Salespeople at investment banks cultivate client relationships and pitch trading ideas, while traders provide liquidity across fixed income, equities, commodities, and currencies. Flow traders profit from bid-ask spreads, agency traders execute client orders, quant traders offer algorithmic strategies, and proprietary traders bet the bank's own capital. The Volcker Rule limits proprietary trading but banks still hold securities for market-making, blurring the line.
Chapters
How banks work, part 8: Sales and trading. In previous episodes in our mini-series on how banks work, we have discussed the role a bank plays in debt and equity issuance facilitation. In this episode, we are looking at the essential role that major investment banks play in creating and sustaining well-functioning markets. Simply, the role of sales and trading teams is to provide institutional investors with the very best trading ideas, strategies, pricing, and execution. Firstly, salespeople act as an important intermediary between client and trader. Their role is to generate new client business and deepen relationship with the existing clients by offering excellent levels of service and delivery. Far from being a simple sales role, salespeople on the desk need to know both their clients and their bank's trading products intimately, and be able to come up with new trading ideas and strategies for clients. Traders fulfill essential market-making, liquidity, and execution functions to ensure that financial markets work smoothly and efficiently. A large investment bank will structure its sales and trading operations into major asset classes: fixed income, equities, commodities, and currencies. Depending on the size and specialism of the global markets division, specialized sales and trading teams will support various regions and strategies. In addition to asset classes, there are different types of traders: flow, agency, quantitative, and proprietary. A flow trader is the most common type of trader in an investment bank. The role of a flow trader is to provide a market with liquidity and depth, whilst also making a market for a particular security. Providing a client with a bid and offer alongside an order volume. Flow traders make money off the spread between bid and offer. The tighter the spread, the more chance of winning business. However, a tight spread is less profitable for the trader and the bank. Agency traders, also known as sales traders, execute trades on behalf of their clients. They are not market makers, and they often operate in highly liquid markets, for example, major currency markets, where there is no need for a market maker. Quantitative or algorithmic traders provide automated rules-based trading strategies sold to clients who want to benefit from a low-fee structured trading product. And finally, proprietary trading involves banks using their own account to make certain types of speculative investments. In the wake of the 2008 global financial crisis, the Volcker Rule restricted certain trading activities which would cause a conflict of interest with bank clients or present a material risk to wider banking operations. Now, it's important to note that banks are still allowed to hold securities as part of their essential market-making activities. Banks also hold significant liquidity asset buffers made up of various high-quality securities. Therefore, the line between flow trading and proprietary trading remains blurred.
