Flow trading business is one of the main revenue source for the big investment banks. Theoretically in flow trading trader trade financial instruments such as bonds, CDS with client's fund and he should be act in interest of client. In financial markets numerous variant of trading are happening. Basic ones are Agency Trading or Proprietary (Prop) trading and all other trading forms overlap between these.
Agency Trading: You simply execute orders for the client – you’re merely an “agent” doing what he/she wants and do not have (much) freedom.
Prop Trading: You are the principal and can make whatever trades you want, using your own money – within your trading mandate and risk limits.
Flow trading where there’s some element of agency trading but also some prop trading involved. In flow trading banks (desk) act as market maker for the clients (mostly hedge funds). Often banks uses Flow trading as generic term for all activities done to provide and manage the desired exposure for the clients. It may involve the market making , hedging , risk/p&l review and marking/pricing. Normally all major banks have flow trading business in Investment Grade (IG) ,High Yield (HY),Distressed Products,Loan trading and Index segments and different trading desk has been setup for these business.
Normally Flow trader takes positions in his books based on the market sense or buying recommendation and later when client places order to buy then he decides based on resting orders and do one of the followings
Differentiating between Prop trading and Market making can be very complex. Market making is important for the clients and it is not always possible for these clients to find an market participant with opposite trade offer. As suggested by George differentiation can be done as below.
You simply need to ask each trader how they get paid and you will know whether the firm is doing proprietary trading or market-making.This is a simple, two-step process:
Agency Trading: You simply execute orders for the client – you’re merely an “agent” doing what he/she wants and do not have (much) freedom.
Prop Trading: You are the principal and can make whatever trades you want, using your own money – within your trading mandate and risk limits.
Flow trading where there’s some element of agency trading but also some prop trading involved. In flow trading banks (desk) act as market maker for the clients (mostly hedge funds). Often banks uses Flow trading as generic term for all activities done to provide and manage the desired exposure for the clients. It may involve the market making , hedging , risk/p&l review and marking/pricing. Normally all major banks have flow trading business in Investment Grade (IG) ,High Yield (HY),Distressed Products,Loan trading and Index segments and different trading desk has been setup for these business.
Normally Flow trader takes positions in his books based on the market sense or buying recommendation and later when client places order to buy then he decides based on resting orders and do one of the followings
- He off load his positions to clients obviously with making profit on that
- Trader buys for both for his prop books and for his client as well, obviously he continue believe in it
- He just act as market-maker and back-to-back it with another counterparty cheaper.
Differentiating between Prop trading and Market making can be very complex. Market making is important for the clients and it is not always possible for these clients to find an market participant with opposite trade offer. As suggested by George differentiation can be done as below.
You simply need to ask each trader how they get paid and you will know whether the firm is doing proprietary trading or market-making.This is a simple, two-step process:
- The sell-side will need to classify personnel as back office and front office. Then, they need to categorize all compensation paid to the front-office personnel as either commission based or P&L based.
- If the amount of money that is paid based on P&L is greater than the amount of money paid based on customer flow (commissions), then you are looking at a proprietary trading operation, and the firm should be held in violation of the Volcker Rule.
We have trading rules that we need to obey. Trading is not just about making money but is also about discipline.
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