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09 21 2015 | by Victor Xing | Capital Markets
What is the day to day workflow of a fixed income buy-side trader versus a sell-side trader?
There are two types of buy-side traders. Execution-only and those who also manage money. My examples are based on my 5 years on a fixed income trading desk covering U.S. interest rates products (awesome experience)
Execution-only buy-side trader
Execution-only buy-side traders are common in mutual funds and hedge funds for two reasons
- Single line of communication in the scenario of a large mutual fund company – if there are 20 portfolio managers managing one or more asset classes, and different managers at various times may come to the market to change their positions, then there is economics of scale to hire traders to focus only on the operational tasks of trading, leaving portfolio managers to focus on risk management
- Intentional opaqueness (this is more specific to some hedge funds). Execution traders are kept in the dark on the fundamental reasons behind the position changes. Since traders themselves don’t know, broker / dealers would also be in the dark (although they would be able to see the flows that were shown to them)
The workflow in the morning begins with checking overnight orders left by the managers, communicating with portfolio managers to clarify details (how aggressive do you want us to get this done? Is the timeline more flexible than what is shown on the trade ticket?
Communication. Emails – a lot of emails. Instant messages – a lot of them. Internal chat rooms, Bloomberg IB, the turret rings constantly – managers could be calling from a research trip abroad, or it could be a random sales person who is calling because the head of sales desk are cracking whip. Buy-side traders answer a lot of email and most of them read ALL emails.
Then there is a lot of reading / gathering useful research. Trading is an art, but execution traders still need to prove their value by reading a lot of dealer research and present interesting ones to portfolio managers. The downside of not able to manage money to prove one’s asset management credential.
Sector-specific events. Corporate credit traders focus on earnings, and interest rates desk focus on economic data, the FOMC and other central bank policy / communication events. Everyone pay attention to bread and butter events in their sectors.
There is of course trading (in both primary and secondary market). Buy-side traders need to have good relationships with sell-side traders (they are liquidity providers), but they must be stern and be ready to respond in force if there are suspected misbehavior (there are all sorts). Since assets / money from multiple managers may participate in a single trade, the trader is responsible for allocating the trade to each managers’ accounts
Work with back office on trade settlement issues. Dealers sometimes mistakenly send incorrect prices on their VCON, which would confuse back office staff working on trade settlement
Be the point person at your firm. There are some excellent economists on the sell-side, and they go on client trips to visit multiple mutual funds, hedge funds, pension funds, and insurance companies to present their views (as a service to the client, and to test the temperature themselves to hear non-consensus views). Buy-side traders coordinate a lot of these trips, as well as gathering interest “hey, so-and-so from BankX is coming to talk about inflation and next month’s FOMC meeting, would you like to come?”
Relationship events. Buy-side traders sometimes go to client dinners organized by dealers. The goal is to have a relaxing environment and build relationship between the buy-side trader(s) and a bank’s sales person as well as traders. This is no different than client dinners at other industries (such as dinners between medical equipment sales people and doctors).
In short, all the above (besides the relationship stuff) happens during the day, and they usually all happen at once, leaving one jumping from one thing to the next. It is never boring.
Buy-side traders with asset management responsibilities (less common)
The workflow is similar, but traders with investment responsibilities are usually portfolio manager-like, although with less asset. They would perform execution trader tasks but at the same time manage their own books.
Sell-side traders usually have access to a greater variety of financial instruments. They focus on two things:
- Market making – when buy-side traders call a bank’s sales person to perform a transaction, the sales person connects with the sell-side trader to get a quote, and the sell-side trader provides a quote to facilitate transaction. This goes on throughout the day, and sometimes at night when an important client calls to do a trade.
- Trade one’s balance sheet. Sell-side traders all have their risk books, and they can take on different risks to generate profit for the bank. This also happens throughout the day
Traders on the sell-side also go on client visits, and they answer many questions from the buy-side.
Next article09 21 2015 | by Victor Xing | Capital Markets