Institutional Sales/Trading at Quant Firms
Just wanted to get a little color on what institutional trading and sales looks like at these market makers (Jane Street, Optiver, Citsec). What do these people do, and how does it differ from banks? Additionally, what prompts this firms to go into it, given their quantitative nature?
Based on previous WSO threads, here's what you need to know about Institutional Sales and Trading at Quant Firms like Jane Street, Optiver, and Citadel Securities:
Role and Responsibilities:
Market Making:
Quantitative Focus:
Prop Trading:
Sales Role:
Differences from Banks:
Quantitative Methods:
Technology and Automation:
Risk Management:
Why Quant Firms Enter Institutional Sales/Trading:
Diversification:
Client Relationships:
Market Presence:
Conclusion:
Institutional sales and trading at quant firms like Jane Street, Optiver, and Citadel Securities involve a blend of traditional sales roles and advanced quantitative trading techniques. These firms leverage their quantitative expertise to provide unique trading solutions and strategies to institutional clients, differentiating themselves from traditional banks.
Sources: What do S&T people actually do?, Market making group exercise, Conversation with an Equities Sales Trader, Sales at HFs/Prop firms/MMs, Is Banking Right For Me?
It's probably good to understand the difference between how banks trade vs algo trading firms. However, they do have a bit of overlap.
Yes, they are both market makers but they to tend execute this in a different manner and at different size.
The banks generally trade in big size and have more of a "high touch" focus. They are also happy to provide customised solutions e.g OTC. Of course this is not always the case, especially on the equities or FX electronic trading desks. The point is that banks are client/relationship focused.
Now switch to an algo trading firm, they tend to trade in smaller size with a "low touch" focus. They don't really have clients and use their algos to interact with the market. They prefer more standardised products to trade e.g. ETPs.
Your question points to the overlap. Some algo trading firms e.g. Optiver, do have "Wholesale Trading" teams which are more "high touch" and tend to trade large blocks e.g. futures rolls, option spreads. Yet they probably shy away from anything too exotic e.g. OTC.
The reason why the algo firms have these teams is to offload large amounts of risk so they can recycle it and continue trading. It could also be that they want to get rid of some obscure risk. It's probable that the receivers of this risk will be a bank.
I see, that makes a lot of sense. I guess my next question would be that how at risk are the banks in losing this side of the business? Will the trading firms be able to handle OTC or institutional volumes in the near future?
This can be answered by looking at the structure of the businesses implied by their trading activities.
What I'm referring to is basically the size of the balance sheet in banks vs trading firms. You are probably aware that banks have massive balance sheets which allows them to "warehouse" risk for extended periods of time. For trading firms, they tend to run on internal capital which is usually provided by their founders - this means the balance sheet is much smaller and they have to be super capital efficient and are less likely to hold onto risk. These differences in structure lead to the differences in trading approaches which I mentioned in my previous post.
So, as long as these structural differences exist, then I don't see how trading firms would completely cannibalize this business from banks. In saying this, trading firms are growing, an example is Jane Street, which recently had to publish its accounts due to a capital raising and this showed that it's extremely well capitalised with strong revenues..
Thanks for the insight.
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