Derivatives II: The Sell Side

Derivatives trading business cast consists of traders, sales staff, analyst, risk managers, product controllers, compliance officers and back-office staff. Among derivatives trading parties, banks and dealers are known as the "sell side" because they provide products and services to clients --- the "buy side". Salespeople on trading desks link the bank's traders to clients. Sales staff is to make clients do trades so that banks and traders make money.

Sales staff has the responsibility to bridge the knowledge gap between clients and their products. That is a requirement to know your clients. They need to constantly call clients to understand what they did and needed from financial products. The banks then market new products and trade with clients. A big hurdle is to find the right person for each client. Banks can figure it out eventually.

Sales person also give client market information, or market color daily. Clients may be cautious on what the sales person told them and verify everything because of the sensitive role. Sales person have lots of Powerpoints. Large amount than clients can read research reports is also another tool to lure customers. Along the path, sales person come up with everything investors need and clients outsource their intellectual power. Sometimes clients just can't differentiate what is good from what is available. That had caused many lawsuits. It seems crazy anyway: if the trades are good, why do the banks use it with their own money?

Traders take contracts and unbind them into smaller parts; each part has its risk; the traders then cover each risk separately in trading. There are market-makers, who support sales person, and proprietary traders, who take positions independent of clients. Despite the names, traders only follow money and make money. To achieve that, traders engage in various analysis tools, e.g., technical analysis and fundamental analysis. Success trading is simple: you must overwhelm others by having more money than others. How to find a good trader? It is hard because you need to find someone is, in a sense, really "lucky".

Analyst conduct research. Derivatives research has become increasingly quantitative, complex math techniques are employed to obtain trading ideas and convince clients.

The above can be called the "front-end office". On the other hand, risk managers, compliance, lawyers, technology, accounting and operations are the back-end office components. The existence of the back-end office is ensure the front-end office does what they can do within all sorts of boundaries, legally and commercially. The back-office is paid less and their pay is from revenue the front-office generates. Frequently, there are fights between them. Trading failures are hard to tell if they are because of the front- or back-office's operations.

Leaders of this structure is the senior management, whose contribution is strictly strategy or business model. But sometimes it is hard to outline the strategy physically. Managers are sometimes promoted due to Peters' Principle --- everyone is put to their highest level of incompetence. That is the reason of having management consultant.