Back to basics | The Securities BusinessJune 30, 2015
The global securities industry is a vast platform of interconnected networks that help institutional clients including fund managers, financial service providers, and large corporations buy and sell financial instruments on exchanges around the world.
Sales & Trading
A key function of the bank is the Sales & Trading desk that buys and sells various kinds of securities including stocks, bonds, commodities, currencies, derivative instruments and other financial instruments. Typically an investment bank will perform these tasks on behalf of itself (Proprietary Trading) and on behalf of its clients.
The Sales element of the job is as the word suggests. The team markets trade ideas to high net worth clients and institutions like Insurance Companies, Mutual Funds and any entity that participates in the public markets. Once they sell an idea, they take an order and transfer it to the Trading desk, which prices and executes the order. With financial instruments getting significantly more complex, structuring has become critical and a key USP for banks as they offer more return and fulfill specific needs like hedging a currency risk or reducing an interest rate on a loan through a SWAP. Multi National Companies have become among the they key players in the global derivatives market as they use financial instruments as part of their overall corporate strategy to counter various Macroeconomic scenarios, often creating another revenue stream altogether.
Proprietary trading (PPT) is when the Investment Banks trade stocks, bonds, currencies, commodities or derivatives on their own balance sheet with the firms own money. This is an area where firms make staggering profits or losses and often where ‘Rouge Traders’ are born. Many of these names might sound familiar, Nick Leeson- who brought down Barings Bank and Brian Hunt from Amarnath Advisors.
Every part of the Investment Bank is linked. Going back to our example of Company ABC, the Sales & Trading desk is often the one that will market the deal to clients on behalf of the advisory team and the company. They are part of the road show that takes the clients to meet mutual fund analysts around the world, explaining why this company is a good investment. They often put out an analyst report suggesting analyzing the suggesting the stock.
Underwriting of the stock is a service offered by large investment banks with strong balance sheets. They underwrite, in that they assure their client that they will buy a certain percentage, (ranging from small to the offering in its entirety) if the offering fails in the market. In the event this happens the PPT desk steps in and picks up the stock.