The Game: How the World of Finance Really Works - part 2: trading

In the second of four extracts from his bestselling book about the City and beyond, Alex Buchanan introduces trading

Depending on whom you ask, sales and trading go together either like Bonnie and Clyde or Cain and Abel. Spawned from the very same seed, they're either best friends or in a constant state of civil war.

Once upon a time sales was the preserve of the gentleman and trading that of the barrow boy, but these days the two are more adjacent than ever. Trading may be the more upwardly mobile - technological advances have transformed its reputation, and today's hot-shot graduates now seek to become traders instead of brokers - but class prejudices take time to shift. In many firms a trader, for all his commercial virtues, remains the salesman's social inferior.

But brokers and traders also have much in common - their jobs are closely related and they're prey to many of the same frustrations, temptations and aggravations. For traders, as for brokers, getting in a client's face is what counts. As long as you have something to say (however tenuous) and can change your mind on a moment's notice, then you should have no problem at all.

In a Nutshell

Trading (or "dealing"), in its most basic form, is the buying and selling of different assets (shares, bonds, futures, options, currencies, commodities, etc) either for your firm or on behalf of an investor (or "client"). Traders fall into several camps. On the sell side there are a) "sales traders", b) "dealers", c) "market makers", and d) "prop traders", and on the buy side there are "dealers" (not to be confused with the sell-side function of the same name). As everyone treads on everyone else's toes (and those of brokers and fund managers), we'll try and keep things as simple as we can.

It's Not What You Know...

Traders get in even earlier than brokers (6.30am GMT is considered late in most firms), sit adjacent to brokers at desks piled high with banks of screens (like despots with CCTV obsessions) and are almost exclusively male. Females do exist but they must either a) have their wits about them or b) revel in/be inured to a climate of crudeness. There's a camaraderie/sharpness about trading desks that no other City department can emulate, and we shouldn't hide from the fact that women find much in male humour that is a) infantile, b) pointless and c) offensive. On the flipside, women who last the course can be among the more popular members of the team. Traders can be both sexist and fraternal.

Before the market opens, traders run a similar gauntlet to brokers. Anyone who's late will be hauled over the coals (serenaded by klaxon, a round of applause or stony silence - it all depends on the firm/mood of the morning), and will be given the appropriate punishment. Most trading desks will then get together ahead of the morning meeting proper to discuss events such as moves in overseas markets or relevant issues from the previous day's trading.

Once this is over traders will get straight on the phone, passing on any relevant (in their eyes) observations to the client base. You shouldn't expect much in the way of indepth company analysis, as many traders don't - indeed won't - read research reports and will focus no further out than the end of the day ahead (ask the average trader a simple question on company valuation and you'll receive a look of bemusement). Intellect is not a prerequisite but wits, intuition and persistence are. Much of the time you'll get an order because you called, not because of what you said. If you have to say something make sure it's something the client wants to hear. Different clients will want to hear different things.

"Brian? Del Boy. How are you, mate? Good result for your lot last night."

"Well, it was only Wigan. Tell me, what's going on?"

"Got a mixed bag for you this morning. Upgrades for Thomas Cook, RWE and a whole load of shite Italian banks - don't say I didn't warn you - and downgrades for Metro, BT and Electrolux. We've had some good two-way in the food retailers and that looks set to continue. What else? Oh yeah - I'd say the insurers look vulnerable here. I'd be selling Swiss Re and Aviva."

"Thanks mate. I've got some Novartis to buy. Can we start with 20,000 with a fifty-seven fifty top?"


"Carl? Del Boy. You all right, son?"

"Yeah, not bad, Del. How's life?"

"Couldn't be better, Carl, couldn't be better. The wife's getting me down but what can I say? I'm sending you something we've done on the Italian banks. We've upgraded the sector this morning and it all looks good. Ask the analyst if you want any details."

"Thanks. Anything else?"

"We've had some form in the food retailers and I'd be selling the insurers - they look toppy here. We're also seeing buyers of Novartis."

"That's cool. I might have something for you later. Keep me posted if you see anything in KPN."

Some clients take an age to make up their minds (because of internal bureaucracy or a lack of courage in their convictions) and thus come to a party too late, while others won't stand on ceremony and will be badgering traders, brokers and analysts well before the market opens.

"Del? Brian. What do you think the miners will do today? We're short Antofagasta (Chile's largest copper producer and listed in London) and the copper price has been rallying. Should we cut and run?"

"Mate, I'd stick tight if I were you. The market looks soggy to me."

But fast forward two hours and,

"Del, I'm being killed in these miners. What shall I do?"

"Yeah, they're looking pretty perky, aren't they? I thought they would. Let's cut them."

To the outsider there's something psychotic about the frequency with which traders change their minds and then forget they've done so. It's as if they all wallow in a permanent state of chronic amnesia.

For traders as for brokers, the most important maxim is "know your client". Work out what he wants to hear and you're away. Get him on side and he'll be your friend for life.

Indeed, many sales traders and buy-side dealers grew up together, went to school together and arrived in the City together, working as "blue buttons" (i.e. runners) on the stock-exchange floor. As in many other walks of life, common ground and longevity form the tightest of bonds. They breed trust, and in the City trust breeds commercial gain. Is it so surprising that, despite broker and fund manager protests, traders reward their friends first, second and third? Blood is, after all, thicker than water.

This "favour culture" might drive brokers and analysts to distraction, but in truth most struggle to do anything about it. A fund manager might ask his dealer to "direct a trade" to a certain firm, but much of the time the dealer will have total discretion, charged with getting the trade done at the most advantageous price. If that happens to be via his best friend, who works for a firm that provides his employer with no other discernible service, then so be it.

Some people will do anything to keep a client on side. One sales trader was borrowing a client's apartment and returned there after a night of revelry. Discovering that he had no clean underwear and faced with the prospect of an alarm call one hour later, he washed his clothes in the sink and then searched in vain for a tumble dryer. In his disordered state, panic set in. What was he to do? Then he had a brainwave. He'd use the microwave. After all, it did the same job as a tumble dryer, only more quickly. So he set the timer to ten minutes and promptly fell asleep. A couple of hours later he woke to a charred and blackened ceiling. The microwave had exploded!

But traders have contacts in the most unexpected of places and are nothing if not resourceful. By the end of the day the apartment looked as good as new. With the boss's express permission (the client was one of the firm's most important), traders had downed tools, donned overalls and set to work with brushes, rollers and paint pots. To this day the client calls the trader "Johnny Hot Pants" and doesn't know the reason why!

It's for this reason that many (especially traders!) regard trading/dealing as the most financially vital of all the sellside services. Although fund managers will stipulate how much commission should be awarded to the individual broking firms, in reality buy-side dealers have carte blanche to overpay their friends. A broking firm without a recognised dealing franchise is like a car with two gears - it works but not very well - and as a consequence traders can have a quite disproportionate sense of self-worth.

This myopia can often lead to tension, with traders disregarding the long hours of relationship building a broker or analyst might put in with a client and the latter resenting the power the former wields in comparison to the perceived value they add. While its management would love to imagine a broking firm as separate parts of the same machine working towards a collective harmony, this is an all too quixotic vision. In the City, as a rule, everyone looks down on everyone else. Across the industry people might claim to be playing a team game, but you shouldn't be fooled - most, if not all, are out for themselves. One of the City's golden rules is that if something moves you grab it, and as a trader just because you pick up an order doesn't mean you can claim it for your own. As soon as you enter an order into the system, colleagues will be swarming around you asking who it's from and trying to establish whether or not they can pinch the credit. Even analysts aren't averse to approaching a trading desk and suggesting that an order is a direct result of their endeavours.

"Del, I see we're trading in BP for Arvzees. I had a great chat with the fund manager the other day."

Cue a snort and the sardonic response,

"And I've been discussing the stock with the dealer for the past few weeks. Today's the day we decided to buy it."

And as the analyst moves away, somewhat chastened, Del Boy will turn to Alan, Bobby and the rest of the team, shake his head and say,

"Just listen to these pricks! They think they rule the world!"

Traders play politics as well as anyone - they're a devious bunch. As for brokers (and any other member of the financial universe for that matter), pulling the right political levers matters as much as the revenue you generate. In this game if you don't shout you don't get recognised - there are so many colleagues swarming over the same client accounts that your contribution can be overlooked unless you stick your head above the parapet.

**The Game: How the World of Finance Really Works****(E&T Books, £9.99) was published in summer 2013.

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