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I used to work in trading. Honestly a very large portion of the markets trading type business for investment banks is really just taking advantage one way or an

I used to work in trading. Honestly a very large portion of the markets trading type business for investment banks is really just taking advantage one way or another of these kind of regulatory loopholes, not as blatantly as this maybe but some still very questionable. That and ripping off clueless corporate clients with bid-ask spreads. Some traders are still able to convince themselves it's cause theyre some sort of market wizard though cause tbh most of these people aren't that bright. Any other finance guys can correct me if I'm wrong, it could be just because my experience had been working with teams that I was never too impressed with

EugeneG 6y ago
You're wrong. Few reasons: 1. "A very large portion" - no, there are some motivated by different regulatory treatment for different transactions, but it's not "a very large portion." There's also nothing wrong with the regulatory-motivated trades generally done by banks. It's not the same as what this guy did which is clearly immoral/wrong - he was not doing something in an optimal way to reduce tax burden. He was doing things that caused governments to literally pay out new money - negative tax payments - possibly under fraudulent pretenses. As an analogy for what is appropriate - if you open a Corp in the US but decide to open an S Corp rather than a C Corp for better tax treatment - is that a reg loophole? No you're following the law to get better tax treatment. 2. Wide bid-offer isn't a rip off. Markets are generally competitive, corp clients can easily ask 3-4 banks for a price for the same product. What confuses novices is that in financial markets its typically easy to see the "mid" in addition to a bid-offer and then feel bad about profits. Would you feel equally guilty if you went to the store and saw the "mid" on a $1000 iPhone is $500 - and the bid/offer is 50%? Before you say "it's different!" - consider the complexity involved in arranging a profitable bank that has a competent sales team, trading desk, operations, compliance, capital, legal, etc. etc. - and also does profitable transactions. It's a moat - hard to replicate - and that's what leads to profits.
- deleted 6y ago
  [deleted]
- ackbar03 6y ago
  For the first point I agree. In this person's case it is more extreme. I don't know what capacity your involved in sell side trading but I'll share some cases I've seen in case anyone else reading is curious as well. For rmb, krw, and a lot of Asian currencies in general there is an onshore and offshore market. A lot of the times both onshore and offshore books are managed by the same team. This creates two tradable currencies which should theoretically move in lockstep and some corporates have capacity to arbitrage/move currency across border. A common strategy is to simply bet that their spread converges when some technical factor like a large trade going through moves one market more than the other. Hardly nefarious but exists because of regulatory reasons and hardly rocket science. The problem happens when currency trends strongly in one direction in which case one book has massive losses and the bank ceo of that branch is not happy. Or when the onshore/offshore team starts trying to claim a stake of the profits because their resources/credit lines are being utilized. A lot of bickering and politics then ensues. Another case, in China, regulation requires long usdcny fx forwards to be accompanied with an extra 300bp charge to stop cny depreciation. Option structure only require half the charge. A lot of the desk pnl is essentially made from selling synthetic forwards structured from calls. Similarly a large part of the hybrid structured business in general is because some insurance/pension funds are only allowed to trade bonds but want fx/equity exposure. For 2, from my experience it really is ripping off most of the time. The exception is when a client comes in with an order much larger than what the market can digest quickly. This usually requires a mixture of luck, skill, and balls to avoid it blowing up in your face and is one of the rare times I think traders really are doing their job. However these trades don't come too often
- Apofis 6y ago
  I like the way you put it... "Better Tax Treatment"...
smabie 6y ago
You make market making sound very easy, but let me tell you, it really isn't. Quoting correct big/ask spreads that are competitive, leave you with some profit, and aren't unduly risky is a very difficult job.
- dcolkitt 6y ago
  I agree with you, but think OP has something different in mind than you. Market making in an open, competitive space (e.g. prop shops competing on a public exchange) is extremely difficult. But I get the sense that OP was talking about captive flow. You do see this a lot on sell-side desks. Some client approaches the bank to do a trade that's ancillary to their business. E.g. a large multinational needing to hedge its FX exposure. They're mostly selecting the bank based on the overall reputation and relationship with the franchise. If the desk squeezes them for a few basis points on a cross-currency swap, the client pretty much doesn't care, let alone seeking out competitive pricing on individual trades.
  - ackbar03 6y ago
    Yes this is what I meant. Basically if your in sell-side trading, corporate flows are your bread and butter. The way it works is some corporate customer has some hedging need and the sales desk slaps on a big fat margin that contributes to the majority of money being made. The trader sees this and he's a greedy sob too so what he does is he quotes the sales desk an internal price that is further away from the true market bid-ask. This usually involves some degree of bickering depending on how well the two desks get along, and whatever the trader is able to get away with contributes to his "trading" pnl. And yes it is as pathetic as it sounds and involves a fair bit of weaseling around. Less the case if your client is a financial institution though, in which case it more depends on how many flows and trades you get and hope it matches off
Privacy846 6y ago
It’s interesting that the biggest _diss_ here seems to be that they are “not that bright”, not the implication that they are doing something blameworthy.
kwere 6y ago
Not a finance guy here: i think it depneds on which branch or company you are working with and their incentives/business model. But yeah very few companies can call themselves "market wizards" for 5+ years

EugeneG 6y ago

You're wrong. Few reasons: 1. "A very large portion" - no, there are some motivated by different regulatory treatment for different transactions, but it's not "a very large portion." There's also nothing wrong with the regulatory-motivated trades generally done by banks. It's not the same as what this guy did which is clearly immoral/wrong - he was not doing something in an optimal way to reduce tax burden. He was doing things that caused governments to literally pay out new money - negative tax payments - possibly under fraudulent pretenses. As an analogy for what is appropriate - if you open a Corp in the US but decide to open an S Corp rather than a C Corp for better tax treatment - is that a reg loophole? No you're following the law to get better tax treatment. 2. Wide bid-offer isn't a rip off. Markets are generally competitive, corp clients can easily ask 3-4 banks for a price for the same product. What confuses novices is that in financial markets its typically easy to see the "mid" in addition to a bid-offer and then feel bad about profits. Would you feel equally guilty if you went to the store and saw the "mid" on a $1000 iPhone is $500 - and the bid/offer is 50%? Before you say "it's different!" - consider the complexity involved in arranging a profitable bank that has a competent sales team, trading desk, operations, compliance, capital, legal, etc. etc. - and also does profitable transactions. It's a moat - hard to replicate - and that's what leads to profits.

deleted 6y ago
[deleted]
ackbar03 6y ago
For the first point I agree. In this person's case it is more extreme. I don't know what capacity your involved in sell side trading but I'll share some cases I've seen in case anyone else reading is curious as well. For rmb, krw, and a lot of Asian currencies in general there is an onshore and offshore market. A lot of the times both onshore and offshore books are managed by the same team. This creates two tradable currencies which should theoretically move in lockstep and some corporates have capacity to arbitrage/move currency across border. A common strategy is to simply bet that their spread converges when some technical factor like a large trade going through moves one market more than the other. Hardly nefarious but exists because of regulatory reasons and hardly rocket science. The problem happens when currency trends strongly in one direction in which case one book has massive losses and the bank ceo of that branch is not happy. Or when the onshore/offshore team starts trying to claim a stake of the profits because their resources/credit lines are being utilized. A lot of bickering and politics then ensues. Another case, in China, regulation requires long usdcny fx forwards to be accompanied with an extra 300bp charge to stop cny depreciation. Option structure only require half the charge. A lot of the desk pnl is essentially made from selling synthetic forwards structured from calls. Similarly a large part of the hybrid structured business in general is because some insurance/pension funds are only allowed to trade bonds but want fx/equity exposure. For 2, from my experience it really is ripping off most of the time. The exception is when a client comes in with an order much larger than what the market can digest quickly. This usually requires a mixture of luck, skill, and balls to avoid it blowing up in your face and is one of the rare times I think traders really are doing their job. However these trades don't come too often
Apofis 6y ago
I like the way you put it... "Better Tax Treatment"...

smabie 6y ago

You make market making sound very easy, but let me tell you, it really isn't. Quoting correct big/ask spreads that are competitive, leave you with some profit, and aren't unduly risky is a very difficult job.

dcolkitt 6y ago
I agree with you, but think OP has something different in mind than you. Market making in an open, competitive space (e.g. prop shops competing on a public exchange) is extremely difficult. But I get the sense that OP was talking about captive flow. You do see this a lot on sell-side desks. Some client approaches the bank to do a trade that's ancillary to their business. E.g. a large multinational needing to hedge its FX exposure. They're mostly selecting the bank based on the overall reputation and relationship with the franchise. If the desk squeezes them for a few basis points on a cross-currency swap, the client pretty much doesn't care, let alone seeking out competitive pricing on individual trades.
- ackbar03 6y ago
  Yes this is what I meant. Basically if your in sell-side trading, corporate flows are your bread and butter. The way it works is some corporate customer has some hedging need and the sales desk slaps on a big fat margin that contributes to the majority of money being made. The trader sees this and he's a greedy sob too so what he does is he quotes the sales desk an internal price that is further away from the true market bid-ask. This usually involves some degree of bickering depending on how well the two desks get along, and whatever the trader is able to get away with contributes to his "trading" pnl. And yes it is as pathetic as it sounds and involves a fair bit of weaseling around. Less the case if your client is a financial institution though, in which case it more depends on how many flows and trades you get and hope it matches off

Privacy846 6y ago

It’s interesting that the biggest _diss_ here seems to be that they are “not that bright”, not the implication that they are doing something blameworthy.

kwere 6y ago

Not a finance guy here: i think it depneds on which branch or company you are working with and their incentives/business model. But yeah very few companies can call themselves "market wizards" for 5+ years