are all about. A noisy, pressure-filled place where only a ‘certain’
type of person can survive and, until comparatively recently, that
meant mean, confident, strong-willed, young, men mis-behaving!
This kind of image and generalization is, not surprisingly, far off the
mark. Yes, there are many young, arrogant and noisy dealers, but that
is hardly unique to financial markets, and the antics of certain
professional footballers and offspring of the famous spring to mind.
Certainly, some dealers are known to ‘relax’ by playing hard in the
clubs and bars but then the demands of their particular job requires
a release of the pressure to perform aggressively and successfully for
many hours. Equally, in the heat of the moment as the success of the
deal varies, an outpouring of emotion is hardly surprising. OK so the
language may be bad and the humour often tasteless to the ‘average’
person, but then if you cannot handle that you shouldn’t be on the
dealing floor or, for that matter in a job, which means you potentially
come into contact with that kind of environment. In any case, not all
dealers or dealing rooms possess these characteristics. Many are full
of decent hard-working and pleasant men and women doing their job
and having good and bad days at the office, exactly the same as the
operations teams in the middle and back offices!
Of course, to those who have to liaise with the dealers in this
supposedly raucous environment, it can be somewhat daunting,
particularly for new or junior personnel. A problem can exist in terms
of the relationship between the so-called front office and those
supporting that function in the middle and/or back offices. If the
relationship issue becomes too significant it impacts across the
business. What causes the relationship between dealers and operations
to be really good or bad or even in between?
There are many possibilities. Certainly a lack of understanding of the
role of each area, the processes, critical times and failure to
appreciate the importance of a request or piece of information will
not make for much mutual respect. Operations teams need to
understand the dealing environment, the important issues and the
pressure. By doing so they can communicate better and from a
position of confidence and that will be appreciated. The dealers are
essentially a client and a very important one at that. Of course, that
does not make them always right, nor does it require total
subservience, in fact exactly the opposite is needed. However, there
is no doubt that a firm with a front office and operations team that
have mutual respect for each other, has understood the working
environment and the requirements that each area has and can
genuinely work together, will be highly successful.
It is therefore important for an operations team to understand the
basics: for instance, in the dealing area there are differing roles and
ways of actually trading. There are principal traders dealing with the
firms’ own money, arbitrageurs trying to profit from price anomalies,
market-makers quoting bid and offer prices in amounts which they
are committed to trade and sales teams executing orders on behalf of
clients. The dealers in a fund management organization will be
operating very differently from a principal trader at a major
international bank, the latter being often referred to as traders.
Dealers or traders in different types of products have markets, which
can be more or less volatile than others and consequently are more or
less difficult to trade in. Dealers on the sales desk are operating for
clients trying to achieve the best price and get paid a commission
while traders have profit targets to hit if their bonus is to top up their
basic pay. There is pressure on both, but it is a different pressure.
Likewise, the skill sets are different and so, often, is the character of
the person.
It is essential for operations personnel and particularly managers and
supervisors to understand the trading and dealing they support. By
recognizing what is going on in the pre-trade and trading environments
they will be better able to provide the services that are needed
and also to cope with the occasional outbursts and stress on the
relationship between what is, after all, two integrally linked business
units which need each other. The front–back office relationship is
vital to the overall success of the company. Without a good
understanding of each other’s roles there is potential for significant
risk situations to develop and the likelihood of financial loss through
unnecessary errors and inefficiencies. Just as importantly, there is the
risk of breaching regulations, hidden dealing, incorrect positions and
compliance failures, all of which will have very significant consequences
for the firm should they occur. If we look at the issues that
arise in trading and dealing we can see where the potential for
problems lies.
Whatever is transacted in the marketplace has to be settled. This
fundamental premise illustrates that the operations function is
important to the front office otherwise any profit the dealer makes will
not be realized. The efficient recording of the transactions and their
reconciliation to the market are vital. The information on open
positions, status of trades and whether a purchased security has been
received and is therefore available to be sold and delivered on, will
enable the front office to avoid transactions that may incur costs as
well as to take advantage of opportunities safe in the knowledge that
their dealing position is confirmed and correct. Suffice to say that if
the information is late and/or error-strewn the dealer can lose
confidence and be reluctant to take new positions until the true
position is confirmed. Losses can occur on existing transactions
because of late settlement, incorrect instructions and sundry other
errors. Additional costs and expenses including possible fines levied
by the exchange and or regulators are a real possibility. These costs
reduce the profit or increase the loss on the trades, making the dealers’
job harder and will not endear the operations team to them.
The traders therefore rely on operations teams to check, verify and
record the trade details and to reconcile the positions held on the
book. Traders and dealers assume that the transactions they enter
into are OK, but only the matching process confirms this is the case.
Matching processes differ depending on the type of market. Openoutcry
markets generate potential unmatched or ‘out-trades’ because
of the face-to-face dealing process where there is scope for
misunderstanding and error. Electronic markets, on the other hand
have no mismatches as the system can only carry out trades where the
details match. There is a point here to remember, of course, and that
is that a trader or dealer can still carry out an incorrect transaction,
i.e. buying instead of selling in an electronic market and so from an
operations point of view the traders and dealers records need
verifying to the trades actually carried out.
Key points in the process are the order placing to the booth on the
trading floor and the transmitting of the order to the trader in the pit
or area designated for trading by the exchange. Once the trade is
completed, which can be a matter of a few seconds, the order is
confirmed as filled by the booth clerk. However, at this stage the
trade is not matched. That will be the case after the details of the
trade are compared to the details submitted by the counterpart to the
trade. If everything agrees then matching is complete and the
transaction passes to the clearing process for settlement. If it does not
agree then the two parties to the trade must resolve the disputed
details. On most markets there will be a strict deadline by which the
unmatched trades must be resolved.
Read More : Trading, dealing and investment
