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1.5.2 Sales and Trading Desks

Trading activity is usually divided by asset class: equity, commodities, and fixed income (which includes interest rates, credit, and foreign exchange). The type of trading can roughly be considered as belonging to one of three kinds: proprietary, meaning that it is carried out with the bank's money; on behalf of clients for those banks who are market makers (institutions offering a two-way price on selected financial instruments); or as a hedge of the bank's positions. Within each asset class (with some variations taking into account characteristics that are specific to a certain asset class) trading desks vary according to the complexity of the traded instruments. There are the cash desks, carrying out the simplest type of activity, which can be trading shares in equities or spot foreign exchange (FX) rates in FX, vanilla options desks, and exotic options desks,[1] On each desk there can be a mixture of trading for proprietary purposes or on behalf of clients. Almost all traders need to trade for hedging purposes since they need to mitigate the risk in their portfolios. Proprietary trading, as a consequence of the 2007 to 2009 financial crisis, is disappearing, particularly within those institutions that have accepted government intervention.

Sales desks facilitate the contact between clients and traders: a client who wants to do a simple but large transaction for hedging purposes (e.g., an exporter wanting to protect itself from all currency fluctuations) or an institution (e.g., a retail bank) wanting to offer its own clients a structured product, will contact a sales desk, which in turn will contact a trading desk. A sales commission goes to the sales desk and is a one-off percentage of the profit on the first day. The profit for the trader is calculated as a percentage of the profit of the trade throughout its life.

This different compensation structure is behind a trader's (irrespective of what the popular press might think) natural risk aversion compared to the salesperson's greater insouciance: a trade might be very costly to hedge over a long period but this has no effect, or only a small one, on the sales commission. The note on different compensations is key to understanding the difference in the alignment of interests. Not only will this be stressed when discussing the difference between a for-profit investment bank with a nonprofit development bank, but the fact that a trader has some future costs throughout the dynamic life of a trade is crucial toward asking the question, where do the funds come from?

When a trader decides to enter into any transaction, be it a swap, a forward, or the purchase of an option, when he needs to post collateral or pay margin calls, he needs ready available cash. Some of this cash comes from the treasury desk.

  • [1] Sometimes cash desks are called Delta 1 using their sensitivity to their underlying as their name (a certain move in the underlying corresponds to the same exact move in the value of the portfolio). A mathematically minded and slightly irreverent nomenclator would call cash desks Delta 1 Gamma 0; vanilla options desks Delta non 1, Gamma constant; and exotic options desks Delta non 1, Gamma non constant.
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