When you hear the words Investment Banking you might imagine it to be a corporate banking job that supports M&A (Merger and Acquisition), which is basically buying companies; however, there is another side of the Investment Banking business: Global Capital Markets, usually referred to as Sales & Trading, and takes care of many kinds of securities. Today, I would like to introduce the job of trading since I experienced internships as a junior trader (sometimes as a junior sales person) in 4 investment banks.Mainly, there are two types of the trading job: position-taking and market-making.Position-taking is just making profits by taking the risks by the traders. With their own market views, traders always speculate how the markets move, and they take a position to make a profit. If the trader thinks that the price of Microsoft’s stock will go up, he or she buys the stock and will sell it when it is a higher price. This gives a trader a positive profit.
For a more detailed example in FX trading (currency trading), if FRB(Federal Reserve Bank), the central banking system of the United States, decides to make the U.S.’s interest rates lower, the value of the dollar gets weaker, and everyone would like to sell the dollar. Then, the trader can sell the dollar when it is still at the higher price, and buy it back when it becomes a cheaper price, thus making a profit.Market-making is generally called underwriting. Clients call and tell sales people that they want to buy or sell securities such as equities, bonds, or currencies, and sales people ask traders the price of the securities, and traders have to give the price to sales people. If the client likes the price, the trader must execute the deal.
Even though the trader doesn’t want to buy or sell the securities, they need to do it for the client if the client wants it done. Therefore, in many cases, the trader needs to take a position likely to lose, and in that case, they need to buy or sell other securities to hedge the position.Traders used to take advantage of a price differential between two or more markets and there were a lot of opportunities to do this practice within the industry itself; however, with the evolution of information technology, the spread of the price differences became smaller and traders cannot expect a lot of profit from that particular way of doing business in the market anymore. Presently, Investment Banks’ traders and Financial Engineers have been thinking of new ways that they can make a larger profit, and they are now more into creating structured security products which have some or many securities combined. They then trade them since structured products have more variety and uniqueness so traders can expect more profit from the structured products. The traders’ tasks in the future will be creating and trading more complicated structured products to make a greater profit for themselves. All in all, experience in investment banking is a useful thing to have.
The industry is growing and the demand for experts in this field of securities and trading is growing all the time.Works CitedArbitrage (n.d.). Retrieved August 29, 2007, from http://en.wikipedia.org/wiki/Arbitrage