The Trading Floor

Overview

The Trading Floor is the entity within the investment bank in charge of
pricing and executing trades. It is generally composed of “Desks”, which
are small units specialized in a particular market (bonds, equity, SWAPs,
Forex…)

The main desks in a trading floor are:

 The Fixed-income Desk
 The Equity Desk
 The FX Desk
 The Treasury Desk
 The Derivatives Desk

In recent years, trading floors have come to include a new activity:

structuring, which creates new complex products tailored to customers’
needs and offering higher margins
 The Fixed-Income Desk

The fixed-income desk is in charge of the bank’s activities on the bond

markets, whether they are related to intermediation or market making
 To avoid conflicts of interests, separate traders carry out those two different
activities
 If the bank is also a primary dealer, it will delegate this mission to this desk

Depending on its size, the investment bank will create a separate portfolio
that invests parts of its capital in the bonds markets (proprietary trading)
 This portfolio is usually invested in government bonds and has a long-term
strategy (or even a hold-to-maturity (HTM) strategy)

The accounting treatment of bond trades and portfolios will vary,

depending on investment strategies. The main accounting books are
Trading, Market making and HTM.
 For example, HTM books are not valued at market prices but at historical
prices (so no yield curves impacts) but bonds in these books cannot be sold…
 The Equity Desk

The equity desk is in charge of the bank’s trading activities on equity

markets. These activities are mainly oriented towards speculation, to a
limited extent, or arbitrage

The equity desk can engage in some market making activity if:
 Its shares are listed and wants to offer liquidity or maintain market prices at a
target range
 It has a contract with a client to offer liquidity to its shares in return for a
negotiated fee. The bank usually offers such services to its IPO clients

The equity desk can also execute trades on behalf of other desks, such as
the derivatives desk, that offer financial contracts whose underlying is a
stock, such as equity options. This is a hedging activity

If the equity desk is very active, it will be an important client for the
bank’s brokerage business unit
 The Treasury Desk

The treasury desk is in charge of the bank’s trading activities on money

markets. The desk’s main mission is to level out the bank’s cash balance
by borrowing or investing day-end balances

The treasury desk is active on both segments of the money market:

 Interbank market: reserved to banks only and no collateral is required from the
borrower
 Repo market: open to all money markets players. It does require a collateral
whose market value should equal the amount borrowed. For this purpose, the
treasury desk will borrow bonds from the FI desk portfolio (leverage effect…)
 By being present in both segments, treasury desks contribute, via arbitrage
activities, to reducing rates differentials between Interbank and Repo markets

The treasury desk plays an important role in implementing the bank’s

Asset-Liability Management (ALM) strategies, especially in matching
short-term inflows and outflows
 The Foreign Exchange Desk

The FX desk is in charge of the bank’s trading activities on foreign

exchange markets. The desk’s main missions are to:
 Best execute transactions on behalf of the bank’s corporate clients as they
hedge their activities (imports, exports…)
 Carry out some limited market making activities on the local FX market,
offering continuous bid-ask quotes in the interbank market
 Hedge the bank’s overall FX exposure that results from other entities such as
the asset management unit, when investing in foreign markets, or the trading
floor’s derivatives desk, engaging in a currency SWAP for example…

The FX desk can also engage in speculative trades by taking bets on future
movements of FX markets. However, this activity is usually heavily
regulated as it is risky and capital consuming
 In Morocco, speculation in FX markets is forbidden. FX activities are under the
double supervision of the Central bank and “l’Office des Changes”
 The Derivatives Desk

The derivatives desk is in charge of the bank’s trading activities on the

derivatives markets. The desk’s main missions are also related to:
 Offering the bank’s clients the appropriate products to hedge their exposures
related to their activities
 Hedging the desk’s and the bank’s overall exposures. This hedging consists
usually in reversing the position in the derivatives market. As such, the desk
needs to trade frequently on the derivatives market

The derivatives desk works closely with structurers to create new

derivatives products and strategies to be proposed to investors
 In small banks, structuration activity is carried within the derivatives desks
 In big banks, the two activities are separated. Moreover, traders of the
derivatives desk specialize by products (SWAPs, Options, futures…)

The derivatives desk is essential to implementing the bank’s ALM strategy

as their products’ flexibility makes it easier match assets and liabilities
 The Sales Desk, Sell-Side Research…

Traders engage in market-making and intermediation activities. In both

cases, they work closely with the sales force, commonly called “Sales”,
who proposes the trading ideas to clients and transmit their orders back
to the appropriate trading desk

To avoid conflicts of interests, sales people do not communicate to traders
the identity of their clients while expecting to get best execution for their
orders. Therefore, it is important to align interests of traders and the sales
force, especially through a clever division of revenues between them

Sell-side research is research aimed to assist traders and sales in

suggesting trade ideas to customers. The quality of this research is an
important marketing for the investment bank

In addition, road shows for important clients, are regularly organized by
the sales force to elaborate on the Research’s findings, offering
opportunities to build closer relationships with those clients
 The structure of the trading floor

In recent years, large investment banks have evolved their corporate

organization into a three-layer structure:
 Front Office: in charge of activities such as investment management services,
corporate finance operations (IPOs, Mergers and acquisitions…), development
of trading strategies, investment research reports…
 Middle Office: in charge of implementing internal controls, risk management,
regulatory and compliance norms, equity research, internal development…
 Back Office: in charge of trade confirmations, execution and settlement of
transactions, maintaining trading platforms…

These different activities can also be looked at in terms of two main

business lines:
 Buy side: trading securities for cash or other securities
 Sell side: providing “financial advice” to clients looking to buy investment
services

The trading floor adopts the same organizational structure