Option Trader – Job Description

Option Trader – Job description

Akshit GUPTA

This article written by Akshit GUPTA (ESSEC Business School, Grande Ecole Program – Master in Management, 2019-2022) presents the job description of an Option Trader.

Introduction

Options are a type of derivative contracts which give the buyer the right, but not the obligation, to buy (for a call option) or sell (for a put option) an underlying asset at a predetermined price and at a given date.

Option traders are generally hired by investment banks, investment firms, brokerage firms and commercial banks (for the trading of currencies on the foreign exchange).

Work of an option trader

An option trader is responsible to maximize trading revenue and use different hedging strategies to minimize the portfolio risk and prevent capital loss. He/she trades in two types of option contracts namely, call and put options by taking long or short positions (most of the time selling options to clients).

Trading in options is a highly complex work as the option pricing and risk exposure depend on a number of factors which includes the changes in prices of the underlying, volatility, interest rates, time value, etc. To manage his/her option book, an option trader also uses option Greeks, which are financial tools that measure the price sensitivity of option contracts.

These tools help the option traders to understand the market in a better sense and determine which options to trade and when. Option traders also use different quantitative models (such as the Black-Scholes-Merton model in continuous time and the binomial model in discrete time) to price different option contracts and manage their positions.

With whom does an option trader work?

Option traders work in coordination with several teams. These teams are responsible for providing the option traders with underlying data and market inputs. Some of the most common teams that an option trader works with are:

Sales

A sales analyst works with the retail or institutional clients of the firm to implement profit generating strategies on the client’s investments. An option trader also works with the sales team of the firm to execute trades based on the clients’ needs.

Portfolio managers

An option trader also works with the portfolio managers of the firm to manage portfolios of the firm’s clients by implementing hedging strategies based on option contracts.

Quants

An option trader also works with the quantitative analysts of the firm to utilise different quantitative models to price option contracts and implement hedging strategies.

Economists and Sector specialists

An option trader trading in indices, equities or currencies, works in tandem with the Economists or sector specialists to predict the macroeconomic trends and gather information about specific sectors and economies

Equity researchers

An option trader trading in equities work with the equity researchers of the firm to obtain financial and non-financial data about different equity underlying.

How much does an option trader earn?

The remuneration of an option trader depends on the type of role and organization he/she is working in. As of the writing of this article (2021), an entry level option trader working in a financial institution can earn an average salary of €65,000/year. The option traders also earn high bonuses and commissions which are based on a percentage of the total profits they have generated over the period.

What training to become an option trader?

In France, an individual who wants to work as an option trader is highly recommended to have a Grand Ecole diploma with a specialization in market finance. He/she should possess strong knowledge of financial markets, mathematics, and economics. He/she must understand financial and economic trends and have strong research skills and interpersonal skills.

The knowledge of coding languages like Python and VBA is also a very desirable skill to become an option trader. To work as an option trader, it is advised to start your career as an intern or an apprentice at a French financial institution while pursuing your diploma.

The Financial risk management (FRM) or Chartered Financial Analyst (CFA) certification provides a candidate with an edge over the other applicants while hunting for a job as an option trader.

Relevance to the SimTrade course

The concepts about option trading can be learnt in the SimTrade Certificate:

About theory

    • By taking the Trade orders course, you will know more about the different type of orders that you can use to buy and sell assets in financial markets.
  • By taking the Market information course, you will understand how information is incorporated into market prices and the associated concept of market efficiency.

Take SimTrade courses

About practice

    • By launching the Sending an Order simulation, you will practice how financial markets really work and how to act in the market by sending orders.
  • By launching the Efficient market simulation, you will practice how information is incorporated into market prices through the trading of market participants and grasp the concept of market efficiency.

Take SimTrade courses

Useful resources

Hull J.C. (2018) Options, Futures, and Other Derivatives, Tenth Edition, Chapter 10 – Trading strategies involving options, 276-294.

Hull J.C. (2018) Options, Futures, and Other Derivatives, Tenth Edition, Chapter 8 – Mechanics of options markets, 235-240.

Related posts

▶ Akshit GUPTA Market maker – Job description

▶ Akshit GUPTA Trader – Job description

▶ Akshit GUPTA Risk manager – Job description

About the author

Article written in June 2021 by Akshit GUPTA (ESSEC Business School, Grande Ecole Program – Master in Management, 2019-2022).

Quantitative Trader – Job Description

Quantitative Analyst – Job description

Akshit GUPTA

This article written by Akshit GUPTA (ESSEC Business School, Grande Ecole Program – Master in Management, 2019-2022) presents the job description of a Quantitative Analyst.

Introduction

Quantitative analysts or “quants” are professionals that work on designing, implementing, and analyzing algorithms based on mathematical or statistical models to help firms in taking financial decisions. With the advent of technology-based trading, the demand for quantitative analysts has seen a rise in the recent years. The analysts are generally employed at investment banks, hedge funds, asset management firms, brokerage firms, private equity firms, and data and information providers. They develop algorithms using programming knowledge of several languages like C++, Java, Matlab, Python, and R. Quantitative analysts possess strong knowledge of subjects like finance, mathematics, and statistics.

Quants create and apply financial models for derivative pricing, market prediction, portfolio analysis, and risk management. For example, quants develop pricing models for derivatives using numerical techniques for asset valuation (including Monte Carlo Methods and partial differential equation solvers) like the Black-Scholes-Merton model and more sophisticated models. Such models are used by traders and structurers in the trading rooms of investment banks. They design and develop decision-supporting analysis, tools and models that support profitable trading decisions. In risk management departments, quantitative models are used to assess the risks associated with the bank’s portfolios. Some popularly used techniques include Value-at-risk, stress testing and direct analysis of risky trades. Along with all this, quants are also responsible for regular back testing of the tools and models they develop, in order to maintain quality assurance and add improvements if any.

Types of Quantitative Analyst

The professionals working as quantitative analyst can be divided into two categories namely, front-office quantitative analysts and back/middle office quantitative analysts.

Front-office analysts

The front-office quants are employed at firms that are involved in sales and trading of financial securities which includes investment banks, asset management firms and hedge funds. The role of the analyst is to devise profitable strategies to trade in different financial securities by leveraging the use of algorithms to implement these investment strategies. They are also responsible for managing the risk of the firm’s investments by using quantitative models. With the advent of algorithm-based trading, the job of a quantitative analyst and a trader has mostly consolidated. The analysts in the front-office generally work on trading floors and deal with clients on a regular basis. The job of the front-office analysts is quite stressful as compared to the other quantitative analysts but on the upside, it provides them with better compensations.

Quantitative analysts in credit rating agencies and asset management firms develop quantitative models to predict the macroeconomic trends across different geographies.

Back-office and middle-office analysts

The analysts working in the back/middle office are generally employed by investment banks and asset management firms.

The analysts working in the back/middle office are primarily responsible to develop algorithms to validate the quantitative models developed by quants working in the front-office and to estimate the model risk.

After the financial crisis of 2008, the demand for risk managers has increased across all financial institutions. The quant analysts in the back/middle office also work as risk managers to manage the firm’s risk exposure.

Whom does a Quantitative Analyst work with?

A quantitative analyst depending on the type of office he/she is employed in, works in tandem with many internal and external stakeholders including:

  • Institutional clients of the firm – A quantitative analyst working in the front office deals with the institutional clients (or even wealthy retail customers) of the firm to implement profit generating strategies on the client’s investments.
  • Sales and Trading – A front office quantitative analyst also works with the sales and trading team of the firm to execute trades based on the quantitative models.
  • Portfolio managers – A front office quantitative analyst also works with the portfolio managers of the firm to manage portfolios based on the quantitative models.
  • Economists and Sector specialists – A back/middle office analyst developing models to predict the macroeconomic trends work with economists and sector specialists to gather information about specific sectors and economies
  • Legal Compliance – A quantitative analyst also works with the legal compliance team of the firm to maintain a proper check over different rules and regulations and prevent legal challenges
  • Equity researchers – The quantitative analyst developing models to predict the stock market developments also works with the equity researchers to obtain insights about financial and non-financial data about different companies

How much does a Quantitative Analyst earn?

The remuneration of a quantitative analyst depends on the type of role and organization he/she is working in. As of the writing of this article (2021), an entry level quantitative analyst working in a financial institution earns a median salary of €60,000 per year (source: Payscale). The analyst also avails bonuses and other monetary/non-monetary benefits depending on the firm he/she works at.

What training do you need to become a Quantitative Analyst?

An individual working as a quantitative analyst is expected to have a strong base in computer science, mathematics, and market finance. He/she should be able to understand and develop mathematical and statistical models using programming languages and possess knowledge of market finance. He or she must understand financial and economic trends and have strong research skills and interpersonal skills.

In France, a Grand Ecole diploma with a specialization in financial engineering, mathematics or market finance is highly recommended to get an entry level job as a quantitative analyst in a reputed bank or firm.

The Financial risk management (FRM) or Chartered Financial Analyst (CFA) certification provides a candidate with an edge over the other applicants while hunting for a job as a quantitative analyst.

In terms of technical skills, a quantitative analyst should be efficient in the use of programming languages like C++, Java, Matlab, Python, and R.

Relevance to the SimTrade course

The concepts about quantitative analysis can be learnt in the SimTrade Certificate:

About theory

  • By taking the Trade orders course, you will know more about the different type of orders that you can use to buy and sell assets in financial markets.
  • By taking the Market information course, you will understand how information is incorporated into market prices and the associated concept of market efficiency.

Take SimTrade courses

About practice

  • By launching the Sending an Order simulation, you will practice how financial markets really work and how to act in the market by sending orders.
  • By launching the Efficient market simulation, you will practice how information is incorporated into market prices through the trading of market participants and grasp the concept of market efficiency.

Take SimTrade courses

Useful Resources

Payscale

Related posts on the SimTrade blog

▶ Akshit GUPTA Risk manager – Job description

▶ Akshit GUPTA Trader – Job description

▶ Akshit GUPTA High-frequency trading

About the author

Article written by Akshit GUPTA (ESSEC Business School, Grande Ecole Program – Master in Management, 2019-2022).

Trader – Job description

Trader – Job description

Akshit GUPTA

This article written by Akshit GUPTA (ESSEC Business School, Grande Ecole Program – Master in Management, 2019-2022) presents the job description of a Trader.

Definition

Trading in financial markets refers to the buying and selling of financial assets (stocks, bonds, currencies, commodities, etc.) in order to make money from capital gains that result from the increase or decrease in asset prices. In financial markets, a trader is a person who deals in the purchase and sale of securities. Traders try to maximize the capital gains on their trades by thoroughly analyzing the markets for the assets they trade in and accounting for the risk and return strategies.
Traders are generally hired by investment banks, investment firms, brokerage firms and commercial banks (currency trading).

Types of traders

There are different types of traders depending on the type of trades they execute and the clients or companies they serve for. We usually classify traders into three broad categories:

Flow traders

Flow traders are responsible for executing the trades on behalf of the bank’s clients and use client’s money to take positions in the market. They act as an agency trader and a proprietary trader at the same time. For example, if a client wants to buy the shares of an investment bank XYZ where the flow trader works, the trader will sell the shares of the bank XYZ to the client and serve the interest of both the parties.

Agency traders

The agency traders, also known as brokers, act as an intermediary between the bank’s clients and the proprietary or flow traders. Such traders generally take instructions from the clients and are responsible for skillfully executing trades to generate profits for the clients. The trader is responsible for searching for counterparties for their client’s demand and trade on the basis of the instructions received. The company earns fees and commissions on the trades the agency trader settles on behalf of the company’s clients.

Proprietary traders

Unlike agency traders, proprietary traders are hired by the banks and execute trades on behalf of them. Such traders are engaged in the buying or selling of financial securities by using the bank’s own money. Their objective is to generate profits for the bank. Proprietary traders generally possess more freedom than the agency traders in terms of the autonomy they hold to execute trades as per their discretion. They are also more accountable for the actions they undertake.

Types of securities

The trading activities of a trader depends on the securities they specialize and deal in. With the world of financial products becoming more complex, investment firms and banks have categorized different departments based on financial products they trade in. Some of the major investment categories include:

Equities

Traders working in equity products work in collaboration with the research team which is responsible for collecting and analyzing data about different companies and presenting the findings to the trading team. The traders act on behalf of the inputs received from the research team and execute the trades. In some firms, the equity trading desk is also subdivided as per sector specialization.

Fixed income

Traders working in the fixed income category generally deal in the bonds, government securities, treasury notes etc. They generally follow the macroeconomic trends of different geographies and trade in the fixed income products of a geography or a company on the basis of their interest rate policies and ratings.

Currencies

Different banks and investment firms deal in currency hedges to mitigate the risk associated with cross border transactions. Traders working for these firms or banks trade in foreign exchanges and generally focus on mitigating the financial risks to the bank associated with currency fluctuations.
Some individual traders also deal in foreign exchanges on the basis of their knowledge about the geographical trends.

Derivatives

The traders working the derivates segment of trading specialize in one of the many categories of derivatives which involve equity futures and options, fixed income options, commodity futures, structured products etc. They work in collaboration with the respective research and structuring teams which are responsible for providing inputs on behalf of the current market trends.

Types of stock trading

The type of stock trading varies depending on the financial products they trade in and also on the type of trade a trader wants to execute. Generally, every trader skillfully executes a trade after thinking about the various factors including the financial burden, the risk appetite, the return expectations and the duration for which he/she wants to hold the trade for. Every trade comes with a financial cost and it is imperative for every trader to lay out the basic requirements before entering into any trade.

Some of the most common types of stock trading different traders across different financial products practice are:

  • Day Trading
  • Positional Trading
  • Scalping
  • Momentum Trading
  • Swing Trading
  • Market Making

With whom does a trader work?

Traders work in coordination with different teams which are responsible for feeding the trader with adequate research and data regarding the stocks the bank can invest in. In general, the trader works with the research team which is responsible for providing a summary of the company’s financials for which the trades will be entered. For structured finance products, a trader works with the quantitative, sales and structuring teams for getting the right inputs about the structuring of the products. They also work alongside risk analysis teams, to ensure risk adjusted returns on their portfolios.

How much does a trader earn?

The salary of traders varies upon the type of bank they are employed at and the relevant market experience they have. As per the figures given by Glassdoor, a novice stock trader earns a yearly salary ranging between €40,000-€60,000 in the initial years of their joining. As the trader gains experience, they earn an average salary of €70,000-€75000 euros excluding bonuses and extra benefits. The bonuses and extra compensations vary from bank to bank and the performance of the specific trader but are usually very high.

What training to become a trader?

In France, an individual who wants to work as a trader is highly recommended to have a Grand Ecole diploma with a specialization in market finance. The knowledge of coding languages like Python and R is also a very desirable skill in the current world driven by technology and automation. To start a career as a trader, it is advised to start the career as an intern or an apprentice at a French or an International bank while pursuing the diploma. This can help in building a strong foundation as a successful trader and learn directly from the industry practitioners.

What positioning in the career?

A career in trading generally involves long working hours and requires excellent research and execution skills for entering trades at the right time. A trader forms the backbone of every investment bank, investment firm, commercial banks, exchanges, treasury departments of companies and brokerage houses and is highly required for their proper functioning. The remuneration of a trader seems lucrative but comes with challenging situations and often requires strong analytical, research and communication skills, long working hours, financial knowledge, and IT expertise.

With the advent of algorithm-based trading, the trading floors across the world have shifted to high frequency trading and all major investment banks have reduced the size of their workforce working as a trader. With increasing liquidity across equities and fixed income products, algorithms have become more advanced and trades executed using such algorithms have become simpler. Advanced skills including knowledge of financial products and writing codes for the algorithms provides the person with an edge over the other applicants.

For more information regarding the remuneration and pay scale of a trader, you can refer to my previous post “Remuneration in the finance industry”

Related posts on the SimTrade blog

   ▶ Akshit GUPTA Remuneration in the finance industry

   ▶ Akshit GUPTA Market maker – Job description

Useful resources

Glassdoor

About the author

Article written in January 2021 by Akshit GUPTA (ESSEC Business School, Grande Ecole Program – Master in Management, 2019-2022).

Film analysis: Rogue Trader

Film analysis: Rogue Trader

Marie Poff

This article written by Marie POFF (ESSEC Business School, Global Bachelor of Business Administration, 2020) analyzes the Rogue trader film and explains the related financial concepts.

Based on a true story, ‘Rogue Trader’ details how risky trades made by Nick Leeson, an employee of investment banking firm Barings Bank, lead to its insolvency. This film explores how financial oversight and a lack of risk management from Leeson’s supervisors, lead to irrecoverable losses and the eventual fall of the banking giant.

Film summary

‘Rogue Trader’ recounts the exploits of Nick Leeson and his role in the downfall of Barings Bank, one of the single largest financial disasters of the nineties. Directed by James Dearden, this film encapsulates the economic and social changes of a tumultuous period. Leeson is a young derivatives trader sent to work in Singapore for Barings Bank, a major investment bank at the time. After opening a Future and Options office in Singapore, Leeson is placed in a position of authority where he takes advantage of the thriving Asian market by arbitraging between the Singapore International Monetary Exchange (SIMEX) and the Nikkei in Japan. He begins making unauthorised trades, which initially do make large profits for Barings – however he soon begins using the bank’s money to make bets on the market to recoup his own trading losses. At first, he tries to hide his losses in accounts, but eventually loses over $1 billion of Barings capital as its head of operations on the Singapore Exchange. He eventually flees the country with his wife, but inevitably, he must face how his actions lead to the bankruptcy of Barings Bank.

The Rogue Trader film

Financial concepts from the Rogue Trader film

Financial derivatives

For any new investors, financial derivatives describe a broad class of trading instruments that have no tangible worth of their own, but “derive” their value from a claim to some other financial asset or security. A few examples include futures contracts, forward contracts, put and call options, warrants, and swaps. Derivative trading started from the practice of fixing contracts ahead of time, as a way for market players to insure against fluctuations in the price of agricultural goods. Eventually the practice was extended to cover currencies and other commodities. As exchange rates became increasingly unstable, the derivatives trade facilitated huge profits for those estimating the future relative value of various commodities and currencies, through the buying and selling complex products.

Barings Bank

Founded in 1762, Barings Bank was the second oldest merchant bank in the world before its collapse in 1995. Barings grew from being a conservative merchant bank to becoming heavily reliant on speculation in the global stock markets to accumulate its profits. The derivatives market was somewhere this could be done in a very short space of time. Following the stock market crash of 1987, derivatives became central to the banks’ operations as they sought to offset their declining profits. The volume of their derivative trading soared from less than $2 trillion in 1987, to $12 trillion in 1993. As finance capital became increasingly globalised, Barings branched out to exploit these new markets in Latin America and the Far East.

Tiger Economies

The term “tiger economies” is used to describe the booming Southeast Asian economies of South Korea, Taiwan, Hong Kong, and Singapore. Following export-led growth and especially the development of sophisticated financial and trading hubs, Western interest spiked for these untapped markets in the 1990s.

Arbitrage

Profitable arbitrage opportunities are the result of simultaneously buying and selling in different markets, or by using derivatives, to take advantage of differing prices for the same asset. In the film, Leeson makes a profit by exploiting the small price fluctuations between SIMEX in Singapore and the Nikkei 225 in Japan.

Cash neutral business

A cash neutral business means managing an investment portfolio without adding any capital. For Leeson, any money made or lost on the trades should have belonged to the clients, and only a small proportion of the trades were meant to be proprietary. However, Leeson used Baring Bank’s money to make bets on the market to recoup his trading losses.

Short straddle position

A short straddle is an options strategy which takes advantage of a lack of volatility in an asset’s price, by selling both a call and a put option with the same strike price and expiration date, to create a narrow trading range for the underlying stock. Lesson used this strategy but sold disproportionate amounts of short straddles for each long futures position he took, because he needed to pay the new trades, the initial margin deposits, and meet the mounting margin calls on his existing positions.

Errors account

An errors account is a temporary account used to store and compensate for transactions related to errors in trading activity, such as routing numbers to an incorrect or wrong account. This practice allows for the separation of a transaction so that a claim can be made and resolved quickly. Leeson used this accounting to conceal the losses to Barings Bank which eventually amounted to over £800 million, though the account was supposedly activated to cover-up the loss made by an inexperienced trader working under Leeson’s supervision.

Key insights for investors

Don’t Lose Sight of Reality

An important insight is noticing how Leeson forgot to consider the real-world impact of his trades. He reflects on seeing trading as just artificial numbers flashing across screens, “it was all paid by telegraphic transfer, and since we lived off expense accounts, the numbers in our bank balances just rolled up. The real, real money was the $100 I bet Danny each day about where the market would close, or the cash we spent buying chocolate Kinder eggs to muck around with the plastic toys we found inside them.” Leeson saw the Kobe earthquake as nothing more than an opportunity and conducted more trading in one day than he ever had before as the market was butchered. Investors can avoid Leeson’s mistake by keeping a firm grasp on reality, and remembering the real companies and people represented by the stock exchange.

Destructive Practices

Other employees at Barings Bank most likely relied on internal auditors to discern wrongdoings or mistakes made by others, but as can be seen from Leeson’s case, regulators can be slow to catch on to any wrongdoing – especially when there are large profits involved. The lesson here is that an investor must be aware and proactive in helping to prevent other investors from engaging in destructive trading practices. This is especially true when it comes to newer markets or products, where regulators are unsure what entails best practice.

Tacit Agreement

While Leeson is assumed to be the villain, consider how Barings was able to contravene laws forbidding the transfer of more than 25 percent of the bank’s share capital out of the country for nearly every quarter during 1993 and 1994? Ignorance is not an excuse – tacit agreement is as effective as active engagement. A lesson here is that investors should remain informed on all their business engagements regardless of how much profit it being made.

Relevance to the SimTrade certificate

Through the SimTrade course, as well as a strong understanding about trading platforms and orders, you are taught about information in financial markets and how to use this to make successful trades. Several case studies teach you how to analyse market information to make valuations, and correctly assess how market activities will affect your own trades. The simulation and contest allow you to compete against others in the course and deepen your understanding of how a market reacts to different players.

Famous quote from the Rogue trader film

Nick Lesson: “Despite rumours of secret bank accounts and hidden millions, I did not profit personally from my unlawful trading. To be absolutely honest, sometimes I wish I had.”

Trailer of the Rogue trader film

Related posts on the SimTrade blog

All posts about financial movies and documentaries

▶ Akshit GUPTA Analysis of The Rogue Trader movie (another analysis)

▶ Akshit GUPTA The bankruptcy of the Barings Bank (1996)

▶ Jayati WALIA Value at Risk

About the author

Article written in November 2020 by Marie POFF (ESSEC Business School, Global Bachelor of Business Administration, 2020).

Analysis of The Rogue Trader movie

Analysis of The Rogue Trader movie

Akshit Gupta

This article written by Akshit Gupta (ESSEC Business School, Grande Ecole Program – Master in Management, 2019-2022) analyzes The Rogue Trader movie and explains the related financial concepts.

Rogue Trader (1999) is a British drama film depicting the life of Nick Leeson, a former derivate broker based out in Singapore. The story is inspired by real-life events that shook the global financial system and led to the collapse of the world’s second-oldest merchant bank named Barings Bank based out in England. The movie is based on a book by Nick Leeson named Rogue Trader: How I brought down Barings Bank and shook the financial world and is one of the greatest examples of why a trader shouldn’t try to fight the market.

Summary of the movie

The Rogue Trader movie

The movie starts by introducing Nick Leeson, a person who starts his career by working for Barings Bank in Indonesia and is later promoted to work as a derivatives trader at the trading seat of the bank at Singapore International Monetary Exchange (SIMEX), Singapore. He was made to look after the trades as well as the back office work of and entering and settling those trades by the end of the day. His job is to trade futures contracts based on Nikkei 225, a stock index at Japan Stock Exchange, on behalf of Baring’s clients, and generate profits by arbitraging the small price difference between SIMEX and Japan Stock Exchange. He hires a team of people to be the floor traders for him and imparts them requisite training for executing the orders. Everything seemed fine until, owing to a trader’s error, Nick accrues a small loss. To cover the losses made by the trader, Nick starts trading futures under a newly formed account numbered 88888, an unauthorized account, which is prohibited under the bank laws. Soon, his trades start falling apart and he starts incurring losses amounting to millions of pounds. To conceal the facts from his seniors, Nick lands up a big client and makes enough commission on his trades to make up for the losses. But since he wanted to play big, instead of making profits by arbitraging his positions, Nick starts to hold on to his positions in expectations of higher future prices.

However, his unhedged positions start pouring in heavy losses when a major earthquake hits Japan in 1995 and the stock market starts dwindling. Still determined to cover his losses, Nick starts buying Nikkei futures in large quantities and tries to move the market in his favor. To meet the margin calls, Nick asks the head office in London to wire him more money to enter bigger deals.  But as the market keeps on falling, the losses start amounting to hundreds of millions of pounds. The management of the bank remains oblivious of the losses that are accumulating in the account number 88888, which is an account operated under a client’s name. Barings back had a poor compliance system and regular audits weren’t carried out in a proper manner giving rise to losses amounting to 800 million pounds, almost double the amount of capital Barings had.

As the market keeps going against him, Nick realizes that his game is coming to an end. Nick and his wife plan to leave Singapore to save him from judicial actions. But eventually, Nick is caught at Frankfurt airport and deported to Singapore where he is sentenced to 6 years’ imprisonment.

Relevance to the SimTrade course

The lessons learnt from the movie Rogue Trader are correlated to courses taught in the SimTrade course. The importance of market news has correctly been reflected in the movie by the amount Nick had to pay, trying to fight the trend. The strategy used by Nick to cover his losses known as Martingale’s strategy, or doubling the bets, is a very common mistake traders make in order to cover their past losses, but most of the time it results in even higher losses. A trader should never try to fight the market since it is rightly said that markets are always right, even when they are wrong.

The courses taught on SimTrade teach traders to cover their positions by using different types of orders to protect them from any unexpected market movements. If a stop loss/stop limit strategy would have been entered in by Nick, the losses could have been cut down. A proper investment plan with adequate use of margins and a stop-loss strategy should be put in place by every trader before entering trades. Also, a good trader should never let emotions, such as fear or greed, dictate her judgment.

Most famous quotes from the movie

“I just have to keep buying futures to support the market. If it sticks at 18,000 my options are still in the money. I could get the position back. I may even out ahead.” – Nick Leeson

“Listen to me now. You don’t fight the market!” – Another trader

“The way the market’s going, your losses could be catastrophic.” – Another trader

Trailer of the movie

Related Posts

   ▶ Marie POFF Film analysis: Rogue Trader

   ▶ Jayati WALIA Quantitative risk management

   ▶ Alexandre VERLET Understanding financial derivatives: futures

   ▶ Akshit GUPTA Futures Contract

About the author

Article written in October 2020 by Akshit GUPTA (ESSEC Business School, Grande Ecole Program – Master in Management, 2019-2022).

The bankruptcy of the Barings Bank (1996)

The bankruptcy of the Barings Bank (1996)

Akshit GUPTA

This article written by Akshit GUPTA (ESSEC Business School, Grande Ecole Program – Master in Management (MiM), 2022) analyzes the Big Short movie.

Founded in 1762 by a British born man named Francis Baring, Barings Bank was the second oldest merchant banks in the entire world with some of the most popular names on their client list. Baring futures was incorporated in Singapore in the year 1986 to trade in the futures market at SIMEX (Singapore International Monetary Exchange) under the parent company, Barings group. The arm trading in futures generated reasonable profits until 1992 when Nicolas William Leeson joined as the head derivative trader at the trading floor of the bank at SIMEX.

The bankruptcy

Barings Bank

Nick Leeson, as the new in-charge of derivatives trading at Baring Futures, was assigned to generate profits by arbitraging the price difference of Nikkei 225 future contracts between SIMEX and Japan Stock Exchange. He was also made to look after both the trading floor and the back office to enter and settle trades. A persistent worker, Nick started generating good returns by entering unauthorized trades on behalf of the bank. His trades were working well until a floor trader undertook a wrong trade and resulted in small losses to the bank. To cover the losses for the trader, Nick opens a new account numbered 88888 to hide those losses. But as the losses kept on accumulating, Nick started pursuing his unauthorized trading from the shell account to make up for the losses by doubling his bet. He also started holding on to his position for longer periods than he was permitted in order to generate higher profits. However, the audit system at the bank failed to investigate the accounts due to its inefficiency.

Nick was able to cover up for these losses until a major earthquake struck Japan in 1995 and his unhedged positions started pouring in millions of pounds of losses in the shell account. In order to cover for it, Nick started taking even bigger positions in the futures in the attempt of moving the markets in his favor.

However, the markets didn’t spring back to his side and Nick accumulated losses of more than 800 million pounds. Knowing his game was coming to an end, Nicholas Leeson fled to Germany in order to avoid judicial actions,  but was caught at Frankfurt airport in March 1995 and sentenced to 6 years of jail in Singapore.

Nick Leeson

Lacking sufficient funds to cover for the settlement of the futures contracts, Barings Bank was liquidated on 26 February 1995. In March 1995, the Dutch banking group, ING, purchased Barings bank at a very nominal price resulting in the formation of ING Barings.

In order to prevent such debacles in the future, amendments were made in the Futures Trading Act on 1st April 1995, giving the monetary authority of Singapore the right to oversee the activities at SIMEX more closely. The fall of Baring Bank is a traditional example of how a lack of proper compliance and checks can lead to catastrophic events that even the biggest of all can’t survive.

Relevance to the SimTrade course

The fall of the Barings Bank teaches us some important lessons that every trader and company should follow in order to prevent such events from happening again in the future. Nick Leeson used a martingale strategy in order to double his bets on the loss generating trades. The confidence of covering up for the losses clouded Nick’s judgment and resulted in even bigger losses for the bank. A good trader should never let fear or greed dictate his of her actions. The unhedged trades Nick entered produced catastrophic results when the entire market collapsed due to a natural calamity. The results of such actions were well seen by the increase in losses in the 88888 account.  The excessive use of leverage, speculation, and unplanned trades led to the collapse of this mighty institution. The SimTrade courses teach us to execute trades in a well-planned form in order to handle any unfavorable circumstances. The use of different types of orders is very essential to cover open positions and protect against such events. The fall could have been controlled if stop-loss strategies would have been adopted by the trader. The incidence teaches us the very essence of not trying to fight the financial markets as they are always right.

Related posts on the SimTrade blog

Movies

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▶ Kunal SAREEN Analysis of the Wall Street movie

▶ Raphael TRAEN Film analysis: The Wolf of Wall Street

▶ Marie POFF Film analysis: The Wolf of Wall Street

Financial concepts

▶ Akshit GUPTA Regulations in financial markets

▶ Akshit GUPTA Market manipulation

▶ Akshit GUPTA Securities and Exchange Commission

About the author

Article written by Akshit GUPTA (ESSEC Business School, Grande Ecole Program – Master in Management (MiM), 2022)

Métiers de la finance : trader

Le métier de trader

Colombe Boiteux

Cet article rédigé par Colombe BOITEUX (ESSEC Business School, Grande Ecole – Master in Management, 2018-2022) présente le métier de trader.

Que fait un trader ?

Un trader achète et vend des actifs financiers (actions, monnaies, matières premières…) en vue de faire une plus-value à un risque déterminé. Pour optimiser cette création de revenus, le trader analyse et anticipe les mouvements du marché tout en essayant de couvrir ses opérations du jour pour en limiter les risques.

Il existe plusieurs types de spécialisation au sein du métier de « trader » : d’une part une spécialisation par classe d’actif et par zone géographique, notamment au sein des grandes banques ou institutions, d’autre part une spécialisation par mission :

  • Trader Produits Vanilles (actions, obligations, taux de change) : Sa fonction est de fournir un prix de vente ou d’achat pour un actif donné au client de la Banque (via le Sales), et d’acheter ou vendre pour le compte de ce même client l’actif en question. Une fois la position prise, le Trader doit gérer le risque porté par l’actif afin de générer un profit tout en respectant des limites d’exposition au risque.
  • Trader Produits Structurés : La principale différence avec le Trader Produits Vanilles réside dans la complexité des produits pour lesquels il intervient. Il se doit aussi d’immuniser « complètement » la Banque aux risques impliqués par la vente (ou l’achat) de ce produit pour le compte du client. La composante Hedging (couverture) est aussi importante que la composante « Pricing ».
  • Trader : A la différence des deux postes ci-dessus, le Prop-Trader (Proprietary Trader) n’intervient pas dans une logique d’investissement pour le compte de tiers (les clients de la Banque), mais d’investissement et de spéculation pour le compte de la Banque. En ce sens, il est habilité à prendre des positions sur les capitaux propres de la Banque. De manière fort logique, ce type de poste est réservé à une minorité de « seniors » grands spécialistes d’une classe d’actifs.
  • Trader Arbitragiste : Comme le Prop Trader, il investit pour le compte de la Banque, mais son rôle se « limite » à l’identification des inefficiences ou décalages temporaires de marché afin d’en tirer avantage en se positionnant à très court terme sur ces différences de prix.
  • Market Maker : Sa principale fonction est d’assurer la liquidité de certains titres ou instruments financiers en proposant à ses clients de façon régulière et permanente des prix à l’achat et à la vente, et ce indépendamment de l’état du marché. Il n’est pas censé prendre de positions durables, mais déboucler sa position au plus vite une fois le deal effectué.

Avec qui travaille un trader ?

Les traders (Produits Vanille, Produits Structurés, Market Maker) sont au cœur de la salle de marché, en relation constante avec les équipes de Vente, la Structuration et les équipes d’Analyse Quantitative pour les Traders de Produits Structurés. Ils ont aussi et bien évidemment un lien constant avec les équipes « Risques ».

Le Prop Trader, étant donné qu’il exerce uniquement pour le compte de la banque n’entretient que très peu voire pas du tout de relation avec les autres membres du Front Office, et est même bien souvent « géographiquement » situé à part.

Dans quel type d’entreprise travaille un trader ?

  • Banque d’affaires
  • Banque privée
  • Fond d’investissement
  • Société de trading

Combien gagne un trader ?

En France, le salaire mensuel d’un trader débutant se situe entre 4 000 et 6 000 euros par mois. Toujours en France, le salaire moyen d’un trader est de 70 000 euros hors bonus. Les primes peuvent aller jusqu’à 8 fois le salaire de base. Mais attention, le salaire varie cependant selon les banques : banques françaises ou internationales, banques privées ou banques de détail et selon les pays où elles sont implantées.

Quel positionnement dans la carrière ?

L’évolution professionnelle du trader peut passer par :

  • la spécialisation dans un type d’actifs: bons du Trésor, monnaies, matières premières…
  • l’évolution vers d’autres métiers de la finance: analyste financier, trésorier d’entreprise, gestionnaire de portefeuille…

Globalement, ses compétences et sa connaissance pointues du marché lui ouvrent toutes les portes du monde de la finance et de la Bourse. Il n’est pas rare que le trader utilise l’argent mis de côté au cours de sa carrière pour changer totalement de voie, ou s’offrir une retraite anticipée.

Quelle formation ?

En France un diplôme de Grande École avec une spécialisation en mathématique ou finance de marché est fortement recommandé. Les entreprises anglo-saxonnes sont quant à elles moins pointilleuses sur la formation mais pas moins exigeantes sur les compétences.

Comme pour tout métier en salle de marché il est fortement conseillé de lire le livre de John Hull qui est l’ouvrage de référence de la finance de marché et qui est très utile de maitriser pour les entretiens (Options futures et autres actifs dérivés). Pour exercer le métier de trader il est conseillé de commencer par faire des stages ou V.I.E. en tant qu’assistant trader.

Lien avec le cours Gestion financière

  • SimTrade : Connaissance des marchés financiers, différentes classes d’actifs ainsi que leur fonctionnement.
  • Analyse des états financier des entreprises pour ceux intervenant sur la classe d’actif actions afin de comprendre et interpréter la communication financière et ses impacts sur les marchés

Lien avec des films de la finance

  • Wall Street : l’argent ne dort jamais (2010). Sur fond du krach boursier de 2008, un jeune boursier est prêt à tout pour venger son mentor que d’obscures transactions financières ont poussé au suicide.
  • Krach (2009) : Le film suit un trader dans une grande banque New-Yorkaise qui est dans la constante recherche de gains.  Ce dernier est le seul à voir une corrélation entre variations climatiques et flux boursier et veut profiter de cette opportunité pour créer un « hedge fund ».

Pour plus d’informations sur le métier de trader

Témoignage d’un trader de chez Crédit Agricole CIB (source : Wallfinance)

Témoignage d’un trader de chez HSBC

A propos de l’auteure

Article publié en juin 2020 par Colombe BOITEUX (ESSEC Business School, Grande Ecole – Master in Management, 2018-2022).