop" trading - never explicit as such but there will be some book tucked away for "macro hedging" where they put in the odd punt. Some are more obvious than others... Most head traders have a book where they "hedge" the firm and take a punt...royalflush - if you head of desk is saying the above - shouldn't you be looking for opportunties to pass back to him? Isn't that the real question? P&L is the gaps in everyone elses market....