Skillsfirst Level 3 Certificate in Introduction to Financial Trading (RQF) - UNIT 1: Principles of financial trading
Skillsfirst Level 3 Certificate in Introduction to Financial Trading (RQF) - UNIT 2: Principles of Financial Planning and Cash Flow in Financial Trading
Skillsfirst Level 3 Certificate in Introduction to Financial Trading (RQF) - UNIT 3: Understanding financial trading techniques


Proprietary Traders and Firms

These are either individuals who trade with a proprietary company’s money and are commonly known as ‘backed traders’ as they take a percentage split using profits made on the proprietary company’s money. Backed traders therefore are risking the proprietary company’s money and therefore do not risk their own capital but share a pooled account at that company. Individuals also trade in proprietary companies but they place their own money in a segregated account with the proprietary firm so their funds are kept separate from that of the backed traders ‘pooled funds’.Investment Banks

They can have their own trading desks which either use their customer’s funds to make profits or they set aside internal profits of the banks to trade in a similar way to proprietary. This method caused some controversy during the 2007 – 2008 financial/banking crisis as banks were using client money without direct permissions so nowadays Investment banks are required to separate client money and its own funds for the purpose of trading. Many banks in this modern age use technology to write computer trading models to take advantage of price inefficiencies and it is known as algorithmic trading as the human trading element of decision making is taken away from the physical trader as machines will do it for them! Most algorithms use historic market statistics and order flow to trade the markets and they can do it at speeds much quicker than any human trader.

Investment BanksMarket Makers

These kind of traders add liquidity to markets so that other market participants are encouraged to also trade in those products. In most instances market makers are paid some form of commission for how much volume they add to a market and the amount of time they show prices in that market. They are not necessarily interested in price although any market maker will tell you that they do have to manage risks because often the prices they quote market maker may not be particularly beneficial to them for profit but for commission purposes instead.

So what does a trader do for a living and how do they perform their job. A bank generally makes its expertise through traders available free of charge to its clients. Banks use this expertise serving clients to their own benefit in trading for their own accounts. This activity generates potential profits from the volatility of financial assets and is commonly known as risk. By taking risk in the financial markets, the bank registers a profit or loss. The trader’s role undertaking this activity is key for the bank and as such the trader has two main functions, which often go hand in hand:

  1. Risk management and;
  2. Speculation

These two roles exist throughout the trading profession and vary depending on their relative importance for the bank and its clients, therefore the trader’s job title may vary.

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