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Article on Forex Trading rooms
For more information about this article please use this link:- http://en.wikipedia.org/wiki/Trading_room
Forex Trading rooms first appeared among United States bulge bracket brokers, such as Morgan Stanley, from 1971, with the creation of NASDAQ, which requires an equity trading desk on their premises, and the growth of the secondary market of federal debt products, which requires a bond trading desk.
The spread of trading rooms in Europe, between 1982 and 1987, has been subsequently fostered by two reforms of the financial markets organization, that were carried out roughly simultaneously in the United Kingdom and France.
In the United Kingdom, the Big Bang on the London Stock Exchange, removed the distinction between stockbrokers and stockjobbers, and prompted US investment banks, hitherto deprived of access to the LSE, to set up a trading room in the City of London.
In France, the deregulation of capital markets, carried out by Pierre Bérégovoy, Economics and Finance Minister, between 1984 and 1986, led to the creation of money-market instruments, of an interest-rate futuresmarket, MATIF, of an equity options market, MONEP, the streamlining of sovereign debt management, with multiple-auction bond issues and the creation of a primary dealer status. Every emerging market segment raised the need for new dedicated trader positions inside the trading room.
A trading room serves two types of business:
- trading, and arbitrage, a business of investment banks and brokers, often referred to as the sell side.
- portfolio management, a business of asset management companies and institutional investors, often referred to as the buy side.
Brokers and investment banks set up their trading rooms first and large asset-management firms subsequently followed them.
The business type determines peculiarities in the organisation and the software environment inside the trading room.
Trading rooms are made up of desks, specialised by product or market segment (equities, short-term, long-term, options…), that share a large open space.
An investment bank’s typical room makes a distinction between :
- Traders , whose role is to offer the best possible prices to sales, by anticipating market trends. After striking a deal with a sales, the trader arranges a reverse trade either with another trader belonging to another entity of the same institution or to an outside counterparty;
- market-makers, acting like wholesalers. Trades negotiated by market-makers usually bear standard terms.
Sales make deals tailored to their corporate customers’ needs, that is, their terms are often specific. Focusing on their customer relationship, they may deal on the whole range of asset types.
Many large institutions have grouped their cash and derivative desks, while others, such as UBS or Deutsche Bank, for example, giving the priority to customer relationship, structure their trading room as per customer segment, around sales desks.
Some large trading rooms hosts offshore traders, acting on behalf of another entity of the same institution, located in another time-zone. One room in Paris may have traders paid for by the New York subsidiary, and whose working hours are consequently shifted. On the foreign exchange desk, because this market is live on a 24/24 basis, a rolling book organisation can be implemented, whereby, a London-based trader, for instance, will inherit, at start of day, the open positions handed over by the Singapore, Tokyo, or Bahrein room, and manages them till his own end-of-day, when they are handed over to another colleague based in New York.
Some institutions, notably those that invested in a rapid development (RAD) team, choose to blend profiles inside the trading room, where traders, financial engineers and front-office dedicated software developers sit side by side. The latter therefore report to a head of trading rather than to a head of IT.
More recently, a profile of compliance officer has also appeared; he or she makes sure the law, notably that relative to market use, and the code of conduct, are complied with.
The middle office and the back office are generally not located in the trading room.
The organisation is somewhat simpler with asset management firms :
- asset managers are responsible for portfolios or funds;
- « traders » are in contact with « brokers », that is, with the above-mentioned investment banks’« sales »; however, this profile is absent from asset management firms that chose to outsource their trading desk.
The development of trading businesses, during the eighties and nineties, required ever larger trading rooms, specifically adapted to IT- and telephony cabling. Some institutions therefore moved their trading room from their downtown premises, from the City to Canary Wharf, from inner Paris to La Défense, and from Wall Street towards Times Square or New York’s residential suburbs in Connecticut; UBS Warburg, for example, built a trading room in Stamford, Connecticut in 1997, then enlarged it in 2002, to the world’s largest one, with about 100,000 sq ft (9,300 m2) floor space, allowing the installation of some 1,400 working positions and 5,000 monitors.
The « Basalte » building of Société Générale is the first ever building specifically dedicated to trading rooms; it is fit for double power sourcing, to allow trading continuity in case one of the production sources is cut off.
JP Morgan is planning to construct a building, close to the World Trade Center site, where all six 60,000 sq ft (5,600 m2) floors dedicated to trading rooms will be cantilevered, the available ground surface being only 32,000 sq ft (3,000 m2).