January 21, 2012

Bonds: Addendum

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After writing 6 long posts on my experiences in EGB IT, I realised I still missed out many points. Here they are in no particular order.

  • Investment banks suffer from serious title inflation. I used to joke that the guy who cleaned the toilets was probably a Vice President. If someone gives you a card with Associate VP or VP on it this doesn’t mean much, most of my co-workers in IT had such titles. First line managers were sometimes had the title Director – their managers definitely had at least that title. It goes without saying they didn’t sit on any company board. Managing Directors are basically middle managers. Be aware of this when seeing a banking business card.
  • Squawkboxes are the most noisy thing on a trading floor. They are an old fashioned cross between a phone and intercom. They have a microphone, a speaker and a large set of quick-dial buttons to other squawkboxes in the same firm. They can also work as phones. When one of the buttons is pressed anything spoken into the microphone automatically comes out of the targeted squawkbox – no chance to screen or block the message. Traders love them for talking to support and salespeople – normally in a loud voice. I refused to have one on my desk once (I dismantled it and put it in my drawer). It is just too distracting to have traders contact you whenever they feel like it.
  • Banks are full of compliance training. Each year front office staff have to do courses on diversity, money laundering, privacy, ethics and occasionally other topics. The courses consist of simple online training followed by an even simpler multi-choice test. If you fail the test, you just take it again immediately – most of the questions are the same. Rarely does anyone fail more than twice, especially since the content is the same each year. They are generally derided by all who have to do it, passing requires little more than remembering: stealing is wrong; you should be nice to everyone; you shouldn’t talk about client details; and, talk to compliance people if you are not sure about something.
  • The FSA also requires front-office staff to take two continuous weeks away from contact with the office. This is to help prevent fraud. The idea being that most frauds would be detected if the perpetrator is not around to keep it hidden. At three of the four banks I have worked this applied to front office IT people too. It’s a good idea I think.
  • Chinese walls (how did that term get past the diversity training?) abound in banks. That is where two parts of a bank should not talk to eachother for ethical reasons. For example, staff negotiating a potential takeover shouldn’t talk to people who could trade on that information. Often these Chinese walls are manifested physically with walls and restricted access doors. At one bank a chest high row of filling cabinets was used. I sat within sight of this “wall” and often saw traders having a chat with the people on the other side. I’m sure no restricted information was ever mentioned.
  • There is a concept in trading called “fatfinger”, it is where someone enters data incorrectly, for instance buying 100 units of an instrument rather than 10. This happens often. Checking for this kind of activity is one of the reasons every keypress in a trading GUI is recorded.
  • Phone calls are recorded in banks, as I write this a trader a few desks down is complaining a client just asked him to do something slightly dodgy on a “taped line”.
  • Slightly dodgy things happen all the time. The technology based ones that I see are accidental and tend to lose money. For instance, a bug in a trading system could result in actions that may constitute minor market manipulation – but such a situation would also most likely result in a loss for the bank, so no-one seems too concerned. Occasionally there are much bigger issues. The famous Dr Evil trade by Citigroup in 2004 was blatant market manipulation of EGB futures. Although many people around at the time suggest the fines levied were smaller than the profit made.
  • One bank I worked at boasted that during the Dr Evil trade they didn’t lose as much as other banks due to their defensive systems. Most EGB desks have various protections against putting out bad prices on the executable D2D markets. If the futures prices move too much all the quotes are pulled. If their quotes are lifted a couple of times in a few seconds all quotes are pulled (or perhaps all for a particular country). It is also common the have the spreads widen under various market conditions. Each bank has different set and they tend to change regularly.
  • The traders also have a button on GUI to turn off all quotes. It is often called the “Panic” button, although the proper name is “Bank Off” (taking the bank off the market).
  • The bank is normally off in the lead up to big announcements. I have never been aware of quotes being turned on over the non-farm payroll announcement. At one bank the traders were very impressed by recent changes to the pricing system and decided to try keeping quotes on through the number. We all went to watch and slowly saw liquidity dry up as the announcement approached. With just seconds to go we were the only ones left in the market and the traders decided it wasn’t work the risk and hit the panic button. Commentators always talk about modern banking providing liquidity even at times of stress. My experience has been that at even times of relatively minor stress no one wants to quote, or they quote with huge spreads.
  • To trade an order is sent to the market. This can be of two types: Fill-and-Kill (FAK), also known as Immediate-or-Cancel (IOC), where either the order is matched immediately (creating a trade) or it is discarded; and Fill-and-Store (FAS), also known as Good-to-Date (GTD), where if the order is not matched it hangs around for a set period of time during which it could be matched. Thus with FAK order a trade is done straight away or not at all, but under FAS the trade could occur some time after the order has been sent. A trade can be complete fill or partial fill (some markets also have zero fill – which is the same as no trade at all). Complete means that all the quantity requested has been filled, while partial means that not all the volume has been filled. For instance if an order is sent for $1M and only $500K is done, then that is a partial fill. One order can result in multiple trades. For instance if you put out an order for $10M and it may be filled by two trades of $5M against different counterparties. There are also iceberg orders on some markets. Icebergs are where the order quantity shown to the other market participants is less than the true order quantity (ie. some of it is hidden). This means that you can put on an iceberg order for $10M with a display of $5M. Other banks will see $5M and when that is filled the other $5M will be automatically available to be filled too.
  • There are various interpolation algorithms for determining rates between points on a yield curve: cubic, splines, Gaussian. However, most places just seem to use linear (at least until recently) – that is just a straight line between points. Not particularly accurate, but good enough. Remember that market quotes are to 2 or 3 decimal places, so having your prices accurate to 7 decimal places is unnecessary and probably resulting in slow quotes.
  • There is a double use of the term covered. A covered bond is like an asset backed bond (I’m not sure the exact difference). A covered auction is one where all the bonds on offer have been sold and the underwriter does need to buy any themselves.
  • A typical trader at the places I have worked would have 6-8 screens. At least one would be showing pricing, one for positions risk, one for BBG and one for communication (Outlook, Bloomberg mail and/or some kind of instant messenger). Most traders would have a Bloomberg keyboard – used for its quick keys. There was always lots of Excel. They usually had 2 or 3 computers to support the large number of screens and heavy load from constant network updates. If the traders had a calculator it would always be the same HP model – easy to spot as it is wider than it is tall.

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