How the Trading Floor Really Works

By: Michael Ashton | Mon, Jan 14, 2013
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I have a book on my shelf, called The Money Market, by Marcia Stigum. It covers the workings of the capital markets, from basic instrument details of bonds, commercial paper, and so on to detailed discussions of how banks operate in the money markets to service client needs. There are chapters on futures, options, and swaps, government securities, repo markets, and bankers' acceptances. When I first came into the market, in 1990, I bought a copy of this book and read it cover to cover - all 1250 pages of it. Together with Money Market Calculations: Yields, Break-Evens, and Arbitrage (also Stigum), it was absolutely essential reading for people entering the bond market.

The third edition was published in 1989, and is fairly out-of-date by now. Unfortunately, Ms. Stigum died in 2003 and so the fourth edition (now called Stigum's Money Market), although updated by Anthony Crescenzi, is not quite on par with the prior versions. I would still recommend the fourth edition, however, to anyone who is actively considering entering the bond markets as a career.

But I have another book that I would recommend both to the people who are thinking of trying to get onto a Wall Street trading floor to pursue a career in finance as well as to those people who are just curious about how the trading floor really works. It is called, appropriately enough, How the Trading Floor Really Works. It is published by Bloomberg Financial, and written by Terri Duhon. (Disclosure: I worked with Terri for a brief time when we were both at JP Morgan, so I know she is writing from a position of knowledge on the topic).

This is not meant to be a mechanically precise book, like Stigum's books on money market calculations. For example, in the section on derivatives, Duhon dispenses with such details as the fact that in a USD interest rate swap Libor is typically paid quarterly on an actual/360 day count basis, while the fixed side is paid semi-bond. That's a detail that is utterly irrelevant for the purposes of this book, which is to illustrate how and why a Wall Street broker/dealer does what it does: how it makes money, how it services clients, how it balances the short-term profit and long-term profit motives, and what the different functions on the trading floor are (and how they fit together). The book begins with chapters on "What Are Financial Markets," and "What Role Do Banks Play in Financial markets," and later discusses "How Do Traders Make a Market," "How Is Proprietary Trading Different from Market Making," and "What Is the Relationship Between Sales and Trading?" The book addresses cash, derivatives, how "structurers" and "quants" are engaged in the bank's business, and how risk is managed.

Crusty Wall Street veterans will not find anything in here that is terribly surprising, but most people with a "Main Street" view of Wall Street probably will. One really neat feature of the book is the generous sprinking of market anecdotes describing actual episodes on various trading floors (thankfully without names). These give the book an honest verisimilitude - I can attest that these things actually happen on trading floors, and indeed I am pretty sure that I was actually present for one of the vignettes.

I really enjoyed the book. If you are curious how Wall Street actually works - this is a book you should consider reading (and it's only about 1/3 the cost of the Stigum book!). You can go to the Amazon page from the link above.



Michael Ashton

Author: Michael Ashton

Michael Ashton, CFA

Michael Ashton

Michael Ashton is Managing Principal at Enduring Investments LLC, a specialty consulting and investment management boutique that offers focused inflation-market expertise. He may be contacted through that site. He is on Twitter at @inflation_guy

Prior to founding Enduring Investments, Mr. Ashton worked as a trader, strategist, and salesman during a 20-year Wall Street career that included tours of duty at Deutsche Bank, Bankers Trust, Barclays Capital, and J.P. Morgan.

Since 2003 he has played an integral role in developing the U.S. inflation derivatives markets and is widely viewed as a premier subject matter expert on inflation products and inflation trading. While at Barclays, he traded the first interbank U.S. CPI swaps. He was primarily responsible for the creation of the CPI Futures contract that the Chicago Mercantile Exchange listed in February 2004 and was the lead market maker for that contract. Mr. Ashton has written extensively about the use of inflation-indexed products for hedging real exposures, including papers and book chapters on "Inflation and Commodities," "The Real-Feel Inflation Rate," "Hedging Post-Retirement Medical Liabilities," and "Liability-Driven Investment For Individuals." He frequently speaks in front of professional and retail audiences, both large and small. He runs the Inflation-Indexed Investing Association.

For many years, Mr. Ashton has written frequent market commentary, sometimes for client distribution and more recently for wider public dissemination. Mr. Ashton received a Bachelor of Arts degree in Economics from Trinity University in 1990 and was awarded his CFA charter in 2001.

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