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11 19 2015 | by Victor Xing | Capital Markets

What values do buy side traders add?

Buy side traders are often unsung heroes of the mutual fund and hedge fund industry.  It is true that many of them do not make investment decisions (in terms of not having a balance sheet nor investment mandate) and mostly focus on execution, but they serve as the “gel” that connects internal investors (portfolio managers, investment analysts) to daily market events.

Buy side traders and their values to the firm

Traders’ foremost duty is trading, a.k.a best execution.  Traders decide which investment banks to send flows to, and each trader keeps track of investment banks’ past poor behaviors (too slow on execution, giving bad prices, or market moving suspiciously during pricing) plus other factors.  They are used to determine which investment banks are value-add to the firm’s share holders.  Buy-side traders have to “manage-in and manage-out” – make sure sell-side doesn’t mess around and to make sure PMs are happy about the execution.  At the same time, sell-side is the firm’s liquidity provider, and buy-side traders spend a lot of time building relationship and trust.

I was on our rates desk, which is close to our EM desk and one row over from our corporate and MBS/structured products desk, and our corporate traders always give us timely updates on talks of large corporate issuance (which would pressure the rates market).  Our EM folks would let us know when one of the EM currencies exhibit unexpected price action (we monitor them as well, but we generally focus on rates and risk assets).  All these information are relayed directly to our PMs and investment analysts.  Some of them also sat with us to hear our views on market events and news headlines.

The trading desk would also generate many investment models and trackers (this was one of my responsibilities) to help PMs make investment decisions (please see Is Financial Engineering useful?).

Traders also aggregate multiple PMs’ execution orders together to facilitate best execution, and they would manage the allocation process afterwards on partially filled orders.

Additionally, trading desks maintain their market views, and they can be very helpful to portfolio managers and analysts looking for diversity of opinions.

Buy side traders and their roles in the financial market

If multiple PMs decide to do the same trade, it is up for the trader to manage the flow and not impact market prices (reduce trading cost).  The trader will need to work with trusted sell-side traders to quietly work on the pieces.  It is an art, and some institutions are known to take days to establish or exit a position.

Without the traders’ micromanagement on order flows, we would regularly see large institutional flows lifting the market or crushing asset prices.  They help reduce market volatility.

Buy side traders and their responsibilities to shareholders

Finally, best executions by buy-side traders translate into cost savings for their firms’ shareholders.  These are individuals investing in mutual funds, hedge funds, as well as part of public pensions.

PIMCO’s London trading desk.  Photo credit: DAS

Buy side traders (PIMCO)

Next article11 18 2015 | by Victor Xing | Capital Markets

What role does trading serve in the financial system?