Guest Post: Are Former Bank Prop Traders Potential Bartenders?

Tyler Durden's picture

Via Cameron Hanover,

“What do you mean Paulson pulled his bid? I’M LONG 500!!”

We thought it timely to repost this oldie but humorous goodie on how bank style traders make their money. Ever wonder why Goldman, or BAC can have 90 straight days of profitable trading?  Don’t wonder too much more, the answer is here.  The new reality is however, Banks are fast becoming utilities now that they cannot hide losses in mark-to-myth book keeping (whale legacy), and have removed (or renamed) their Pro trading divisions.

Meanwhile the Prop traders they jettisoned are also partly hapless without a team of marketers, clients and clerks to permit their prima-donna activities of essentially lining up an exit strategy BEFORE they accommodate the client.Like the locals before them, without flow they will speculate. Some will succeed, most will not.

The Banks for their part will miss that low lying fruit they used to keep captive.  Gone will  be the delayed recognition of losses that they keep hidden “until it comes back” while Bernanke covers their margin calls with ZIRP. Their  balance sheets are fictitious, and thus their capacity to earn is diminished.

At least the traders can get a job as bartenders.

This article gives a clue why.

An excerpt

Trader: Mr. Banker, I make the money that puts your ass in that towne car every day. If you like, I would be happy to let you manage my position for me. Do you even know what a Conversion is? Oh, you came from sales, figures.”

Banker: “Hey Flow Trader, you just burned a client with a fill. Do you know who makes money for this firm? The chair you sit in makes the money here, not you. Because of our reputation and relationships in banking you get deals. Do it again and you’re fired.

The recent purge of prop traders and subsequent start up of unprofitable funds can be attributed to many things; among them market conditions, 100% correlated markets etc.

But the biggest for a certain type of trader is a lack of flow, i.e. no clients to fleece or front run.


For your info-tainment we resubmit the following actual events that happened cobbled into a narrative:


Modern Investment Banks
“Once upon a time investment bankers were supposed to facilitate capital formation for exciting new businesses. They were trusted advisors looking out for the interests of their investor clients, chaperoning to capital to efficient purposes.” William Banzai

In the past, IBs were run by the bankers who protected clients with equanimity. These firms are now dominated operationally by traders. The trading culture operates faster and more darwinistically. This type of environment has no problem in disadvantaging one client to the benefit of another. And frankly it will in the end disadvantage all clients to serve the firm’s short term interests when need be.

Now, for better or worse, IBs offer Broker-Dealer services as a means to get profits. They execute trades for clients in order to take the other side and make implicit fees on the Bid/Ask spread of their markets. At the center of it all are the Flow traders, the firm’s internal principal traders that function as market-makers for the client books and operational risk managers while running their own profit centers.

Mind of a Flow Trader


Before the client makes a trade.


1. The Firm makes a buy recommendation because they believe it and/or
2. The Trader takes a position in the asset prior to telling clients they believed in it. or
3. The Firm makes a buy recommendation because the Trader senses buy interest, regardless of fundamental opinion.


While the client is placing the order


4. Trader buys for his prop book because he sees captive client interest (resting orders) underpinning demand and/or
5. Trader buys alongside the client if he continues to believe in it or
6. Trader sells existing position to the client for a profit or
7. Charge a “convenience premium”- Sell it as a market-maker and back-to-back it with another counterparty cheaper.


When the client wants out


8. Back-to-back an executable order with another market participant or
9. Take a resting limit/ stop exit for your book
10. When #9 is executable, take other side if advantageous for your current position or execute in broader market as agent if not.


What keeps a Trader’s predatory behavior in check? Traditionally it was the Bankers which ran the firm like an ongoing concern, Brokers, which were charged with keeping their client’s interests first; and finally regulatory bodies to the extent they actually have oversight.

Traders are animals, seeking profit above all else. Their only customer is their Firm. Everyone else, including the Firm’s marketers, Brokers, and Bankers, is a counterparty and potential sap. Their job is to kill. They are no different than any well trained Marine in this sense. Their single minded, hyper-focused approach to business shields them from external distractions. It is not their job to worry about clients. Client complaint? Talk to the marketer. Bad fill? Sorry, your customer, your problem. I’m protecting the firm’s balance sheet and generating revenues.
“Mr. Banker, I make the money that puts your ass in that towne car every day. If you like, I would be happy to let you manage my position for me. Do you even know what a Conversion is? Oh, you came from sales, figures.”

Traders operate legally, not necessarily ethically. These days, they are the rock stars of Banks, and are the dominant culture, starting back in the days of the Lehman traders rebellion against their Bankers.

If traders at IB firms are animals, Brokers (and their cousins, Marketers) are animal Trainers. They keep traders in check by protecting their clients’ interests. Not easy to do when your clients are traders to begin with. Even harder when you are not an independent broker, but part of a Broker-Dealer operation where your primary, and sometimes sole permitted liquidity provider is the asshole Flow trader down the desk from you, who is constantly trying to find out what your client’s weak point is and gun for it.

Balance your clients’ interests with the fact that some of your own customers see less value in what you do, and simply want to talk to the trader for prices. The best selling tool is a good price for sure, but do these clients even know what will happen to them when they have to get out if they are not protected by a broker?

“Hey Flow trader, you suck and my client is getting better prices across town. And the next time you fuck me on a fill, I’m going to lose this client. And without flow, you are just another day trader asshole.”

Brokers/ Marketers are the rainmakers at the operational end. But these days, the IB culture is a Trader’s culture and a good Broker/Marketer is increasingly undervalued and hard to find. Even more so, those that intend to do right by clients often get punished for it.

Bankers run the circus. They keep traders in line making sure the Firm’s clients are protected. They also try to make sure no client is operationally preferred over another in executions. The book is the book, and the price is the price. If a client’s price is violated, then the client is filled.
“Hey Flow Trader, you just burned a client with a fill. Do you know who makes money for this firm? The chair you sit in makes the money here, not you. Because of our reputation and relationships in banking you get deals. Do it again and you’re fired.

A Word about Resting Orders- Central Limit Order Books
Resting orders are information, which is key to maximizing trading book returns. Clients with resting bids at IBs may never get filled as the firms Flow Trader is buying at prices just above them. Orders may trade thru prices and no fill is guaranteed. The factors that the good Flow Trader weighs constantly is what level of disservice will the client tolerate before he leaves vs. how much money can be made on this particular trade. (That is a cynical way of saying, how to balance the short term profit prospects with the long term objectives of the firm as a viable concern.) The Flow Trader’s potential bonus and job security are the tipping factors. Guess which way he will tip with no moderator?

With the morphing of the Banking culture, deals are no longer underwritten in a syndicate. They are just big trades. It is too hard for even a competent Banker or Broker to keep up and know what is in the best interest of the firm, especially when the deal velocity is as fast as it has become, and firm wide books are aggregated for risk management purposes. Something has to give, and it is the client who suffers. Traders have the loudest voice now as they are on the surface the biggest revenue generators.

The question for any financial firm that engages in Flow-trading is: Do you run your firm like a series of sprints, looking to max out profits on each trade and not care so much if a client gets burned, or do you run a Marathon, opting to preserve the relationship and lose a penny to better ensure a stream of nickels in the long term?

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Aziz's picture

More nickels in front of a steamroller mindset; lots of short, slightly profitable sprints in front of the steamroller before the runner gets crushed and gore and bones get splattered over the track.

Bottom line should be that no firm that makes trading recommendations should engage in trading, and vice verse. Unbelievable conflicts of interest. In a free market, with real accountability I don't think these market making-trading-investment banking-retail banking-insurance-securitisation megabanks would be allowed to exist — they'd all go bust under the steamroller. The only thing that keeps this egregious bullshit going is government bailouts.

malikai's picture

ZIRP's a helluva drug.

smlbizman's picture

thier you go again tylers...speaking all crazy and shit....

ACP's picture

I thnk they would make good bartenders though, I bet they could stack shot glasses pretty damn high before they come tumbling down.

Marco's picture

The bail outs are no barrier to entry, how do they ensure that these guys don't lose their customers to competition?

Market maker privileges, now those are a barrier to entry ...

OpenThePodBayDoorHAL's picture

I was selling to the head of prop trading at one of the largest Swiss banks (unnamed). I got him to buy. It didn't work out, and I called him. He said QUOTE: "Oh that's OK I'll just put that one in my Long-Term book. If the trade had worked out I would put it in my Short-Term book. That's the one I get measured on"

And people wonder why former prop traders get lousy returns when they go out on their own...

francis_sawyer's picture

Future restroom attendants...


"Umm sir... Would you like some Vitalis & Hai Karate"?

Manthong's picture

No thanks, but I'll take a little of that Brylcream and Brut.

francis_sawyer's picture

...a little dab'll do ya! (no, really!)

lasvegaspersona's picture

use more only if you dare...

and I will not embarrass myself by completing the jingle

Hype Alert's picture

So what does happen when people boycott Wall Street?

Oh yeah, volume goes to shit.

Tuco Benedicto Pacifico Juan Maria Ramirez's picture

Do not be deceived, God is not mocked; for whatever a man sows, this he will also reap.   For the one who sows to his own flesh will from the flesh reap corruption, but the one who sows to the Spirit will from the Spirit reap eternal life.

 Galatians 6:7-8

midtowng's picture

Is Las Vegas boycotted?

As long as the sheeple can dream, there will always be some who want to be sheared on Wall Street.

However, the numbers will dwindle eventually.

max2205's picture

"fills that burn"...yep

monopoly's picture

If this volume does not pick up soon there are going to be a lot more laid off "prop traders" all over the street. Mayor Bloomberg not a happy camper.

A Man without Qualities's picture

Everyone's just waiting for something to snap.


It's damn weird though, reminds me of one of those scenes in Jaws when you know the sharks's going to appear any second...

cryomancer's picture

Ever hear of the "Summer Doldrums"?

Intoxicologist's picture

"At least the traders can get jobs as bartenders."

Except you need a lot of patience, personality and people skills to make any money.  I refer to it as Adult Daycare With Alcohol.

Brokenarrow's picture

I have 0 in the game. I'm not playing against a crooked deck. I would rather give the money to charity.

Everybodys All American's picture

This market is now simply one sided trading. If the market never goes down there is absolutely not going to be any trading profits for brokers and broker dealers. The market is completely broken and you can thank none other than Chairman Bernanke. What a mess.

Meesohaawnee's picture

damn..its all that crazy ZH guys fault..

Meesohaawnee's picture

.. and like i sadi this morn. I dont think fuck nuts bernak really gives a shit about the wreckage hes created one being the jobs that are gonna be lost due to the fraud market. Im waiting for william banzai to do a PT Barnum parody. ."The Greatest Fraud on Earth"

Whoa Dammit's picture

Jobs as carnival barkers for  freak shows would be suitable for traders... "Step right up and see the 3 eyed sheep get fleeced by a giant squid"..."Watch tranny midgets in action"..."View the death defying high frequency trapeze artist"

Meesohaawnee's picture

thanks for the laugh !!!!!!  whoa.. Priceless!! i hope WB comes up with one. that photo shop will be low hangin fruit

icanhasbailout's picture

I'll be the guy who takes up a wide swath of the middle of the bar every night and tips $2 on my $80 tab

spekulatn's picture

Great stuff ZH. 

midtowng's picture

It's too bad the sheeple are so slow at waking up. But then after getting burned out of nearly all their hard-earned money, even the sheeple wake up.

FRBNYrCROOKS's picture

It happens over and over again. I remember when I was in University the Professors proclaiming 50% of the Engineers would be retiring within the next 5 years and we would all have plenty of jobs to choose. Well, the geezer in the next cubicle is still hanging in there "just for a few more years" to make back what he lost when Lehman went BR and unload his house so he can get that condo. My boss finally retired, for the third time, at the age of 75. I plan on retiring on the cheap, keeping most of my 401k in a money market (and that ain't full-proof), hoping to regain the lost equity in my real estate and feeling fortunate to have a decent job since I can't really relocate because everything, everywhere sucks!!!!! I'll probably end up buying a sail boat and smuggling shit from Central America. Oh Yeah! The American Dream baby!

Father Lucifer's picture

OMG we're gonna close RED

FRBNYrCROOKS's picture

two days in a row!!!! This might be the FRBNY signal/memo to close out long positions let the short selling begin in earnest.

Either that or the guy/algo at the FRBNY prop trading desk fell asleep.

lasvegaspersona's picture

Red is NOT permitted....READ THE RULES!!!

Centurion9.41's picture

Yep, trading flow is a LOT easier than trading one's own capital....and living with what that means goes on the dinner table, under the tree, and of course, around the wife's neck.

Nage42's picture

Still remember the prop trading system in Lehmans Tokyo.  The core autotrading system used RV between the pricing, risk, and execution gateways.  After they fired some of the internal quants ("team French" as I liked to call them) the whole team bailed for another shop.

Later on they figured out why.  So the head guy had inserted some hooks into the client order handler, to give him a heads-up on any inbound order over a certain threshold...

Pretty useful information to know when a multi-tens-of-millions order is chugging down the pipe when you know you can get ahead of it... I think they call that something... front something... pretty sure it's a no-no.  :D  

Ah, the good old days of TSE 3pm close and everyone down to magumbos for some bell-ringing shots, shots, shots, shots!


CharliePrince's picture

i saw the changes in the cbot when elcltronics came. same scenerio as liffe..most didnt make it.....high brow phone clerks or institunional salesman

suffered the most...working a phone for dollars is not trading....

Nage42's picture

>working a phone for dollars is not trading....

Hmm, so talking with a human counterparty to negotiate an agreeable price is not trading?

Some might argue that just looking at a screen and firing off buy/sells into an electronic counterparty is hardly "trading" either (more like electronic masturbatory gambling), but ya... languages change over time, right?


NEOSERF's picture

This market is like a case of super Gonorrhea....all itchy and slowly killing me

Random_Robert's picture

I closed my brokerage account in August(!)  2008 and bought an RV...


Nowadays,  I just drive that mother fucker everywhere, seeing all kinds of cool shit, and the more it depreciates, the happier I am that it's ME that's depreciating it, and not some coke-snorting, Lithuanian hooker banging ass-clown on Wall Street...


“Rebellion to tyranny is obedience to God.”-ThomasJefferson's picture

This is a complete horse shit article.  I-banks do what is good for the bank, period.  The customer is truly a muppet, a mark, to be used to help said bank make a profit.  All the BS about recommendations and buy/sell orders is so painful.  Each and every firm has a prop desk who front runs customer orders regularly. The whole thing is a scam and the bank's primary objective is to siphon off a percentage of each and every chumps net worth, each and every year.  Plain and simple.

Now let's re-title this article Are former congressmen..., lawyers..., gay porn stars, or whatever, good bartenders?

Super Marco's picture

Lower equity volume

billsykes's picture

Oh ya, only in modern times have bankers been only out for themselves. Rothchild, morgan, rockefeller have been savoirs of the united states when they needed "help" from the bankers to take over the money supply and creation from the government. Thats why they went to an island that was private, to "help" the people of america. Its we the people that should actually be thanking the bankers for all their help and assistance in the past.


Hang em then, hang em now.




silverserfer's picture

this is the problem with this country. to many douchebags mentioned in the above article who dont actualy work for a living. When you live in a world of usuary you are living in HELL where you end up eating yourself. Welcome to the world of banking. Stealing from hard working honest poeple to make a living. awsome.   

EZYJET PILOT's picture

Aziz, hello, are you from Hereford?