The Role of Sales
The sales team communicates directly with hedge funds, mutual funds, and other financial institutions to deliver information regarding securities and financial products. They interact with institutional clients to provide updates on global market trends and potential investment opportunities. A deep understanding of financial products brought about by the trading team is required in order to provide valuable insights to clients. Additionally, the sales team works with traders to price and execute orders of desired trades.
The Role of Trading
Traders buy and sell securities on behalf of their clients while making a profit on a spread, which occurs when they purchase securities at a lower price than the price quoted (see key terms below). Traders specialise in trading different asset classes (mainly fixed-income, equities, commodities, foreign exchange, or derivatives).
What is market making?
Market making is an activity that provides the market with liquidity while helping the market makers profit from the difference in the bid-ask spread. Market makers are compensated for the risk of holding assets because they could see a decline in the value of an asset after it has been purchased before it is sold to a buyer. One famous example of a market maker is the US-based quantitative trading firm and liquidity provider Jane Street Group LLC, which made about $4.4 billion in revenue in the first-quarter of 2024 managing just over $140.2 billion in assets.
Key terms in Sales and Trading
Offer: The price at which the market maker offers to sell an asset to other traders.
Bid: The price of an asset for a buyer
This will almost always be lower than the offer price.
Spread: The difference between the bid and offer price quoted for an asset from which market makers make a profit.
PnL: Refers to Profit and Loss
How traders refer to the daily change in the value of their trading positions at the current market price
Key roles of traders
The role of Flow traders
Flow traders actively participate in market making, using this opportunity to profit from the bid-offer spread while providing liquidity to the market. Profit and loss are created by traders when executing these trades.
The role of Agency traders
Agency traders execute trades on behalf of the firm’s clients (usually high volume, followed by a high commission). When executing an order on behalf of institutional clients, traders must strategically spread out their orders in smaller volumes that reduce their impact on the market to purchase the desired number of shares at a lower price.
The role of Quantitative traders
Quantitative traders create automatic, rules-based trading algorithms for clients who want to benefit from a low-fee, structured trading product. They get involved in markets with structural trading opportunities where algorithms perform better, especially with those requiring high-frequency trading in order to generate profit.
Types of Asset Classes
Equities
Equity represents ownership held by shareholders in an entity, which is realised in the form of shares. Equity trading requires the analysis of companies using various financial metrics (Discounted Cash Flow (DCF) valuation, P/E ratio, EPS, EV/EBITDA multiple etc).
Fixed-Income
Fixed-income securities provide returns in the form of fixed periodic payments known as coupons. The most common fixed-income securities are bonds, which companies and governments issue to raise capital.
The yield to maturity (YTM) is the rate of return on a bond if purchased today for its current price, held through its maturity date, and paid off in full at maturity. Normally, the yield to maturity is expressed as an annual rate.
Currencies
Currencies are traded in pairs on the FX market. A currency pair includes a base and a quote currency, such as “USD/GBP”, where USD is the base currency and GBP is the quote currency.
Spot rates are the price a buyer will pay “on the spot” for a foreign currency. The forward rate is the price at which currencies will be exchanged at some given date in the future. The forward rate is used by speculators as well as companies looking to hedge their foreign exchange risk.
Commodities
Commodities such as metals (copper, iron, etc) or energy-related products (oil and natural gas) can also be traded. In particular, investors view metals as a reliable investment because they tend to retain their value over time. Precious metals such as gold are often used to hedge against inflation and currency depreciation.
Commodities are usually traded using derivatives (explained below), especially through futures or options contracts. For example, Crude Oil WTI (NYM $/bbl) Front Month involves a future toward crude oil.
Derivatives
A derivative is a type of investment that derives its value from the value of other assets like stocks, bonds, commodities, or market index values (S&P 500, FTSE 100, etc). Some derivatives involve futures contracts, forward contracts, call options, put options, etc.
For instance, a call option gives the holder the right to purchase an asset for a specific price on or before a specified expiration date. Contrastingly, a put option gives the holder the right to sell an asset for a specified price on or before a specified expiration date.
Major S&T Event: India's Bond Inclusion in Global Indices
JPMorgan’s widely tracked emerging market debt index has been gradually adding India’s government bonds, preparing the stage for billions to flow into the world’s fifth-largest economy. The market has received inflows totalling $10.5 billion since the announcement, a six-fold increase from two years ago. India’s high economic growth rates and the low volatility of rupees have made the Indian market attractive to global investors.
Nonetheless, the Reserve Bank of India (RBI) will likely allocate this large inflow of dollars into foreign reserves to prevent rapid appreciation and maintain currency stability. India has kept their currency relatively stable compared to other emerging markets, giving the RBI more credibility. This makes the Indian Rupee an attractive carry trade, where investors borrow money in a low-yielding currency and invest in rupee-denominated assets to capture higher yields. This low volatility encourages more investments by reducing the risk of capital losses that could arise due to sudden sharp exchange rate fluctuations. Moreover, the Indian government bonds provide good diversification to portfolios as there are low levels of foreign ownership, even following this inclusion. Therefore, to fully ride the momentum of this wave of investments, RBI must prioritise currency stability and the government needs to remain fiscally responsible. As foreign ownership of Indian bonds grows, the country’s bond market stands poised to play a pivotal role in the global financial ecosystem.
Wigglesworth, R. (2024, April 29). Jane Street is big. Like, really, really big. @FinancialTimes; Financial Times. https://www.ft.com/content/54671865-4c7f-4692-a879-867ef68f0bde
Vora, N., & Dharamraj Dhutia. (2024, June 26). Five things to know as India enters JPMorgan EM debt index. Reuters. https://www.reuters.com/markets/rates-bonds/five-things-know-india-enters-jpmorgan-em-debt-index-2024-06-26/
Dharamraj Dhutia. (2024, June 19). Foreigners buy $10 bln of index-bound Indian bonds since JPM inclusion announcement. Reuters. https://www.reuters.com/markets/rates-bonds/foreigners-buy-10-bln-index-bound-indian-bonds-since-jpm-inclusion-announcement-2024-06-19/
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