Reuters Guide To The Financial Markets

Reuters Guide to the
International Financial
Markets
Version 1.0
Version 2.0 ii Contents Reuterss Guide to the International Financial Markets
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copyright legislation, no part of this document may be reproduced,
distributed or transmitted in any form or by any means or process
except for educational purposes without the prior written permission of
Reuters Ltd.
Copyright © 1997, Reuters Ltd, 85 Fleet Street, London EC4P 4AJ

Unless otherwise noted, names of companies and people contained
herein are part of completely fictitious scenarios and are designed
solely to illustrate the point being discussed.
Although great care has been taken to ensure this Guide is accurate,
readers should note that markets and roles change and that the
information should only be used for general guidance.
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Document Change Log

Date Version Incorporated by Details of Change
Reuters Guide to the 08/1997 1.0 University Relations Migration to an external

International Financial document for students.
Markets
Contents
Introduction 1
Purpose of the Reuters Guide to the International Financial Markets 2
Who’s Who in the International Financial Markets 5

The Roles in the International Financial Markets 6
Traders 6
Brokers 8
Sales 9
Investment Institutions 9
Decision Support 10
General Management 10
Trader Support 10
Back Office 11
Retail Sector 11
Introduction to Financial Markets 13

Overview of Financial Markets 14
Types of Instruments 15
Equity 15
Debt 15
Commodity 15
Over The Counter or Exchange Traded 15
Cash or Derivative 16
Domestic or Global 16
Types of Markets 17
The Foreign Exchange (FX) Market 17
Fixed Income Market 17
Equities Market 18
Commodities Market 18
Relationships between Instruments and Markets 19
Types of Institutions 20
Banks 21
Building Societies 23
Broking Firms 23
Corporations 23
Local Authorities 23
Fund Management 23
Attributes of Institutions 24
Roles within Markets 28
Traders 28
Fund Managers 29
Corporate Treasurers 29
Version 1.0 i Contents Reuters Guide to the International Financial Markets

Brokers 29
Sales 30
Decision Management 31
General Management 31
Trader Support 31
Back Office Support 31
International Considerations 32
Foreign Exchange Traders 33

What Does a Foreign Exchange Trader Do? 34
The Foreign Exchange Trader’s Role 34
Specialisms Within the Foreign Exchange Market 34
Currencies Traded 36
Typical Employers 36
Characteristics of Foreign Exchange Traders 38
Demographics 38
Career Path 38
Computer Skills 38
Working Relationships 40
External Relationships 40
Relationships with Colleagues 41
The Workplace 43
Environment 43
Computer Systems 43
Other Equipment 44
Common Tasks 45
Form an Opinion 45
Receive Analysts’ Predictions 45
Trade on the Markets 45
Complete Details of a Deal 47
Complete Administration for the Day 47
Fixed Income Traders 49

What Does a Fixed Income Trader Do? 50
The Trader’s Role 50
Specialisation Within Fixed Income 51
Where are the Bond Markets? 52
Characteristics of Fixed Income Traders 53
Career Path 53
Common Tasks 56
Form an Opinion 56
Attend the morning meeting 56
Trade on the Markets 56
Daily Administration 57
Version 1.0 ii Contents Reuters Guide to the International Financial Markets

Information Requirements 58
Sales People in the Financial Markets 59

What Does a Salesperson Do? 60
The Salesperson’s Role 60
Specialisation Within Sales 60
Characteristics of Salespeople 62
Career Path 62
User Characteristics 62
Common Tasks 65
Understand Customers’ Requirements 65
Answer a Customer Enquiry 65
Call a Customer with an Opportunity 65
Get a Price from a Trader 66
Scenario: A day in the life of a salesperson 66
Analysts 69
What Does an Analyst Do? 70
The Analyst’s Role 70
Forms of Analysis 70
Characteristics of Analysts 73
Career Path 73
Common Tasks 76
Form a View of the Markets 76
Write the Morning Report (Sell Side) 76
Brief the Sales Force (Sell Side) 76
Monday Morning Meeting (Buy Side) 77
Company Visits 77
Broker Research 77
Phone Calls from Investors (Sell Side) 80
Online Information 81
Other Information 81
Fund Managers 83
What Does a Fund Manager Do? 84
The Fund Manager’s Role 84
Specialisms Within Fund Management 84
Characteristics of Fund Managers 86
Version 1.0 iii Contents Reuters Guide to the International Financial Markets
Career Path 86
The Workplace 89
Environment 89
Computer Systems 89
Common Tasks 91
Monday Morning Meeting 91
Receiving Calls from Brokers 91
Analysing a Possible Investment 92
Assessing the Current Portfolio 93
Studying Broker Research 94
Buying and Selling 94
Thursday Afternoon Meeting 95
Online Information 96
Other Information 96
Glossary 97
Bibliography 108
Version 1.0 iv Contents Reuters Guide to the International Financial Markets

Chapter 1
Introduction
Version 1.0 Chapter 1: Introduction Reuters Guide to the International Financial Markets
Purpose of the Reuters Guide to the
International Financial Markets
Why The Reuters Guide to the Whenever I talk to students, especially those not studying
International Financial Markets? economics, about the world of the financial markets they express
huge interest but tell me they want to know more. In general this
desire for information is related to being able to understand what
goes on so that job hunting can be carried out from a position of
knowledge rather than ignorance!
This Guide, seeks to fill this gap and help, you the student,
understand something of the mechanics of the International
Financial Markets, the players and the sheer opportunity for
satisfying and rewarding jobs within them. The Guide
supplements a series of seminars which will be given in October
1997 at a number of UK universities, see the Graduate web-site,
address below, for dates and locations.
Of course, the markets comprise the obvious companies, such as

the investments banks, but they are only part of the story. The
International Financial Markets function because they receive a
continuous supply of information - prices, facts, figures, news of
politics, economics, natural disasters to name but a few. And it
is these companies, such as Reuters, whose job it is to search
out this information and to deliver it quickly, accurately and
without bias. Understanding the information within the financial
markets is a crucial part of understanding the market themselves
- not least because the information providers are also major
employers!
This Guide is provided for private educational purposes only

and within this usage you are free to copy it. Beyond this usage
it is protected by copyright and written permission from Reuters
is required prior to reproduction.
To ensure the fastest possible download time from the Internet,

the document is text only and it is only a guide, giving a flavour
without being exhaustive. I hope you find it useful. Should you
have any comments about how we might improve I would
welcome them and in the meantime good reading.
University Relations Department

Reuters Ltd
85 Fleet St
London EC4P 4AJ
UK
Email: ukgraduate.recruitment@reuters.com
Corporate site: www.reuters.com
Graduate site: www.ims.reuters.com/ukgrad
What does Reuters Reuters Guide to the International Financial Markets provides a general
Guide to the International overview of the International Financial Markets markets, for which
Financial Markets Reuters is the major supplier of information, and roles within those
provide? markets.
The document then profiles five customer groups, and provides an

analysis of their roles. These groups are:
• Foreign Exchange traders

• Fixed Income traders
• Salespeople
• Analysts
• Fund Managers
What is contained in the Each of the profiled roles in this document contains the following
detailed analysis? information:
• characteristics such as demographics, career path, computer literacy
• working relationships both within and external to the institution
where they work
• common tasks.
Sources of information Information for Reuters Guide to the International Financial Markets
was gathered from:
See Bibliography on • introductory finance books
• internal Reuters documents
• interviews with financial markets practitioners
• interviews with Reuters customer trainers and marketing staff.
Chapter 2
Who’s Who in the

International Financial
Markets
Version 1.0 5 Chapter 2: Overview of Who’s Who? Reuters Guide to the International Financial Markets
The Roles in the International
Financial Markets
The participants in the International Financial Markets work in a wide
variety of roles. Figure illustrates these roles.
Figure 1 Roles in the International Financial Markets
Traders
Traders buy and sell in the financial markets. Trading may take place at
physical exchanges, for example, for commodities or futures, or over the
counter, for example, in foreign exchange.
A trader specialises in a particular type of financial instrument. Different
types of trader have different roles and requirements. Common types of
trader are described below.
Money
Money traders buy and sell currencies and short term debt to fund the
business of their employer, such as lending or trade, or for profit. The
instruments that they trade are usually of maturity between one month
and one year. The instruments may be cash, for example, deposits,
treasury bills, Certificates of Deposits – or derivatives, such as Interest
Rate Futures, FRAs, swaps.
Money traders work in banks and corporate treasury departments.
Trading in the cash market does not take place at an exchange but is
performed over the counter using telephones and dealing terminals
Money traders require foreign exchange rates, bank deposit rates and
news information.
Foreign Exchange
See Foreign Exchange Foreign exchange traders generally trade currencies on a shorter term
Traders on page 33 basis than money traders: up to one month maturity.
The trading environment is over the counter using telephones and
dealing terminals. Foreign exchange traders require foreign exchange
rates, bank deposit rates and news.
Bonds
See Fixed Income Bond traders buy and sell government, quasi-government and corporate
Traders on page 55 bonds for customers and for their own account. They work in investment
banks and securities houses.
Most bond trading is over the counter. Traders’ requirements include
bond data such as issuers, prices and yields; interest rates, foreign
exchange rates, graphical analysis and news.
Equities
Equities traders buy and sell equities (stocks and shares) for customers
and for their own account. They work for investment and securities
houses and are members of an exchange, such as the London Stock
Exchange for UK equities.
Some traders specialise as market makers; they are obliged to quote buy
and sell prices for a selection of chosen instruments at all times during
market hours
Most equity trading is exchange based, although large over-the-counter
equity markets exist, for example NASDAQ in the US.
Equities traders require equity prices, information about related
instruments such as convertibles and warrants, interest rates, graphical
analysis and news.
Commodities
Commodities traders buy and sell commodities such as metals, softs,
grains for customers and for their own account. They are normally
members of a commodity exchange, such as the Chicago Board of Trade,
where trading takes place.
Commodities traders work in independent companies and as part of
larger financial institutions. They require market future and spot prices,
graphical analysis and news.
Energy
Energy traders buy and sell energy contracts—oil and gas—for
customers and for their own account. They are members of an exchange
where the trading takes place, such as the International Petroleum
Exchange in London.
Energy traders work in independent companies and a small number of
financial institutions. They require market future and spot prices, foreign
exchange rates, graphical analysis and news.
Derivatives
Derivatives trading is a relatively new activity. Traders buy and sell
derivatives instruments such as swaps, futures and options for
customers and for their own account, and operate across money, bond,
equity and commodity markets.
Derivatives traders require a wide variety of information, including data
which relates to the underlying instruments of the derivatives they trade.
They need access to exchange and OTC prices, both real time and
historical, plus of course, relevant news. news.
Brokers
Brokers intermediate between traders and customers. They earn
commission on the deals that they arrange. Brokers do not normally
manage a position, that is, own equities, currency or other instruments,
in the market in which they trade.
Brokers exist in the foreign exchange, bond and equity markets. They
work for independent brokerage companies.
Brokers require the same type of information as traders: a money broker
would require foreign exchange rates, bank deposit rates, bond data,
graphical analysis and news. However, brokers need to obtain this data
from a large number of players in the market, so that their prices reflect
the market as closely as possible.
Brokers also need to create interest in instruments to persuade their
customers to do business. They need to publicise their prices and be
able to respond quickly to calls asking their opinion on particular markets
and instruments.
Sales
See Salespeople in the Sales staff transact buy and sell orders for customers, often institutional
Financial Markets on investors, and also act as an intermediary between customers and
page 65 traders. They work for investment banks, integrated securities houses
and stock, commodity and energy brokerage houses, and include those
working on the corporate desk.
The sales function exists in all markets. In equity, commodity and energy
markets, sales staff may also be known as brokers. However, sales staff
differ from traditional brokerage in that they may hold positions in the
market.
Sales staff may use the same information as brokers, depending on the
instruments they specialise in. This includes foreign exchange rates,
bond and equity data, other market prices, graphical analysis and news.
They use any information they can to build relationships with customers,
including leisure topics such as sport.
Investment Institutions
See Fund Managers on The primary interest of some institutions is to invest in, that is, buy and
page 89 hold, instruments. These institutions are said to work on the buy side.
Fund managers, portfolio managers and staff in corporate treasury invest
the funds they manage in all financial markets to generate a return for the
investors in those funds.
Fund and portfolio managers work for pension fund and insurance
companies and fund management divisions of major investment
institutions.
Most large companies have a corporate treasury department to manage
their capital requirements, whether surplus or deficit.
Those working on the buy side use interest rate, foreign exchange, bond
and equity data, typically across a broader range of markets than a
trader. Corporate treasurers also require forward and deposit rates. Fund
and portfolio managers require portfolio management facilities, with data-
feed inputs, to value their portfolios on an intra-day or inter-day basis.
Decision Support
What does decision The term decision support describes the function that provides the
support mean? research information, analysis and interpretation of that information.
They include:
• economists
• analysts
• researchers.
These groups of people forecast economic performance and market
movements to provide guidance to traders and sales staff. They may
also publish their forecasts, for a fee, to a wider market audience.
Analysts play a key role in the services provided by the sell side to the
buy side.
Decision management exists in all markets and in all financial
institutions.
Those in decision management require price information, access to large
quantities of historical data, spreadsheet and graphical analysis and
notification of impending financial events and announcements.
General Management
The term general management describes the following groups of
people:
• those from dealing room manager upwards who may be active in the
day-to-day trading operation
• those in corporate finance and mergers and acquisitions in financial
institutions
• managers in a variety of roles in non-financial companies who are
users of limited financial information and news.
Managers may require historic and current information about
companies in their sector or areas of interest. They also require basic
foreign exchange information for the countries in which they operate.
Trader Support
Trader support can be split into two distinct roles:
• position keeping, assisting traders in the dealing room
• order entry, a book-keeping role in the Back Office of a financial
institution.
Those who work in trader support roles require a general view of the
financial marketplace, for example foreign exchange rates, interest rates
and inter-bank offered rates for currencies of interest.
Back Office
The Back Office exists in all financial institutions. It is here that the
administrative tasks connected with dealing are performed.
Those working in the Back Office carry out transaction administration
(clearing and settlement), credit control (limit setting) and statutory and
management accounting.
The information they require is mostly internal, with company financial
data needed for credit control.
Retail Sector
This term covers those working in retail banking. Retail banks provide
exchange transactions and derivatives trading
Chapter 3
Introduction to Financial
Markets
Version 1.0 13 Chapter 3: Introduction to Financial Markets Reuters Guide to the International Financial Markets
Overview of Financial Markets
What is a Financial A financial market is an environment where various types of financial
Market? entities are bought and sold, such as equities, currencies, money,
bonds, commodities and energy according to a set of rules. Various
derivatives of these base entities are also traded, for example, futures,
options and swaps. A market for a particular entity exists when there are
enough buyers and sellers to influence its liquidity. The more buyers
and sellers, the more liquid the market is likely to be.
Historically, markets have been physical places, a trading floor for

example. Increasingly they are becoming electronic ‘places’ where
traders use computer terminals with which to commuicate their buy/sell
requirements to each others and to conclude the trades.
What is a Financial Financial securities of all types including foreign exchange and money
Security? are traded in the financial markets. A financial security is a contract
between the buyer and seller of the security. This contract specifies
future cash flows of the security, in terms of the amount (fixed or
variable), timing, how long the contract lasts (maturity) and the price the
buyer pays the seller. In many cases, it is obvious who the buyer and
who the seller is. However, for certain types of financial securities, for
example, swaps, the market determines the buyer and seller roles by
convention - for example, the buyer in a fixed-for-floating interest rate
swap is the fixed rate payer.
Over-the-Counter (OTC) There are two main types of financial market:
and Exchange Traded • Exchanges: where standard products are traded and where the
(ET) Markets exchange is responsible for administration, clearing, settlement,
some regulation and price dissemination.
• Over-the-counter: where products traded tend be non-standard and
are designed to satisfy a particular financial need of one of the
counterparties, for example, a client who requests a broken date
FRA.
Who are the participants In general, participants in the financial markets are the buyers and
in the Financial Markets? sellers which can be sub-divided into various roles. There are also
indirect participants (who facilitate but do not buy or sell) such as
regulators, clearers information providers and intermediaries. The main
group of intermediaries are called brokers - whose main business is to
bring buyers and sellers together for commission.
Types of Instruments
Instruments can be classified as:
• equity, debt, or commodity
• over the counter or exchange traded
• cash or derivative
• domestic or global
• electronic or physical
Equity
An Equity Security can be defined as “A security that represents
ownership in a company and the right to receive a share in the profits of
that company.”
Debt
A debt involves the lending of money for a given “price” which is the
interest rate. The party that puts forward the money is the lender and he
receives interest plus principal from the borrower for the risk he is
taking. There is a wide variety of debt instruments, for example money
market deposits, company bonds, government bonds and Mortgages.
Commodity
The commodities market is where products such as metals, grains and
softs are traded. Although some commodities are traded spot, the main
market for commodities is the futures market, the largest of which is the
Chicago Board of Trade (CBOT).
Over The Counter or Exchange Traded

General Attributes of Instruments which are traded directly between counterparties are said
Instruments to be over the counter (OTC) traded and instruments which trade on an
exchange are said to be exchange traded. Exchange trading matches
buyers and sellers, either electronically or physically.
An OTC instrument is tailored to the buyer or seller. They can be traded
in various denominations, amounts and maturities. This in contrast to
Exchange traded instruments which tend to be standardized, although
there is a move by exchanges to trade OTC-like products in order to
compete with OTC markets.
Cash or Derivative
Derivatives can be defined as “instruments derived from existing
instruments in the cash market.” The source of the derivative is called
the underlying cash instrument. Derivative and cash markets tend to be
quite distinct, with different players - although the current trend within
security houses is towards integration of cash and derivative
operations.
A derivative can have more than one underlying instrument, for
example, an equity convertible bond. Theoretically, it is possible to
have a derivative of a derivative, for example, a compound option,
although these instruments are not directly traded. The value of a
derivative depends on the price and other market characteristics, such
as volatility or correlation, of the underlying instruments.
Domestic or Global
With the expansion of global financial markets, a number of instruments
are traded internationally. This makes geographical boundaries between
markets more or less irrelevant as trading books are often passed from
one time zone to another as the markets close in one and open in the
other. The largest example of a truly global market is the foreign
exchange cash market which effectively runs 24 hours a day. There are
also instruments which are issued in one currency and traded in
another, for example, Japanese warrants issued in Yen but traded in
Swiss Francs or US dollars.
Electronic or Physical
Financial markets have historically been associated with physical
trading - buyers and sellers meet face to face or over the telephone.
Increasingly though, technology is creating electronic ‘places’ where
instruments can be traded over computer networks. The first major
market was in Foreign Exchange with Reuters Dealing 2000-1. It’s OTC-
nature leant itself to screen-based trading. Electronic trading, of one
form or another, is now possible in equities, bonds and commodities as
well as Foreign Exchange. Even exchanges, which had long been
associated with physical trading are now launching electronic systems.
Types of Markets
Markets use instruments to exchange assets. A brief introduction to
each of the following main markets in the financial sector is given
below:
• Foreign Exchange
• Fixed Income
• Equities and Equity Linked
• Commodities
Instruments traded by these markets are defined in Types of
Instrument.
The Foreign Exchange (FX) Market

What is traded on the FX The FX market is an international market which currencies are
Market? exchanged for spot or forward delivery.
The “prices” of the various currencies are in most cases quotes against
the US dollar. When this is not the case, the price is called a cross rate.
Further details of the FX market are in Chapter [4].
Fixed Income Market

What is traded on the FI Bonds of different types are traded in the fixed income (FI) market. A
Market? bond is a contract of the indebtedness of one organisation to the holder
of the bond. The different types of bonds purchased within the fixed
income market include: corporate, euro, government and asset-backed
bonds which include mortgage bonds.
The most important type of bond in the market is usually government
bonds because the government is normally the largest organisation that
issues bonds, in a given country. Also, government bonds in
developed countries are considered risk-free.
Maturity of FI Maturities in the fixed income market tend to be longer which is a factor
Instruments that distinguishes the fixed income market from the money market. In
general terms, any debt instrument that matures in over 1 year is
regarded as a fixed income instrument, or bond. However, the one year
boundary is not strictly adhered to, for example, a 12X18 FRA is clearly
over 1 year in maturity but is considered a money market instrument.
Equities Market
What is traded on the When a business is an incorporated company, a number of shares are
Equities Market? issued which represent part ownership of the company. If a company
wishes to raise capital from the public by issuing shares, it often seeks
to list its shares on an exchange. In order to list its shares on an
exchange, a company must comply with the regulations of that
exchange. These regulations usually involve reporting the profits and
losses and assets of the company.
The exchange provides a means for institutions and the public to buy
newly issued shares and to buy and sell previously issued shares.
These shares are bought and sold in the equities market and traders in
this market must be members of a stock exchange, such as the London
Stock Exchange. Membership binds them to the rule of the exchange.
Maturity of Equity Shares issued by companies last for the lifetime of the company.
Instruments
Commodities Market
What is traded in the Physical commodities such as metals, grains and precious metals are
Commodities Market? traded within the commodities market. The companies which trade in
this market are normally members of a commodity exchange such as the
LME, where trading takes place.
Physical vs. Cash Much of the activity in the commodities markets takes place in the form
Delivery of futures trading, that is, agreements to deliver commodities at a future
date for a price agreed today.. However, most of the commodity trading
is cash settled, in other words, there is no actual physical delivery
involved.
Relationships between Instruments
and Markets
Although some markets are characterised by the instruments in which
they deal, some instruments may be traded across more than one
market. The following table illustrates these inter-relationships.
Markets
Instruments FX Money Fixed Income Equities Commodities
Bill ü
Bond ü
CD ü ü
Convertibles ü ü
CP ü ü
Deposits ü
Equity ü
EuroCurrency ü ü
Forward ü ü
FRA ü
FRN ü ü
Futures ü ü ü ü ü
MTNs ü
Options ü ü ü ü ü
Preference Share ü ü
Repos ü
Rights ü
SPOT ü ü
SWAPs ü
Treasury Bills ü
Warrants ü
Types of Institutions
The term financial institution describes an organisation involved in
some capacity in the financial markets. Care is needed in the use of this
term since “institution” is sometimes reserved for the “buy-side” of the
market with the term “securities house” generally implying the “sell
side”.
It is useful to discuss institutions since their business goals and the
instruments they trade determine to a large extent the roles of
employees of that institution.
International and The financial market consists of international and domestic institutions.
Domestic Institutions International institutions deal with international loans, import/export
finance, and foreign exchange dealing. Domestic institutions deal with
banking and monetary issues in their respective countries (although
some domestic institutions are becoming increasingly global).
A financial institution such as a bank, uses investors, depositors or its
own funds to invest in financial assets such as equities or bonds to
make profit. Examples of institutions are:
• banks
• building societies
• broking firms
• corporations
• local authorities
• fund management and insurance companies.
Banks
Most countries have regulations governing the operation of banks. If a
company is to operate as a bank, it must have a licence granted by the
government and conform to the regulations which apply to banks in
that country.
For an institution to operate as a bank in the United Kingdom, it must
be authorised by The Bank of England. The institution must satisfy the
Bank of England that :
• it has adequate capital
• it has adequate liquidity (that is sufficient funds to meet its
obligations when due)
• it has a realistic business plan
• it has adequate systems and controls
• it has made provision for bad or doubtful debts
• it’s business is carried out in a prudent manner
• its directors, managers and controllers are “fit and proper”
Banks are often given an exclusive right to undertake activities that
other institutions may not be able to, for example, take deposits or clear
cheques. The government usually acts as a guarantor for bank
deposits.
Because of the advantages given to banks by the government, they
often have the largest financial asset base in a country, making them
pivotal in the financial market.
Most of a bank’s assets are held in loans or other instruments which
give a return, this gives the bank a cash flow. The bank also has
deposits which are its liabilities and tries to maximise the difference
between the money it pays to its depositors and the money it receives
from its creditors, or the financial assets it holds.
Although banks can be grouped together as a broad type of financial
institution, there are different types of bank. These are:
• Commercial
• Investment
• Universal
• Central.
Commercial Banks Banks whose principal activities are taking deposits and lending money
to individuals and small and medium sized businesses, are often called
retail, clearing or commercial banks. These banks have large cash flows
and they aim to maximise their profits by getting the largest possible
spread between the rate at which they acquire money via deposits or
through loans from other institutions, and the rate at which they lend
money.
A commercial bank participates in the financial markets to manage the
flow of cash in and out of the bank and to get the best return on the
financial assets of the bank.
Investment Bank An investment bank, or merchant bank as it is sometimes known in the
United Kingdom, is a bank which helps large businesses to raise capital,
usually by underwriting the issue of shares or bonds. Fees charged for
this service provide income for the investment bank.
Investment banks also take trading positions using the assets of the
company - this is known as proprietary trading. The activities of
underwriting and proprietary trading involve some risk which must be
managed by the investment bank.
Universal bank A universal bank is one which takes deposits, underwrites securities
and offers fund management services. Regulations in different countries
may or may not allow universal banks to operate. For example, in the
United States, a bank which underwrites securities is forbidden by the
Glass-Steagall Act 1933 to take deposits. This act was designed to
protect depositors’ funds from the risky activity of underwriting
securities.
European banks, in particular Swiss and German banks, are not under
the same restrictions and can take deposits and underwrite securities.
These banks are known as Universal Banks because they encompass all
banking activities.
Increasing deregulation in the United States and the United Kingdom
has resulted in a trend towards banks in these countries either
broadening their areas of operation or merging with banks operating in
different areas.
Central Banks Governments are involved in financial markets to implement their
monetary policy and to raise funds to finance the government’s
activities. Most governments participate in the financial markets via a
central bank. These banks fulfil a number of functions such as:
• issuing bank notes
• supervision of banks
• management of exchange reserves
• issuing Government debt.
The central bank in different countries has various names, for example,
The United State Federal Reserve System, Deutsche Bundesbank, The
Bank of England.
The specific responsibilities of the Bank of England as stated in the
1995 Report and Accounts :
“ ...maintaining the stability of the financial system, both domestic
and international; and seeking to ensure the effectiveness of the
UK’s financial services sector.”
When central banks get involved in financial markets, it is usually to
intervene either in the currency market or to implement monetary policy
by setting long or short term interest rates. Arguably, the central banks
of the major economic powers have the most important influences on
world interest rates.
Building Societies
Building Societies (known as Savings and Loans in the United States)
are organisations which are set up to pool depositors funds so that
they may be lent to other members to purchase real estate. In general
they have a far smaller asset base than commercial banks, but they
operate in a similar way, that is, they take deposits and make loans.
Traditionally they have restricted their lending to mortgages against
real-estate. Recently there has been a trend for building societies to
merge and/or gain licences to become banks.
Broking Firms
Broking firms provide an intermediary service between buyers and
sellers in the financial market. For this service, they charge the buyer
and the seller a commission on any deal they broke, and the more deals
they broke the greater the profit they make. Brokers are agents working
within a broking firm who do not hold a position in the market. They are
not principals as they simply provide a matching service between
buyers and sellers.
Corporations
Corporate Treasury A company may have large and variable cash flows because of the
nature of its business, and they may need to buy or sell goods and
services overseas or raise capital for large projects. The management of
the cash flow, assets and liabilities of a company is usually performed
by the corporate treasury department.
Local Authorities
Local Authorities form part of the government structure, although they
often participate in the financial markets independently of central banks.
Local authorities have large cash flows and often require short term
funding or have a temporary surplus of funds.
Fund Management
Fund Management encompasses pension funds, insurance funds and
collective investments such as mutual funds and unit trusts. Fund
managers select what instruments to hold positions in for maximum
return and minimum risks and manage these investments on a medium
to long term basis. In addition to return objectives, fund managers have
to operate within trustee requirements. Insurance and pension fund
managers also need to structure their portfolios to meet the various
claims on the fund, such as insurance or pension claims, a process
called “portfolio dedication”.
Fund Manager Skills There are several analytical techniques that a fund manager can use to
protect the return on his investments. The first is called switching.
When the fund is not performing, the fund manager uses available
market information and his skills to restructure his portfolio by selling
some positions and replacing them (switching) with assets which have
better prospects. In most cases, the amount of turnover in a fund is
either restricted by regulation or by the tax implications of the fund.
The second technique is called immunisation - and is typically used in
fixed income portfolios, where for example, the fund manager sets the
duration of a portfolio to equal the longest period over which he can
predict events.
Attributes of Institutions
It is important to recognise the differences between institutions
because the objectives of the institution will be a large factor in
determining the goals and how they go about achieving them.
Institutions can differ greatly, although the majority of financial
institutions, such as Building Societies and Banks, have common
attributes.
Revenues Institutions earn revenues and therefore can generate profits in a
number of different ways:
• Market makers make a profit through the “turn” - that is, the
difference between their bid and ask prices on any instrument.
• Traders make a profit though their skill in determining when and at
what price to buy and sell.
• Brokers earn their revenues by charging commission on trades they
complete for their clients - the “fills”.
• Fund managers earn fees, which in most cases are based on return
or risk performance.
• Investment banks earn fees for underwriting new issues.
Business Objectives All organisations or institutions develop and try to meet business
objectives that steer the activities of the organisation towards the
achievement of certain goals. Some common objectives are to:
• satisfy customers and develop a good business relationship with
them
• increase earnings per share
• increase market share
• reduce costs
• expand into new developments.
In order to meet these objectives, institutions must perform these
activities:
• trading
• sales activities
• cash flow management
• asset management
• risk management.
Trading Trading involves taking a position. A position is held when there is an
imbalance between the sales and the purchases of an instrument. When
there are more purchases than sales of an instrument the position is
said to be long. When there are more sales than purchases the position
is said to be short.
Sales Activities The sales role is the customer-facing one in most security houses. The
role of sales is to drum up business with clients, private clients,
corporate clients or fund management companies. In security houses
that also perform proprietary trading or market-making, the security
house must be careful not to off-load unattractive positions onto
unsuspecting clients. The new tighter regulatory structure is intended
to minimise this practice.
Many institutions offer to buy or sell financial instruments on behalf of
other institutions, for commission. An example is a bank which buys
foreign currency such as Deutschmarks on behalf of a corporate
treasurer. This activity will leave both institutions with a position in the
market since the bank will be short on Deutschmarks and the corporate
treasury will be long on Deutschmarks. The institution usually hedges
this position.
Cash Flow Management Large organisations often have temporary cash surpluses or deficits in
their domestic currency or foreign currency. These need to be managed
by making deposits or loans. An example of where cash flow
management may be required is pension or insurance claims in an
investment management institution. If a company does not have
sufficient funds to cover the cash requirement, it may arrange a loan to
cover the shortfall.
Asset Management Asset allocation accounts for a significant number of the tasks of many
players in the financial markets, especially portfolio and fund managers.
The aim of asset allocation is to select the assets in which to invest, for
a stipulated risk and return, subject to a variety of constraints, for
example, “no more than x% of the fund must be invested in emerging
markets” or “at least 20% of the fund must be cash” etc.
Asset allocation is important, as the user will want to browse through
and search for the available instruments that fall within the constraints
and meet the objectives of the business.
Risk Management Most financial institutions hold positions in the financial markets, and
are therefore exposed to a number of different types of risk. Risk is the
probability that a loss may occur due to an unforeseen development in
the market. Risk management is a term used to cover all the tools and
strategies managers use to minimise risk and avoid a possible financial
loss on a position. It is important to note that there are various types of
risk, for example, market risk, counterparty, or settlement, risk.
Hedging is a strategy used to manage market risk by using one position
to offset another. Different types of instruments can be used to hedge,
such as forwards, options and futures. These instruments allow the
investor to limit market risk.
Limits Limits are net amounts which define the range within which an
institution or trader can trade. These are set by the institutions
management in order to manage risk. A trader who reaches his limit
must get authorisation from his manager if he intends to exceed that
limit. A trader’s limit increases as his experience and responsibilities
increase.
The following table illustrates how the strategy used depends upon the
type of risk to be managed:
Risk Type Management Strategies

Credit Risk/CounterParty Risk
The exposure to counterparties Set counter party limits.
defaulting on a payments due,
such as a bank becoming
insolvent.
Country Risk/Sovereign Risk
The total exposure of investments Set country limits.
in a particular country. Possible
problems could include economic
collapse, changes to local
regulations or government seizing
or freezing assets.
Currency Risk
The potential losses due to Setting limits on traders and
adverse movements in exchange desks exposed to a particular
rates. currency, and hedging large
positions with derivatives.
Inflation Risk
Associated with the return on an Investing in inflation-linked
investment being eroded by the investments such as Gold or
loss of purchasing power. index-linked bonds.
Market Risk
The risk associated with losses Hedge, plus limits, plus capital
due to the reduced value of adequacy constraints
investments, reduced income or
increased costs due to interest rate
movements.
Liquidity Risk
The risk of not being able to Only participate in liquid
purchase or sell an instrument at markets.
the times desired.
Settlement Risk
The risk of a counterparty not Dealing with reputable market
settling on time. If the participants, and using efficient
counterparty settles late, this settlement procedures. Bilateral
means you either have a long or limits. Netting.
short position until the deal is
settled.
Roles within Markets
This section defines the roles in the markets and details the activities
they are involved in and the type of information they require.
Traders
What do Traders do? Traders buy and sell in all areas of the financial market. They aim to buy
low and sell high. Trading may take place at physical exchanges, for
example, for commodities or futures, or over the counter (OTC), for
example, in foreign exchange.
A trader may specialise in a particular type of financial instrument and
different types of traders have different roles and requirements
depending on the instruments they trade in. A trader who has gained
responsibility in his career for managing a group of traders may be
classed as a chief trader. The chief trader sets the credit limit for each
trader and ensures that at the end of the day, all his traders are not long
or short, that is, their buy and sell deals balance.
What is Order Driven If a trader is buying or selling instruments to fulfil an order for a
Trading? customer, it is said to be order-driven trading. To avoid potential
confusion with another meaning of this term, it is best to refer to this
type of trading as “customer-driven trading” to distinguish it from
“proprietary trading.
It is important to note that order-driven and quote-driven trading in the
markets are also used to describe different types of trading markets. For
example, the old Seaq Level II and also NASDAQ are quote-driven
markets, in which market-makers quote firm two-way prices and sizes.
The new UK equity market Sequent 6 and Reuters Dealing 2000-2
matching are both examples of order-driven markets.
What is a Proprietary If a trader takes positions on behalf of his institution, he is known as a
Trader? proprietary trader. Proprietary traders tend to take decisions based on
detailed technical and fundamental research, analytic calculations and
time series forecasting. In most cases, the tools available to the
proprietary traders are developed in-house and are jealously guarded.
What is Arbitrage Arbitrage trading involves the buying and selling of the same or similar
Trading? instruments in different markets in order to take advantage of any
misalignment in the relationships between these instruments. The
arbitrageur makes a profit when the relationships are restored. For
example, a currency options trader who believes that the put-call parity
relationship between a call, a put, and the DEM underlying on the IMM
may execute an arbitrage strategy whereby he will buy the call and sell
the put, or vice-versa, depending on his view of the misalignment.
What information do they Traders require real time prices for the market in which they trade, plus
need? any supporting technical analyses and related news. However, because
of the relationships between various instruments, they may also look at
information from markets that they do not directly trade. For example, an
equities trader may look at foreign exchange rates, deposit rates, bond
prices and yields.
Fund Managers
What do Fund Managers Fund managers may invest funds for themselves or on behalf of their
do? customers. Fund managers deal within the FX and money, fixed income
and equities markets. An individual fund manager may specialise in a
given market, or country, or region, or currency. They generally manage
medium to long term investments such as pension funds, insurance
funds, investment trusts or unit trusts.
What information do they Fund Managers require information on markets in which they directly
need? invest. However, they also look closely at interest rates, foreign
exchange, bond and equity data for any trends that may affect their
investment strategy.
Corporate Treasurers
What do Corporate Corporate Treasurers work within the FX and money markets, as part of
Treasurers do? a treasury department within an institution. Their main functions are to
manage the institution’s day to day cash, invest cash surpluses, and
borrow funds at minimum costs to the institution.
What information do they Corporate Treasurers require information on interest rates, foreign
need? exchange, bond and equity data as well as forward and deposit rates.
They also require the cash flow status of the institution they work for.
Brokers
What do Brokers do? Brokers mediate between buyers and sellers which means, in practice,
customers and traders. Brokers also mediate between dealers or market
makers - in which case they are referred to as inter-dealer brokers. They
operate in the foreign exchange, bond and equity markets and usually
work for independent brokerage companies.
The main means of communication between brokers and clients is the
phone. Most brokers have a constant live telephone connection with a
number of dealers to increase the chance of obtaining best deal for their
clients in terms of price and speed. Brokers earn commission on the
deals they arrange. Brokers are agents. They are not principals and as
such they do not normally manage a position, namely own equities,
currency or other instruments, in the market in which they trade.
Brokers have to be in touch with the market and be aware of
developments so they can talk knowledgeably to customers when they
ring.
Agency Broker Agency brokers buy or sell instruments on behalf of their customers on
the buy side of the market. As brokers, they earn their living by
charging a commission or brokerage fee for this service.
Inter-Dealer Broker Inter-Dealer Brokers match buys and sellers on the sell side of the
market. They ensure that traders can trade with each other
anonymously.
Brokers also need to create interest in the relevant instruments to
persuade their customers to do business with them and to attract new
business. By virtue of the fact that brokers are in constant touch with
the market, they have access to the latest dealable prices. A number of
the bigger brokers assemble these prices into a price service for their
clients. For example, money brokers such as Tradition, Tullett and
Tokyo, Harlow Butler all have price services distributed by various
vendors on their behalf.
What information do they Brokers require the same type of information as traders. a money broker
need? requires foreign exchange rates, bank deposit rates, bond data,
graphical analysis and news information, as does a money trader.
Sales
What do Sales staff do? Sales staff take orders from customers to buy and sell instruments and
act as an intermediary between customers and traders. Sales staff
function in all markets. In equity and commodity markets, sales staff
may also be known as brokers. Their customers are often institutional
investors and they work for investment banks and agency brokerage
houses. However, sales staff differ from traditional brokerage in that
their institutions can hold a position in the market.
What information do they The sales function exists in all markets. In equity and commodity
need? markets, sales staff may also be known as brokers. Sales staff may use
the same information as brokers, depending on the instruments they
specialise in. This includes foreign exchange rates, bond and equity
data, other market prices, graphical analysis and news information.
They use any information they can to build relationships with
customers.
Decision Management
What is Decision The term decision management describes the function performed by:
Management? • economists
• analysts
• researchers.
These groups of people forecast economic performance and market
movements to provide guidance to traders and sales staff. They may
also publish their forecasts, for a fee, to a wider market audience.
What information do they Decision management exists in all markets and financial institutions.
need? Those engaged in decision management require price information,
access to large quantities of historical data, spreadsheet and graphical
analysis and notification of impending financial events and
announcements.
General Management
What is General The term general management describes the function performed by the
Management? following groups of people:
• those from dealing room manager upwards, who may be active in the
day-to-day trading operation
• those in corporate finance, mergers and acquisitions
• managers in a variety of roles in non-financial companies who are
users of limited financial information and news information.
What information do they Managers may require historic and current information about
need? companies in their sector or areas of interest. They also require basic
foreign exchange information for the countries in which they operate.
Trader Support
What is Trader Support? Trader support can be split into two distinct roles:
• position keeping, assisting traders in the dealing room
• order entry, a book-keeping role in the back office of financial
institutions.
What information do they Those who work in trader support roles require well developed
need? operation skills and the patience to deal with traders in a hurry. They
also need to have a general view of the financial marketplace.
Back Office Support

What is the Back Office? The back office is where the administrative tasks connected with
dealing are performed. The back office staff are responsible for clearing,
settlement, consolidation, integration with accounting, and so on.
They also perform credit control and statutory and management
accounting.
What information do they In addition to deal ticket flow, the information they require is mostly
need? internal - credit limits, ledgers, etc.
International Considerations
Although the financial markets are becoming increasingly global, each
country has its own currency and laws, taxation and other nuances
such as number of currency days per year, bond yield calculation
conventions, and so on. Considerations for internationalisation of
software products, in addition to language issues, should be given
during the design and development of products.
Since the FX market is an international market, all the standards, rules
and regulations are in place to ensure smooth running of the market. All
businesses, regardless of size, must register within the appropriate
bodies before they can trade in the market. By registering, the business
must agree to adhere to any guidelines laid down by the regulatory
authorities.
Chapter 4
Foreign Exchange Traders
Version 1.0 33 Chapter 4: Foreign Exchange Traders Reuters Guide to the International Financial Markets
What Does a Foreign Exchange
Trader Do?
The Foreign Exchange Trader’s Role

A foreign exchange (FX) trader, or dealer, buys and sells currencies in
the foreign exchange markets. He may specialise in one of the major
currency pairs, for example dollar/mark or dollar/yen, or trade several of
the less active ones.
Size of the FX Market The Foreign exchange market is one of the largest markets in terms of
turnover. It is essentially a 24-hour global market which never really
closes. Typically, $1 trillion a day is traded in this market. In this market,
$5m dollars is a small deal since deals can be as large as $100m or more.
Traders in major currencies may perform up to 1000 deals per day.
Individual traders have been known to make their banks £10 million in
one day.
What motivates traders? Traders are motivated purely by profit which they earn from their
bid/ask spread. They buy (that is, take long positions in) currencies that
they think will rise in value and sell (that is, take short positions in)
currencies they think will fall in value.
Foreign exchange traders look for mispriced currencies in the market so
that they can benefit from long positions in undervalued currencies and
short positions in overvalued ones. They assess a currency’s
prospects using a number of sources. These include currency rate
trends from inter-day and intra-day charts, interest rate policy, news of
major political developments, economic announcements and the
outlook of its domicile country. They also keep a look out for relevant
developments in related markets such as the debt markets, equities and
commodities, as these might also affect exchange rates.
How much can a trader Unless appropriate controls are put in place, an FX trader can expose
risk? the bank to quite large currency or counterparty risks. The dealing room
manager sets a daylight limit on the size of the position, or quantity of
currency, that a trader can hold. Traders cannot ordinarily trade beyond
their limits and must notify the dealing room manager if they make a loss
in excess of the loss reporting limit that has been set.
Specialisms Within the Foreign Exchange Market

Different types of foreign exchange transaction exist; traders tend to
specialise in one particular type of transaction. Traders may however
trade a number of currency pairs.
Spot trader A spot trader conducts spot deals. A spot deal is an agreement to
exchange one currency for another, settled over a standard period of
trade (spot), usually two business days. By convention, one of the
currencies in a spot deal is the US dollar. When this is not the case the
deal is a cross rate deal, although settlement is still spot. A spot deal
always involves a single outright exchange of principal and in the
majority of cases leads to transfers through the payments system of the
countries in which the currencies are issued.
As all the spot trader’s deals are settled spot, delivery dates do not
have to be matched and as a result turnover and liquidity are high and
the markets can be volatile. In April 1992, about 47% of the foreign
exchange market was in spot activity.
Forward trader A forward trader conducts two types of forward deals: outright and
swap. In April 1992, forward deals amounted to 46% of foreign
exchange turnover.
A forward outright deal is similar to a spot deal, but is settled on a date
other than spot. Outright deals represent somewhat less that 15% of the
total forwards market and about 7% of total foreign exchange turnover.
An outright rate is quoted in the same way as spot.
A forward swap consists of two separate parts. Two counterparties
agree to exchange two currencies at a particular rate on one date called
the near date, and to reverse the transaction, generally at a different
rate, at a future date called the far date. For most swaps, the near date is
normally spot but a number of forward/forward transactions exist, where
the near date is not spot.
Forward swaps make up somewhat more than 85% of the forwards
market, which represents about 39% of the foreign exchange turnover,
and are heavily concentrated on the US dollar. A forward swap is
quoted as a margin. This is the difference between the exchange rates
for the near date and far date and there are conventions governing how
the subtraction is done using the two bid/ask exchange rates.
Nearly two thirds of all forward transactions have a maturity of seven
days or less. Only around 1% of forward deals have maturities greater
than 1 year.
Derivatives trading Derivatives trading is relatively new, with 6% of turnover in April 1992,
yet is the fastest growing sector of foreign exchange. FX derivatives
include futures and options. Strictly speaking, a currency forward or
swap is also a derivative, as its value depends on time to maturity, spot
and deposit rates.
Currency Futures are contracts which specify delivery of a particular
currency at a given rate on a date more than two days hence. They
differ from forwards in that they are standardised contracts tradable
through an exchange clearing house.
Currency Options give the purchaser the right, but not the obligation,
to buy or sell a certain amount of currency in the future at a
predetermined rate. They are traded on an exchange or over the counter
(OTC). Around 80% of currency activity is OTC where a whole range of
customised products (exotic options) have evolve
Currencies Traded
The US dollar is the predominant counter-currency in foreign exchange
trading and it appears in over 80% of all transactions. Other major
currencies, for which there is an active cross-market, are the German
mark representing 38%, and the Japanese yen representing 24% of all
transactions.
Europe In Europe in general, and London in particular, the most heavily traded
currency is the dollar against the mark ($/DM).
Other heavily traded currencies include:
• sterling against the dollar (£/$) and mark (£/DM)
• dollar against Swiss franc ($/CHF) and yen ($/¥)
• mark against yen (DM/¥)
• all European Monetary System (EMS) currencies.
Asia In Asia, and Tokyo in particular, the most heavily traded currency is the
dollar against the yen ($/¥).
Other important currencies are:
• Australian dollar (A$)
• New Zealand dollar (NZ$)
• Hong Kong dollar (HK$)
• Singapore dollar (SG$)
• Thai Baht (THB).
Americas In the Americas the vast majority of foreign exchange trading is
performed in the USA and Canada, and the majority of that in New York.
The emphasis is on the major currencies:
• mark (DM)
• sterling(£)
• Swiss franc (CHF)
• yen (¥)
• Canadian dollar (CA$).
Periods when the New York markets trade are especially important. This
is because the release of US economic indicators is carefully tracked
and the US Federal Reserve (the “Fed”) is the most influential central
bank. What the Chairman of the Fed says about the state of the
financial market has the power to move all markets
Typical Employers
Most foreign exchange traders are employed by international banks
such as Barclays or Citibank.
Locations London has the largest share of foreign exchange dealing, about 27% of
trading activity. All the world’s large banks have branches or
subsidiaries there. Dealing is carried out in any convertible currency.
Other major dealing centres are the United States (mainly New York)
with 17% of turnover, and Japan (Tokyo) with 11%. Singapore,
Switzerland and Hong Kong are also important centres, and dealing
takes place in many other cities worldwide.
Modern technology even allows dealing to be performed from home. A
trader in London may phone his or her New York or Tokyo branch in
the late evening to take, or get out of, a currency position.
Characteristics of Foreign Exchange
Traders
Demographics
As of 1995, there were approximately 15,000 foreign exchange traders
worldwide. London is the largest centre, employing about 3,800 traders.
However this number has declined slightly in recent years partly as a
result of new trading methods and company mergers and acquisitions.
In London, the majority of traders are in their mid 20s to mid. Very few
are over the age of 50. There are few female traders working in London.
Career Path
Educational background Although some banks currently recruit graduates only, approximately
half the FX traders in London dealing rooms are estimated to have a
degree. Often the degree is not in a financial subject.
Typical skills Traders have to be quick-thinking and able to prioritise information.
They need to be able to assimilate new market information and relate
this to their current or potential position. Information arrives from all
sides in many different forms. Experienced traders can pick up what is
most relevant to them and what represents potential trading
opportunities.
Work experience Some traders work their way up from the bottom. A school leaver could
begin in the Back Office checking deal details, then move to the trading
floor to assist traders as a position keeper or dealer’s assistant. The
aspiring trader might then be allowed to deal small amounts in quiet
currencies and gradually take on more responsibility and risk.
A graduate might begin working in the dealing room as a dealer’s
assistant and progress from there.
Work performance Many traders are required to achieve appropriate profit targets. This is
targets the main mechanism for determining salary. Traders need to sustain
consistently high performance to retain their jobs and to progress
within their company.
High staff turnover Employers tend to be unsympathetic to traders who do not achieve
required levels of performance.
Computer Skills
In general, foreign exchange traders are relatively inexperienced
computer users. Foreign exchange traders are primarily interested in
getting their job done.
Initial computer skill
Although the number of foreign exchange traders familiar with
Windows and using a mouse is increasing, it is estimated that as many
as 20% are not familiar. For example, a trader may know how to move,
resize and minimise application windows, but have had no experience of
file management.
Working Relationships
External Relationships
Figure 0.1 shows the typical foreign exchange trader’s relationships
with people outside his or her own institution.
FX trader Unknown
Broker counterparty
buy or sell sell or buy
request request
buy and sell

directly
Counterparty
Figure 0.1 Foreign exchange trader’s external relationships

Counterparty A trader in one bank or other trading institution often conducts deals
with his or her opposite number, or counterparty, in another. This could
be over the telephone or through an electronic system such as Reuters
Dealing 2000-1.
In 75% of cases the counterparty is a trader in another bank. Otherwise,
counterparties are customers or traders in other financial institutions.
Foreign exchange Less than one third of foreign exchange dealing is performed via
brokers “voice” brokers. Brokers do not take positions as principals but earn
commission on each deal that they arrange. Traders phone brokers to
find counterparties for deals; they do not know the identity of the
counterparties until deals are complete.
Whilst brokers are essentially confined to the inter-dealer market, they
do handle a small amount of customer business. They are most active in
the spot and swap sectors.
Over recent years traditional “voice” brokers (whom the traders ring to
gain a price and counterparty) have found an increasing amount of their
clients turning to automated dealing systems in which software
matches buyers and sellers over worldwide computer networks. An
example would be Reuters Dealing 2000-2 system.
Relationships with Colleagues
Figure 0.2 shows a foreign exchange trader’s typical relationships with
his or her colleagues.
Chief trader Senior

trader
high-level monitoring
management position
currency market
Corporate orders Foreign analysis Economists
desk exchange trader & analysts
assistance in completed deal

performing tickets
deals errors to
reconcile
Position
keeper Back Office
Figure 0.2 Foreign exchange trader’s relationships with colleagues
Chief trader The chief trader has responsibility for a dealing group, such as the
foreign exchange spot desk. The chief trader liaises between managers
and traders, defines overall strategy in line with the state of the market,
defines profit objectives and assesses individual total trading room and
traders’ dealing limits. The chief trader spends a high proportion of his
or her time maintaining contacts with the organisation’s corporate
customers with a view to developing and maintain good business
relationships with these customers.
In a well-run dealing room there is an ongoing dialogue between the
chief trader and his or her team members, concerning individual market
activity, positions held, and the profit and loss of those positions. The
chief trader is often responsible for assessing the exposure of the
dealing room as a whole and taking corrective action when necessary.
Senior trader A senior trader controls his or her team, constantly monitoring
positions held. The senior trader must also deal and run his or her own
positions.
The senior trader has to monitor all aspects of the market. This entails
being aware of activities in the parts of the dealing room for which he or
she is not responsible.
Corporate desk Customers do not normally communicate directly with traders. These
customers may be companies investing foreign income, investors
buying overseas or speculators on the markets and the corporate desk
manages the relationships between customer and trader.
The corporate desk passes deals and orders on to the foreign exchange
traders by shouting across the room to them. This is rather inefficient
and some dealing rooms have an intercom system for this purpose. In
larger banks, the corporate desk may hold positions itself.
Economists & analysts Larger banks employ economists and analysts to look at macro-
economic developments during the trading day. They assess the likely
impact of world news, market movements, interest rate fluctuations and
so on. They use charts to identify past trading patterns that may
provide clues to future trends and pass this information on to the
foreign exchange traders.
Smaller institutions buy analytic information from third party analysts.
Position keeper Position keepers keep traders’ positions up to date and notify them if
they overstep their exposure limits. Position keepers check deal tickets
and keep in contact with the Back Office. They may assist traders by
calling up prices.
Back Office The Back Office processes the deal tickets a trader generates
throughout the day. They check ticket details, make payments and
reconcile accounts. The Back Office prints out their position
calculations and ensures that these match traders’ position
calculations.
The Workplace
Environment
Noise A dealing room is open plan and is dominated by noise. Traders use
several telephones at their workplace and call across the room to their
colleagues. There is constant noise from traders shouting prices and
orders and from squawk boxes broadcasting brokers’ prices.
Performance monitoring Transactions conducted by traders, by telephone and via automated
dealing, are recorded. At the end of the day, the traders’ estimates of
profit or loss must reconcile with those of the Back Office.
Computer Systems
Computer screens A foreign exchange trader’s desk may contain three or four computer
screens. These could include a Reuters Terminal, a Telerate system,
Dealing 2000 and Deal Manager, or similar competitor products. More
sophisticated dealing rooms may integrate a number of these products
on the same screen using a video switch, such as Prism, or a digital
system fed by datafeeds, such as Triarch.
Screens may be built into the desk to save space.
Reuters Terminal In the United Kingdom, 30% to 40% of foreign exchange traders have
Reuters Terminals. Monitor terminals are also still used.
Reuters Terminals are typically used to display news and currency
rates. Traders may filter news alerts to show only headlines for the
countries in whose currencies they trade, and display this information
in one part of the screen. Customised displays may show particular
currency rates or system-calculated rates, such as cross rates for less
common currencies.
Reuters Dealing 2000 The percentage of deals performed by electronic dealing systems such
as Dealing 2000-1 or -2 varies widely from country to country. The
United Kingdom and United States are relatively low, with 24% and 32%
respectively. Sweden and South Africa have 65% and 90%,
respectively, of deals conducted electronically.
Traders who do not have Reuters Terminals use the bottom half of their
Dealing 2000-1 screen to display a page of latest FX rates.
Traders use Dealing 2000-1 to perform deals with counterparties in other
banks by means of electronic conversations. Dealing 2000-1
conversations are better than the telephone, especially where language
can potentially cause misunderstanding. The product interprets one
trader’s requests and presents the other with the most likely response,
which he or she can confirm.
Traders usually arrange broker deals by telephone. Brokers do,
however, broadcast their prices and deals over Dealing 2000-1.
A small proportion of banks use Dealing 2000-2 in addition to 2000-1.
Dealing 2000-2 is an anonymous deal-matching service, where a central
computer matches bids and offers from different parties and notifies the
parties of the completion of deals.
Traders quote a bid or offer when using Dealing 2000-2 in order for
Dealing 2000-2 to find a matching opposite requirement. In essence,
Dealing 200-2 is acting as an electronic broker.
Dealing keyboard A foreign exchange trader often only has one keyboard, which he
switches between different screens. A Prism keyboard, or equivalent,
can be switched between applications such as Dealing 2000, Reuters
Terminals and other PC applications. Keyboards suitable for dealing
have extra keys to perform specific actions such as Conversation,
Accept, Interrupt and Change Conversation.
Deal Manager Reuters Deal Manager may be used, tying in with Dealing 2000-1 and
2000-2 and linked to the Back Office mainframe used for settling
payments. Deal Manager is used for position keeping and tracks profit
and loss (P & L).
Other Equipment
Telephone switchboard Traders use advanced telephone switchboards known as dealer boards.
These include some or all of the following features:
• a large number of preset lines to important numbers
• a microphone and two telephone hand sets
• a number of squawk boxes which broadcast broker prices
• an intercom system to talk to colleagues.
Tally sheet Traders use tally sheets which are delineated pads of paper, to record
details of every deal. This may include the client, the broker used,
currency rate, quantity traded and profit or loss.
Common Tasks
This section describes the common tasks performed by a foreign
exchange trader on a day-to-day basis.
Form an Opinion
Foreign exchange traders have an early start, typically arriving in the
office by 7.30 am.
On the way to work, traders in London may try to find out what has
happened to the markets overnight by phoning branches of the bank in
other time zones. For example, a European trader might contact traders
in the bank in Japan or Singapore as they come to the end of their
trading day.
Traders review news stories, additionally they may watch a specialist
financial TV “morning briefing”, for example Reuters Financial TV, and
form a picture from the information they have gathered. They look for
anything which helps form a view of the way the markets will move.
Influential events include interest and inflation rate changes and
publication of government figures such as trade and unemployment.
Receive Analysts’ Predictions

Large banks employ analysts and economists whose task is to make
predictions about movements in the market. A trader may attend
strategy meetings to be briefed by the company analysts.
Smaller banks may pay for information from third party analysts. A
trader can access this information via a Reuters Terminal or Telerate
system, or have it faxed.
Trade on the Markets

Foreign exchange trading takes place over the counter, that is, it does
not take place in a physical exchange. As a result, there is no set time
when the markets open, but trading typically begins around 8.00 am.
In the United States, two thirds of all transactions take place between
8 am and 12 am Eastern Standard Time, when trading is still taking place
in Europe. Just under 30% of trades are performed between
12 am and 4 pm, with only 5% of trades in the 16 hour period
4 pm–8 am.
Although many banks use systems such as Dealing 2000, automated
dealing is not all-pervasive. About 50% of global foreign exchange
turnover is performed through Dealing 2000-1. Other companies provide
similar electronic dealing services.
Of non-automated dealing, about 60% is performed by traders dealing
directly with counterparties in other banks. The rest is carried out
through brokers.
Traders are unlikely to perform all their deals electronically. For example,
if a trader needs to trade an unusual quantity of a currency, the dealing
system may not support this, so the trader telephones a bank or broker
instead. An anonymous deal matching system, such as Dealing 2000-2,
can only be used for deals in the currencies it supports.
The following scenarios illustrate how a spot deal and a forward deal
might be carried out.
Perform a Spot Deal
Scenario ABC Engineering, based in the United Kingdom, needs to raise $1.5 m
to pay for an urgent delivery of machine parts from New York.
The treasurer contacts their broker, Pepe at Banco Richo, to arrange to
buy US Dollars against Sterling in the spot market. ABC already have a
business relationship with this Banco Richo and are a regular customer.
Pepe’s Reuters Terminal displays indicative rates contributed by certain
major banks. Pepe sees that the US dollar rate against sterling is around
1.4852/57. This gives him a good idea of the current exchange rate.
However, this is only an indicative rate and he needs to find a dealable
rate.
1. Pepe phones Charlie Counterparty, a spot trader at Big Bank Inc.
Pepe has a good relationship with traders at this bank.
Pepe asks Charlie to quote him a spot rate for dollars against
sterling, known as cable. At this stage he does not specify whether
he wants to buy or sell.
Pepe: “Give me cable”
2. Charlie: “50/55”
Pepe: “I give you pounds, buy $1.5 million”
3. Pepe fills in the deal ticket with details of the trade including
currencies, amount, value date, exchange rate, counterparty and
their bank details.
Charlie is a market maker, so he is obliged to quote a two way price (a
rate at which he will buy and a rate at which he will sell) and must be
prepared to deal at those prices.
Charlie quotes a bid of 1.4850, which is his price in dollars to buy 1
pound and an offer of 1.4855, which is his price in dollars to sell 1
pound. Because both Pepe and Charlie know the general level of the
exchange rate, Charlie only quotes the last two figures of the rate, the
points as 50/55. Pepe agrees to sell (that is, sell pounds and buy dollars)
at the quoted price of 1.4850 dollars per pound. It is only at this stage
that he reveals that he wishes to buy, not sell.
Complete Details of a Deal
When a deal is complete, the trader records the details of the
transaction onto his tally sheet. He keeps track of his position deal by
deal.
Most traders use a tally sheet and a deal-management package which
automatically generates tickets. At certain points in the day a trader
ensures that his or her tally sheet and the deal management system
agree.
After every deal the trader calculates his or her current position. This
may involve entering deal details from the tally sheets into the deal-
management package. If deal details have been entered into Deal
Manager it calculates positions automatically.
Complete Administration for the Day

Manual entry of deals Traders have to spend some time completing paperwork associated with
the job and this tends to be left to the end of the day, especially if the
day has been busy.
If an institution does not have an integrated deal management system
the traders have to manually enter the day’s deals into the deal
management system, using the information written down on their tally
sheets. The Back Office checks that information has been entered
correctly, then processes the deals and generates deal tickets.
Alternatively, traders write paper deal tickets themselves and send them
to the Back Office for processing.
Assistance from position Most spot positions are created and unwound intra day, that is, within
keeper that working day. The exception is banks that allow their traders to run
overnight positions from one day to the next. As these positions create
the maximum possible risk, they are tightly controlled.
A dealer’s assistant or position keeper helps traders by ensuring that
their positions are square at the end of the day, that is, they do not own
any currency. If a trader does hold currency positions at the end of the
day, he or she may hand them over to a branch of the bank in the next
time zone.
Chapter 5
Fixed Income Traders
Version 1.0 49 Chapter 5: Fixed Income Traders Reuters Guide to the International Financial Markets
What Does a Fixed Income Trader
Do?
The Trader’s Role

A Fixed Income trader, buys and sells bonds and other debt
instruments in the fixed income markets. Usually a fixed income trader
specialises in a particular market, for example, US Treasuries.
Trading in secondary A new bond may be issued by a company, in which case it is called a
markets corporate bond, or a government, in which case it is called a treasury
bond. The corporate issuer uses the services of an investment bank to
underwrite the issue. A government issuer issues the bond by auction.
What motivates traders? Traders in the secondary market are mostly speculators. They seek to
buy bonds they feel are undervalued, as these are likely to rise in price.
Conversely, they want to sell the bonds that they feel are overvalued.
Both types of traders are concerned with the short term rather than the
long term developments in the market place.
The bond trader’s expertise is in using as much available market
information as possible to identify overvalued and undervalued bonds
and to take positions in these bonds at the appropriate time.
The importance of Each bond issued usually has a face value the amount of which
interest rates depends on the market. In the US, the face value of a corporate bond is
$1000 whereas in the UK a gilt has a face value of £100. The face value
determines the actual monetary coupon paid and the face value
returned to the bond buyer. Also bonds are normally traded as a
percentage of face value, so a price of 97% for a US corporate bond
means $970 whereas for a UK gilt it would mean £97.
A crucial piece of information for the bond trader is where interest rates
are headed in the short term.
In general, when interest rates rise, bonds prices fall. Conversely, when
interest rates fall, bond prices rise. Bond traders need to be able to
predict when interest rates are likely to change in order to take long
positions (when interest rates are likely to fall) or short positions (when
interest rates are likely to rise). Bond traders watch closely any currency
rate moves, or economic developments that may result in the central
bank or government intervening to adjust interest rates. Because of the
size of transactions in the bond market small changes in bond prices
can mean a large profit or loss when the bonds are sold.
A bond trader look for advantages in the changes in the yield curve
slope because this gives opportunities to take long or short positions at
different parts of the yield curve. The bond trader also examines the
spread between futures and cash instruments. If a discrepancy is
spotted, the futures or cash are bought in the hope of making a profit
when the market realigns. This is known as basis trading.
Analysing yield curves The bond trader analyses yield curves and zero-coupon curves in order
and zero coupon curves to decide where he can make a profit. The statement “when interest
rates rise, bond prices fall” is rather simplistic. There is not, in fact, one
interest rate in any given market, but a whole series across the maturity
spectrum.
A yield curve is a graph which shows the yield against maturity for
each of a number of benchmark bonds in a particular market. Examples
are the US treasury yield curve, or the UK gilt curve.
A zero coupon curve is a graph which shows risk-free interest rates by
maturity for a particular market. Examples are the US dollar zero coupon
curve or the sterling zero coupon curve.
The zero coupon curve is synthesised from a number of interest rate
related instruments in the market, for example, deposits, interest rate
futures and swaps.
Note that a yield curve is a property of a particular set of bonds,
whereas a zero coupon curve is a property of the currency.
Sometimes the yield or zero curve slopes upwards, or downwards, or
parallel shifts. The bond trader needs to have a feel for how the shape
of the yield curve or zero coupon curve will change over his trading
horizon in order to assess profit opportunities.
Specialisation Within Fixed Income

Country markets Often traders specialise in bonds that are issued in a particular country.
For example French or German bonds. The government is usually the
largest issuer of bonds in a country, therefore the market for
government bonds usually leads other debt markets, such as corporate
bonds. Depending on the country, traders may specialise in
government or corporate bonds or they may trade all bonds issued in
that country.
Currency markets Bonds issued in a currency outside the currency’s domicile, are known
as eurobonds or, more correctly, international bonds. For example a
United States Company may issue dollar denominated bonds in
Germany. Traders often specialise in eurobonds denominated in a
particular currency such as US dollars, German Marks and Japanese
Yen. The US dollar Eurobond market is by far the largest.
Derivatives trading In addition to trading in cash, or underlying bonds, traders also trade
bond derivatives, for example, bond futures and options at the various
exchanges. There is also a very large over-the-counter market for bond
options and interest rate swaps. The interest rate swap market has
become a very large and liquid market - most of the eurobond trading is
in fact driven by bond swaps. Other types of bond derivatives are
convertible bonds and bonds-cum-warrant packages.
Where are the Bond Markets?

Europe London is the major centre for Eurobond trading in Europe. London is
also the major centre for trading in British Governments bonds which
are known as gilts.
Americas New York is the major bond trading centre for the Americas. In
particular it is the centre for the trade in US corporate bonds and US
treasury bonds. The US treasury market is the largest domestic market.
Typical Employers
Fixed Income traders are almost always employed by large investment
or merchant banks. These institutions are heavily involved the issuance
of debt.
Because of the large amount of capital needed to underwrite bonds and
trade in the markets, only large banks are actively involved in the
trading of bonds.
Banks with a high international profile often deal in a number of bond
markets. Smaller banks tend to restrict themselves to the domestic bond
markets.
Some high profile international banks are:
• Morgan Stanley
• Swiss Bank Corporation
• Salomon Brothers
• J P Morgan
Characteristics of Fixed Income
Traders
Career Path
Work experience In the past, fixed income traders have typically worked their way up
from the back office through position keeping, to junior traders.
Recently, however, traders have been recruited from graduate training
schemes. In either case, bond traders will have often spent time trading
in the money markets. Early experience in the money markets will have
given the trader a good understanding of how interest rates may affect
markets and how to price debt instruments in a market where the
consequences of a mistake are likely to be less costly.
Typical skills Fixed Income traders must be able to interpret, often under pressure in a
fast moving market, the complex calculations involved in determining
bond yields taking into account the various interest rates along the
yield curve. One basis point error can cost thousands of dollars. The
markets for some bonds are not as liquid as the money and foreign
exchange markets, so a poor trade can be difficult or costly to unwind.
Bond traders receive information from a number of different sources.
They must be able to assimilate this information to form a view of the
direction interest rates will take, if a company's credit rating is over or
under valued.
Work performance Many traders are required to achieve appropriate profit targets. This is
targets the main mechanism for determining their salary. Traders need to
sustain consistently high performance to retain their jobs and to
progress within their company.
Figure 0.1 Fixed income trader’s external relationships shows the
typical fixed income trader’s relationships with people outside his or her
own institution. The roles in the diagram are explained in more detail
below.
Fixed Income Unknown

Broker counterparty
trader buy or sell sell or buy
request request
buy and
sell
Counterparty
Figure 0.1 Fixed income trader’s external relationships
Buy side and Sell Side It is useful to divide players in the bond market into sell side and buy
side. The sell side are the investment banks who effectively make
markets in the bonds on their books and are in a position to buy or sell
bonds from the buy side. These are the institutions (pension funds,
insurance functions, investment funds, and so on). Investment banks
may also sell unwanted bonds in their portfolio to naive, unsuspecting
customers, but this practice is now uncommon, with tighter regulations
and more informed investors.
Fixed income brokers A number of broker specialise in matching trades in the bond markets.
They usually specialise in particular currencies or countries, for
example, Cantor Fitzgerald in the US specialise in US Treasury market.

Figure 0.2 Fixed income trader’s relationships with colleagues shows a
fixed income trader’s typical relationships with his or her colleagues.
The roles shown in the diagram are explained below.
Senior
Chief trader
trader
high-level monitoring
management position
currency market
orders Fixed Income analysis Economists
Sales desk
trader & analysts
assistance in completed deal

performing tickets
errors to
deals
reconcile
Issuance
Back Office
officer
Figure 0.2 Fixed income trader’s relationships with colleagues
Senior trader A senior traders has responsibility for all the traders operating in a
particular unit, normally a dealing room.
The senior trader has to monitor all aspects of the markets in the area
for which they are responsible. They also monitor the exposure of
individual traders in the sector.
Sale desk Customers may be companies investing bonds, investment institutions
or speculators on the markets. Customers generally do not communicate
directly with traders. The sales desk manages these relationships.
The sales desk passes orders from institutions for bonds. This is
usually facilitated by having the sales desk close to the trading desks.
Economists & analysts A country's interest rates are strongly linked to both the domestic and
the world economic situation. Banks employ economists and analysts
to look at economic global and local economic situation. They look for
factors that may affect longer term interest rate trends as well as events
that may affect intra-day trading. This information is given to traders at
a morning meeting and during the day.
Back Office The Back Office processes the trades that the done during the day, they
will liaise with the Back Office of the counter party to ensure that the
details of the deal match.
Common Tasks
This section describes the common tasks performed by a fixed income
trader on a day-to-day basis.
Form an Opinion
Fixed income traders typically arrive in the office by 7.30 am.
Fixed income traders have usually skimmed the financial press by the
time they get in to work. This gives them an overview of the economy
and the financial markets. When they get into work they examine their
screens to see the level of key interest rate benchmarks such as the 30
year US treasury bond. They ring offices in other countries, or examine
market commentaries to find out what has to the market in other time
zones. News services are scanned for relevant information, such as
credit rating changes or new issues, including a specialist financial TV
service available directly on the trader’s terminal.
The trader uses this information to modify his existing opinion of the
market. Most trading days are influenced by the trends of preceding
days. It is important to view the new information gained in the morning
in the context of previous days trading trends.
Attend the morning meeting

A fixed income trader usually attends a morning meeting at about
7:45 am. This meeting is attended by all the traders, the sales people and
any analysts or economists who are working on the desk. The chief
trader, or senior trader chair the meeting. They set the agenda for the
meeting and give their opinion about the directions of the market.
The salespeople give information about actual or anticipated client
orders. The analysts present their predictions about the market. The
trader hopes to gain information from the morning meeting that is not
available on their screens, giving them an edge over other traders in the
market.
Most of the people attending the meeting get a chance to speak so that
whole fixed income team have a common understanding of the market
and the bank’s immediate objectives.
Trade on the Markets

Depending upon the market, Fixed income trading takes place either
over the counter or at an exchange. Some bonds may be traded over the
counter and at an exchange.
By convention, bond trading in London starts at 8:00 am, with most
trading occurring at the start of the trading day or when the New York
market opens at 2:00 pm.
Number of trades A London based bond trader typically performs between 10 and 50
trades a day.
Trades are almost always carried out by phone. However some bonds
are traded on an exchange. In this case, the trader either operates on the
exchange floor or has a direct phone line connection to his colleagues
who are there.
Daily Administration
Position keeping Traders keep some sort of position sheet or possibly use an excel
spread sheet to monitor their positions.
It is possible the trader may hold large positions in bonds overnight. It
is important the these positions are passed to traders in other time
zones, with stop loss and stop profits.
Monitoring the Market
Example: Monitoring the Ken is an Italian Government Bond trader working in an international
market bank in London. Throughout the trading day (8:00 - 12:00 and 14:00 -
16:00) he is making a market for other professional traders and for the
bank's clients via its sales force.
In order to be able to make a market for the Italian Government Bonds,
Ken needs to constantly monitor the prices and the related
information. Some of the information that needs to be monitored is:
• The intra-day prices for Italian Government Bonds, on the
“Telemetica” trading screen. This market has two types of trading
OTC between institutions and electronic trading system called
“Telematica”.
• The yield curves for Italian, German and US benchmarks.
• The divergence between yield curve and the Relative Strength
Index (RSI) of individual Italian Government Bond.
• The difference in basis points between the futures and physical
markets at various points on the yield curve.
• News, bench-mark prices, currencies
A continuous understanding of what is happening in the market
allows Ken to make a two-way price at any time.
Ken decides to go long in five year Italian government bonds. After
checking the price in both the futures and cash markets he calls one of
the London brokers that he uses. The broker tries to match Ken’s
order with one of his counter parties. If the broker cannot match the
order he contacts a friendly Italian bank and asks them to place the
order on the electronic exchange Telematica.
Information Requirements
What is relevant? The information a foreign exchange trader displays on his or her screen
depends on:
• whether the trader specialises in spot or forward
• the currencies the trader covers.
A spot trader typically uses a configured screen of currency rates and
news alerts. He might additionally retrieve currency rates quoted by a
specific bank or the text associated with a news headline.
A forward trader may look at more currency information and have
several saved screen setups which he moves between.
Typical screen setup A spot trader working for an Australian bank in London might use the
following information:
• spot rates for the major currencies (sterling, yen, mark) against the
US dollar – major movement in one of these currencies can affect
many other currencies
• cross rates for Australian and New Zealand currencies against major
currencies
• spot rates for less frequently-traded currencies as background
information for a general view of the market
• news alerts filtered for countries of interest, including Australia and
New Zealand, covering economic developments and commodity
market developments that may affect the economy.
As well as looking for planned releases of information, such as
economic indicators, the trader also needs to be aware of unexpected
announcements. For example, surprise interest rate cuts or national
disasters can affect a country’s economy as in the case of Australia,
where the mining sector tends to have a significant impact on the
market.
Analytic information Foreign exchange traders require analytic and economic information
supplied by analysts within their institution or by third parties. This
information can be sent by fax, telephone or via Reuters or competitors.
Charts Traders may study time-series charts of currency performance to look
for trends indicating future behaviour. They look at intra-day charts for
short term trends, and inter-day charts for the longer term picture. The
charts may show raw rates plotted as bar charts, or candlesticks, or
point and figure charts, or calculated rates, for example, moving
averages, stochastics, and so on. They often reflect their own view of
where the market is heading by superimposing trend lines and support
and resistance lines on the chart.
Chapter 6
Sales People in the

Financial Markets
Version 1.0 59 Chapter 6: Sales People in the Financial MarketsReuters Guide to the International Financial Markets
What Does a Salesperson Do?
The Salesperson’s Role

The sales persons’s primary role is to generate business for his
company. They do this by convincing customers that it is to their
advantage to buy or sell certain financial instruments or packages of
instruments.
A salesperson is remunerated by the company through commission on
the sale of the financial products, or via bonuses on achievement of set
revenue targets.
A salesperson is not responsible for the banks profit, this is the
responsibility of the trader. However, it is the salespersons aim to keep
in touch with the market, to be aware of facts and gossip, and to make
as many sales as possible for the institution.
A salesperson does not manage trading positions but makes sure that
his company has trading positions in the first place. This necessitates
regular contact with existing customers to inform them of any
investment opportunities, and with potential customers to develop any
new business opportunities.
Specialisation Within Sales

Specialisation The amount of specialisation depends on the size of company. Within
small security houses, the scope for specialisation is limited and a
salesperson deals with a large number of the company’s products
across a wide range of customers. However, within large security
houses, there is some specialisation in terms of product and customer
type.
Thus, in a large institution, you may find a salesperson who deals
solely in UK equities cash, whereas in a small house you may find a
saleperson dealing in European equities and equity related instruments
such as cash, futures, options and option strategies, warrants and
convertibles.
In a large organisation, you may also find a sales desk for oil
corporates, whereas in a small company you will find a sales desk
covering a wider scope of activity such as all Equities and Bonds.
Typical, buy side institutions are:
• corporate treasurers
• institutional investors (pension funds, insurance funds, mutual
funds)
• high net worth individuals
Typical Employers
Salespeople typically work for sell side financial institutions, such as:
• the Treasury Division of a large bank such as Citibank
• the Capital Markets Division of an investment bank such as
Goldman Sachs
• a stock broking company, such as Merrill Lynch
Characteristics of Salespeople
Career Path
How does a salesperson A salesperson needs to have a good understanding of the financial
become one? markets in general, and the specific products and customers he is
responsible for in particular. In the past, salespeople often started in the
back office, progressing to a salesperson’s role through a position
keeper and a trader.
Another common source of recruits is competitors, as evidenced by the
fact that poaching is quite common in this area. It is not unknown for a
whole team of salespeople and traders to leave one house today and be
trading on behalf of another house the next day.
It is worth noting however that, it is now becoming quite common for
salespeople to be specifically recruited and trained, often from graduate
trainee programs.
As salespeople progress in their career, they gain responsibility for
more customers or the more prestigious accounts.
Motivation A salesperson's role is to generate as much business as possible. They
are motivated to be aware of any price breaking news or gossip as soon
as possible. This includes keeping their ears open for any rumours -
takeovers, interest rate changes and so on.
Salespeople are assessed on the basis of the amount of business they
generate for the house, measured by how many customers they have,
how many trades they have sold and so on. Salespeople have targets to
meet in terms of the amount of business that they must generate, either
by the dollar value of trades or the traders turn on each trader.
User Characteristics
Salesperson interaction Good salespeople in the financial markets, more so than in other
markets, tend to be very outgoing and extrovert, and have fairly strong
personalities, good interpersonal skills and the ability to entertain and
communicate with a variety of people with different needs. Personality
is definitely the most important characteristic of a salesperson.
Lots of activity Salespeople enjoy lots of activity. They thrive when there are rumours
circulating and positions are being adjusted in anticipation of a major
market development, for example, company half year results, inflation
figures, interest rate rises, and so on.
Understand the Market While they do not need to be as expert as a trader in a particular market,
they must understand the market conventions, what represents good
value and be able to match market opportunities to their customer’s
needs.
Understand the Salespeople often take an interest in the customer’s business to enable
Customer them to communicate and gain a better understanding of what the
customer is trying to achieve. For example, if the customer bids for
overseas projects, the salesperson should be on the lookout for any
OTC currency options that the customer might want in order to hedge a
future uncertain receivable on one of its bids.
The salesperson is the primary contact between an institution and its
customers as shown in Figure 0.1.
Customer
Commercial Analyst &

banker Economist
Salesperson
Senior
Back office salesperson
Trader
Figure 0.1 Salesperson’s relationships with colleagues and customers
Customer Depending upon the market in which the salesperson is operating, the
customer may be a corporate treasurer or a fund manager in an
investment company.
Senior salespeople Senior salespeople manage and assign clients to salespeople. The
senior salesperson tries to match the clients to the salespeople who are
likely to have empathy with them.
Analysts & economists Analysts and economists provide information about market trends and
factors that may influence the markets. The salesperson uses the
information provided by analysts to build a spiel and to interest
customers in their institution's products.
Back Office When customers buy the institution's products, it is the job of the back
office to determine payment and settlement details and carry out the
settlement procedures. The salesperson needs to ensure that this
process runs as smoothly as possible since any problems will reflect
badly on him and the house.
Commercial Banker Banks usually have a separate division for dealing with commercial
customers such as corporations. There is usually an officer, responsible
for all aspects of the customer's business with the bank, with whom the
salesperson works to understand the customer's needs.
Trader The salesperson gets from the trader, prices (usually firm ones) of
products to back up any trade that the client wants, or that he is trying
to convince the customer to get into.
Common Tasks
This section describes the common tasks performed by a salesperson
on a day to day basis.
Understand Customers’ Requirements

Before a salesperson is able to trade on a customer’s behalf, he must
understand his customer’s needs and constraints. He speaks to the
customer directly and talks to the account manager for the customer's
organisation.
He needs to understand the type of business that customer’s
organisation is in, for example textile production, mining or fund
management. For example, if the customer is heavily exposed in Yen
equities, the salesperson may suggest a hedging strategy using
currency forwards or futures, or options, to protect the equity position
against further Yen depreciation.
If the salesperson believes VW stock is going to be rather more volatile,
he may suggest that the customer buy a strangle strategy, and support
this with an illustration showing profits available at various stock price
levels.
Answer a Customer Enquiry

A customer sometimes expresses an interest in achieving a particular
objective, for example, financing the purchase of steel from Australia. A
salesperson on the corporate sales desk might suggest a forward
outright, on AUD vs. GBP, to limit his exposure in case the AUD
strengthens between now and the payment date.
If the salesperson cannot respond to a customer’s request, he passes
the query on to the appropriate function. Salespeople are quite pushy.
They own any query they pass on and they make sure that their client
gets the answer that he wants.
Call a Customer with an Opportunity

The salesperson brings his knowledge of the customer’s needs and the
current market conditions together to spot opportunities. The
salesperson may know of the customer's existing exposure and suggest
appropriate hedges, for example, a FRA to hedge interest rate rises on a
floating rate loan.
Get a Price from a Trader
Salespeople do not price instruments and products. When customers
call asking for a price, the salesperson either calls out to the trader
asking for a price or calls the trader on an intercom. Once obtained, the
salesperson then communicates the price to the customer for
consideration. If the price is accepted, the salesperson immediately
informs the trader, possibly via a hand signal. The house is a
counterparty to all trades that the salesperson has sold. The house
either hedges the trade, if it still has an exposure, or alternatively does
nothing.
Scenario: A day in the life of a salesperson

Profile of Mark Sales Name: Mark Sales
Position: Assistant Director, Corporate Sales. Small Bank Inc. IT support.
Heavy use of Excel spreadsheet for maintaining customer records and
positions.
Age: 37
Marcia wanted to be a trader and started as a trainee in the
large London-based XYZ Bank. He soon realised that he
had a personality that better fitted the role of a
salesperson. Trading has never really appealed to Mark.
Mark has the responsibility of selling various instruments in the FX and
money markets. These are deposits, euro-currencies, Spots, Forwards,
Interest Rate Swaps, FRAs and some short term fixed income
instruments. Just under 50% of his work is conducted using deposits.
Mark heads the sales desk at the bank and has a full complement of eight
salespeople on his team. He provides the direction for his sales team for
the day’s trading and has a personal customer base of between 25-30
customers. The sales desk as a whole handles about 200 customers.
Mark has some customers who give him most of his business and prefer
to deal with him than with other people. Other customers deal with him
when they feel that he has the best advice, or price.
Workplace The sales desk has space for six salespeople, although only up to five
desks are occupied at any one time. The other members of the team are
either on leave, involved in other activities at the bank or visiting
customers. The sales desk is situated close to the analysts’ and
economists’ area on the trading floor.
The schematic in Figure 0.2 Schematic of Mark’s Office shows Mark’s
exact position in his office.
Schematic of Mark’s
office
SPOT
Desk
Sales Forwards
Desk Desk
Mark
Analyst Analyst Economist Economist Secretary
Figure 0.2 Schematic of Mark’s Office

Daily work 7.15am
Mark arrives at the office, he has already skimmed the Financial Times
while on the train coming into work. He looks at some screens that have
overnight prices for major currencies and the global interest rate
indicators, such as the Japanese Government Bond benchmark closing
yields and prices. Finally, he brings up some UK market commentary
pages.
7.30am
Morning meeting conducted over squawk boxes. Everyone in the
dealing room has access to a squawk box. The dealing room is reminded
that the Bundesbank interest rate announcement will be out at
approximately 12 noon.
After this meeting, Mark meets which his sales team to co-ordinate their
efforts for the day ahead. Mark tells his team that Triple X Company has
a large DEM deposit maturing today and may be looking for the best rate
to roll the deposit over or they may be looking to convert to a synthetic
deposit via GBP.
Proactive deals 8.30am
Between 8.30am and 10 am Mark is pro-actively calling his customers. He
tells his customers what he thinks the figures will be and how this will
affect their cash holdings. The house believes interest rates will go up,
and therefore customers should probably shift out of GBP into DEM
deposits.
Reactive deals 10am - 3pm
By 10 am Mark has called all his customers, some have slightly altered
their positions, hedging against an interest rate rise.
The figure comes out, with no particular surprises, it is important that
Mark knows the result as customers will want to discuss the fuller
implications with him.
Triple X corporation have waited until after the release of the
Bundesbank figure before deciding what to do with the large deposit
that is rolling over. They decide to roll over the DEM deposit for another
three months because of the new higher rates.
Deposit deal First of all Mark calls the Deposit desk trader to get the latest rate for
3month DEM deposit. The trader returns a price of 3.82/3.97, which is
now higher than the 3.8/3.95 prior to the Bundesbank hike. Mark calls his
contact at Triple X Company, Anne, to determine whether the price is
attractive enough or whether she wants to wait to see if any better
opportunities arise. Anne accepts the three months deposit rate, yielding
a 3.82%, and rolls over her 100m DEMs for another 3 months.
Mark then fills out a deal ticket with all the information relating to the
deal, the counterparty, the rate for the deposit, and the maturity. The
deal ticket is passed to the DEM desk for processing and Mark enters
the details on his blotter or position sheet.
Back Office query Once the deal has been processed by the DEM desk, if there are any
back office queries relating to settlement instructions, the back office
contact Mark for clarification and any further details.
3-4pm
After 3pm, Mark doesn’t have many customer calls coming in. He takes
this opportunity to look through his customers positions and decide
whether he thinks he can adjust their positions to take advantage of new
market developments. Mark uses a spreadsheet package to perform
simple hedging calculations so he can determine which of his customers
he should call with suggested adjustments. Mark makes sure that when a
customer calls tomorrow, he can talk fluently about their current
positions.
4-5.30pm
Mark starts his internal ‘housekeeping’ work. He has the responsibility
of totalling all his sales staff’s deals. He takes all the dealing system
information and manually enters it into a spreadsheet that will determine
how much business each of his salespeople has done.
Chapter 7
Analysts
Version 1.0 69 Chapter 7: Analysts Reuters Guide to the International Financial Markets
What Does an Analyst Do?
The Analyst’s Role

Analysts research the financial outlook of market sectors and
economies. They make recommendations on the investment
possibilities in the area that they cover.
Analysis is a highly specialised field. There are two broad categories of
analyst: market specialists and macroeconomists.
Market specialists Some analysts specialise in particular markets. These analysts can be
further classed as equity trading or bond analysts, depending on the
instruments they study, and specialise in analysis and predictions of
company valuations and bond prices respectively. Analysts in these
fields usually focus on a particular market sector and/or geographic
area. Alternatively they may cover a portfolio of, say, 100 companies or
bonds.
Within a market sector, an analyst may be a large company or small
company specialist. Large company specialists focus on balance sheets
and company figures; small company specialists focus on who’s who in
the marketplace.
The forecasts that analysts make are used to form opinions for
investment institutions on whether to buy or sell company shares.
Currently, equity analysts’ research is moving towards hi-tech and
biotechnology sectors. Companies in these sectors are seen as more
interesting and dynamic and there are more areas of possible growth.
Macro-economists Macroeconomic analysts make predictions about the behaviour of an
economy as a whole. They study and predict interest rates, inflation,
gross domestic product (GDP), trade deficit, and so on. They are also
aware of the political climate and its effect on the economy.
Forms of Analysis
Two basic forms of analysis are performed: fundamental and technical
analysis.
Fundamental analysis Fundamental analysis is based on the research of base company
performance or country economics. It requires access to historical
company report details. Data visualisation and modelling are more
important than complex analysis.
Technical analysis Technical analysis involves analysing prices and performing complex
calculations on time versus data to forecast future prices. Analysts use
sophisticated computational methods to perform these tasks.
Typical Employers
An analyst is likely to work in one of the following situations:
• on the sell side, for a broker company who sells products
• on the buy side, for a fund management company who buys
products
• for a third party analytic company, supplying research to
subscribers.
A larger proportion of analysts work on the sell side than on the buy
side: there is approximately a 70/30 split. A broker company can recoup
the cost of its analytic staff through the commission it charges its
clients. To achieve comparable levels of research, a fund management
company would have to employ many analysts to specialise in different
areas. This would impact on the returns of each fund.
As a result, the highest paid analysts work on the sell side.
Employment figures There is a wide variation in the number of analysts employed by
institutions. It very much depends on the institution’s size. A major
broker may employ up to 100 analysts.
Locations The largest concentration of analysts is in the United States. This may
be because more companies are based there and because American
companies are required to make public, more financial information than
elsewhere.
Sell side analysts
Sell side analysts work to form a view of the market and to generate
recommendations for their institution’s clients on which stocks to buy,
sell or hold. They analyse and interpret news and other market
developments to encourage clients to trade. Sell side analysts usually
take a short term view of investment.
Proprietary trading A small number of the very good sell-side analysts – about 10% – are
also involved in proprietary trading, investing the investment house’s
own funds for profit. Proprietary trading analysts concentrate on the
more sophisticated instruments to build trading strategies, including
derivatives and work with structured deals which may include baskets
of different instruments.
Proprietary trading analysis is so complex that financial information
vendors cannot cater for these requirements with off-the-shelf software
and need to employ high powered analysts - called “Quants” to provide
an in-house service. Proprietary trading analysts have many database
experts and programmers to provide them with the customised and
complex calculation facilities that they need for valuation and hedging.
Buy-side analysts
Buy-side analysts recommend that their fund managers buy certain
products. Because they conduct their analysis intending to buy, sell or
hold products for themselves rather than to earn commission, they tend
to take a longer term view. However, this does depend on the style of
the institution for which they work.
Third party analysts
These companies tend to operate in niche markets. Larger third party
suppliers may contract out some of their analysis to smaller specialist
companies.
Buy-side companies tend to contract out the more quantitative and
esoteric analysis, and analysis of up-and-coming areas where they do
not have in-house expertise, to third party analysts.
Characteristics of Analysts
Career Path
Educational background Analysts tend to be degree-educated, although not necessarily in a
financial subject. Broking firms train graduates themselves.
It is difficult to become an analyst. It takes a long time to gain a feel for
a particular market and build up the contacts necessary within that
sector. Those that do become analysts tend to have long careers due to
the in-depth knowledge that they develop, of a specific market sector.
Common routes to becoming an analyst are:
• to join a bank firm as a trainee analyst after university graduation
• to qualify as an accountant and then move into analysis
• to work in a certain sector in industry and then move into analysis
of that market sector.
Career advancement Analysts working for sell-side brokers often receive performance-
related pay and a proportion of the commissions generated by brokers
selling to clients. Every year surveys are carried out where clients rate
investment analyst companies.
Typical skills Market sector analysts have a good understanding of their sector:
competitor companies, available products, marketing strategy and so
on. If one of the companies in the sector launches a new product they
are in a good position to assess the product’s likely impact and the
effect this will have on the company’s standing.
Figure 0.3 shows the working relationships analysts are likely to have
outside their own institutions.
This diagram shows the relationships for a sell-side analyst.
Company Company Company
information
about
company
Analyst
request for further

further information
information
Investor Investor Investor
Figure 0.3 Analyst’s external relationships

Company contacts The primary relationships for an equity trading analyst are contacts in
the companies in his or her sector.
Companies may give presentations to analysts, or, for the more senior
analysts, arrange one-to-one meetings with senior management.
Analysts may also have more informal contacts with, for example,
development staff in a software company or those running drug trials in
a pharmaceutical company. Analysts contact these employees to
attempt to elicit information about the true progress of a new product.
Investors Buy-side analysts do not have a relationship with external investors.
The investors that they advise are in fact the fund managers within their
own companies.
Within a sell-side institution, it is the sales force that contacts investors
with investment recommendations initially. However, investors may
then phone the analyst who did the research to get more information
about the proposed deal.
The diagrams in Figure 0.4 show the typical relationships an analyst
working on the sell side or on the buy side has with colleagues.
Chief Investment
Sales force Chief Analyst Officer, fund
managers
sales analysis of
recommendations daily reports proposed areas of
investment
Sell side analyst Buy side analyst
retrieving facts and collaboration retrieving facts and collaboration

figures, typing on reports figures, typing on reports
reports reports
Assistants & Other Assistants & Other

secretaries researchers secretaries researchers
Figure 0.4 Analyst’s relationships with colleagues, a) sell side, b) buy

side
Common relationships
Both buy- and sell-side analysts liaise with the following people within
their institution.
Other researchers Analysts may work with other research staff – fellow analysts and
economists.
Assistants and Most research departments have a good library. Analysts may have
secretarial support assistants to retrieve and research information in the library, and
secretaries to type up draft reports.
Sell-side analyst
Chief Analyst The Chief Analyst gathers together all analysts’ daily reports and
presents the result to the sales force.
Sales force Broker’s analysts are accountable to their sales force. They must
present good reasons to sell certain stocks or bonds to the client.
Buy-side analyst
Chief Investment Officer, Buy-side analysts take part in weekly meetings with the Chief
fund managers Investment Officer and fund managers. They present their analysis of
proposed areas of investment.
Common Tasks
The tasks that analysts perform depend on whether they work on the
buy side or the sell side. Analysts on the buy and sell sides tend to
analyse the same information for different purposes.
This section describes typical analyst tasks in some detail. Where a
task applies only to the buy side or to the sell side this has been
indicated.
Form a View of the Markets

When analysts arrive at the office – early, often around 7.15 am – they
must get a feel for the markets. They look at price and currency
movements overnight and news that has just broken, read the papers
and watch a specialist financial TV round-up. They draw conclusions
about how events will affect their market sectors.
Write the Morning Report (Sell Side)

A sell-side analyst’s most important task is to write the morning report,
which takes one to two hours. Some companies may produce a smaller
afternoon report as well.
The analyst may begin the morning report on the journey to work and
finish it in the office. The report is typically 100–200 lines long and may
cover up to 100 companies. It contains market sector news and buy/sell
recommendations for the day.
Typical coverage of a company in the report includes:
• investment recommendation: buy/sell/hold
• dividend details
• currency exposure, that is, how foreign earnings are affected by
current exchange rates
• figures such as price to earnings ratio and yield, with estimates for
the next two years.
A secretary may type up the draft report properly. All analysts’ reports
are given to the Chief Analyst who briefs the sales force. They are also
faxed to other offices of the broking company.
Brief the Sales Force (Sell Side)

At around 8.00 am the Chief Analyst briefs the sales force for half an
hour to an hour. The briefing covers leads and developments in
different sectors, based on the morning reports that have been
produced.
Immediately after the morning meeting, sales staff telephone investors
to bring them up to date with their analysts’ recommendations and to
persuade them to buy or sell stock..
Monday Morning Meeting (Buy Side)
Analysts working for fund management companies attend the weekly
meetings held by the Chief Investment Officer (CIO) of the company.
These meetings are held to decide the proportions of a fund to invest in
each market sector.
The CIO draws up a grill of locations versus instrument types. The
analysts and fund managers at the meeting decide on the proportions of
funds to invest in each of the grill elements. The analysts constantly
run statistical models (based on currency movements, gross domestic
product, retail price index and other economic indicators) to optimise
these weightings.
Company Visits
An analyst spends about half of his or her time out of the office on
company visits. These may be company presentations of strategy or
new products, where many analysts are present, or one-to-one
confidential meetings with the senior management. Analysts always
seek unique news, so they may attempt to meet strategy consultants
who have worked for a company or those developing new products for
the company in order to help them to assess a company’s performance
prospects.
Analysts receive news kits at presentations containing all the
information presented. Recording information in confidential meetings
may be more problematic, because the meetings are off the record and
tape recorders cannot be used. They rely on writing down as much as
possible and typing it up at a later stage. In the US, analysts frequently
type straight into their portable computers, but this is less common in
the UK.
Broker Research
Company and sector As well as the morning report, analysts work on other research
analysis documents with longer timescales.
Analysts write forecast documents for individual companies in their
sector. The timescale varies from country to country: French analysts
provide two-year estimates, American analysts work no more than two
quarters ahead. Forecasts are reassessed about every two months.
Analysts may also produce reports on the state of their market sector as
a whole, for example, the UK telecommunications industry.
Reassessing forecasts A company releases figures, including sales, earnings and growth,
every quarter or half-year. Analysts project these figures in advance of
their release and recommend buying or selling accordingly. When the
figures are released it is unlikely that the share price will be greatly
affected unless the values are unexpected.
A company that will not achieve market expectations may issue a profits
warning before figures are released. This allows analysts to reconsider
their forecasts and prevents the markets from overreacting to
unexpected news.
Scenario: Produce a bi-monthly forecast
Scenario Arthur Analyst works for Brilliant Brokers Ltd, in London. He
researches the US high-tech sector which includes computing
companies. He has to produce the bi-monthly forecast for Dream
Databases, Inc. (DDI), a software company specialising in database
packages. This report will estimate DDI’s performance over the next two
years.
The analyst’s task 1. Arthur looks at the news concerning DDI and at the state of the
high-tech sector in general. He has a trainee analyst to assist in the
less demanding information retrieval tasks.
• He looks at the following sources:
• news articles about DDI retrieved from Reuters Business
Briefing
• news articles about other companies, in the software and
database sector in particular, that could impact on DDI
• trade magazines.
He looks for information such as:
• gossip, news about new products, market research, forecasts
by key magazine columnists
• fundamental changes to DDI, such as acquisition of a
competitor company or divestment of part of the existing
company
• the state of the sector as a whole, including potential mergers,
acquisitions and strategic alliances.
2. Arthur discovers that DDI has recently bought Groovee Graficks
Inc. (GGI), with the intention of incorporating more graphical
capabilities in its database products. However, this move was not
unanimously agreed by the board and two members resigned in
protest. In addition, the 56-year old chairman of the board has
recently retired due to ill health.
DDI was to release the next version of its database product,
DataDelite, at the start of last month. This has been delayed in
order to enhance its graphics and charting capabilities with the
assistance of GGI. In the meantime, DDI’s main competitor,
InfoImpetus, has released a database product which, although not
as sophisticated, fills a large gap in the market.
3. Arthur analyses DDI’s financial figures.
He has a spreadsheet set up for DDI containing historical and
forecasted figures, such as yield, profit to earning (PE) ratio,
percentage foreign earnings. The spreadsheet also has links to live
data feeds for share price, the previous night’s closing price, PE
ratio and exchange rates.
Arthur plots various graphs from his spreadsheet data. These
include:
• DDI’s share price and the FTSE index against time
• profit/earnings ratio relative to the FTSE index over the past 24
months
• yields
• concentration ratio, that is, DDI’s market share
• sales on a sector and regional basis
• risk exposure for various currencies which generate foreign
earnings.
DDI does not pay dividends as it is a young high-tech company
that reinvests its earnings in R&D (research and development).
Shareholders expect to be rewarded by a corresponding rise in
share price.
4. Arthur looks at the figures to assess certain risks, such as:
• is it likely that DDI can reach its earnings forecast?
• has DDI got an exposed foreign currency position?
He finds that 30% of DDI’s earnings come from Brazil and hence
may be adversely affected by variations in the value of Cruzeiro.
DDI had forecasted high earnings for this year but the delayed
release of DataDelite and resultant success of InfoImpetus’
product makes achieving the target figure unlikely.
5. Arthur pulls together all the information he has amassed to make
associations and deductions about DDI’s future performance. He
reaches the following conclusions:
• DDI is unlikely to reach earnings targets due to the delayed
release of DataDelite, but the product is fundamentally sound
and longer-term earnings should be healthy
• DDI’s dependence on the historically unstable Brazilian
currency makes future foreign earnings unpredictable
• the takeover of GGI, with possible threats of redundancies, and
turbulence on the board, is likely to affect company morale in
the short term.
6. Arthur makes forecasts for up to two years in advance.
He predicts that share prices will fall over the next six months due
to short-term problems in DDI. However, he thinks conditions will
stabilise and that DataDelite will ultimately be a successful product,
leading to a significant rise in price six to 18 months hence.
Arthur’s advice is that current investors in DDI should either sell
their shares now or hold them for the next 18 months. Prospective
investors should wait for three to six months before buying shares
in the company.
The entire task takes about one week to complete.
Phone Calls from Investors (Sell Side)
Although a broker’s sales force make an initial recommendation to an
investor, the investor may require further information and contact the
analyst who performed the original research to discuss the investment
in greater depth.
For an analyst to make more sophisticated and accurate forecasts than
analysts in other institutions, he or she has to seek out as wide a range
of information as possible.
Information ranges from that which is commonly available to that which
is off-the-record and highly confidential.
Online Information
Diary pages An analyst needs to know about up-and-coming financial events.
Reuters diary pages contain information such as:
• who is publishing their year or half-year results
• important meetings
• political announcements and events
• publication of key economic indicators.
An analyst looks at a company’s performance in the period coming up
to the release of figures, and will scrutinise previous company
accounts.
Price information Analysts are likely to retrieve Reuters pages such as .FTS3, which
shows the performance of the FT-SE 100 and pages on individual
companies. They are also likely to set up feeds of exchange rates and
share prices into their spreadsheets.
Historical databases Analysts need to draw on large quantities of historical financial
information such as balance sheets, annual reports, and employee
statistics. They may also require information concerning the
development history of a company and its management personalities.
Analysts are likely to retrieve this information from in-house databases
or subscriber services such as DataStream or Reuters Business Briefing.
Spreadsheets Spreadsheets are used to track information such as company earnings,
profits and forecasts. The spreadsheets may be set up with real-time
currency data feeds to re-evaluate constantly foreign exposure.
Other Information
Company briefings Companies give regular briefings for analysts, perhaps every six
months. Briefings open to all analysts may be very general. Influential
analysts may be briefed confidentially, off the record, by senior staff in
the company. These analysts are experienced enough not to accept the
company line but to probe for the more significant hidden information.
Gathering gossip Analysts listen to market gossip. For example, they try to talk to
strategy consultants who have worked for a company to try to get an
inside view of what that company is like.
They also endeavour to speak to people directly involved in developing
new products, to discover how good a new product really is and, as a
result, its likely market impact.
Conferences Analysts attend conferences on analytic techniques given by industry
specialists. They may, for example, learn about new methods of
quantitative analysis.
Trade fairs Analysts may attend trade fairs relevant to their market sector.
Although large companies give presentations to analysts, smaller ones
may not have the resources to do so, and this is an opportunity for the
analyst to do some research.
Chapter 8
Fund Managers
Version 1.0 83 Chapter 8: Fund Managers Reuters Guide to the International Financial Markets
What Does a Fund Manager Do?
The Fund Manager’s Role

Fund managers manage money, investing it in portfolios of assets.
They must ensure that portfolios are safe against loss and provide
capital growth. Portfolios must also be able to pay their long-term
liabilities such as pension payments or matured life assurance policies.
Fund managers buy and sell for relatively long-term investment return
for a given risk, whereas traders buy and sell for short-term profit.
Traders focus on real-time information and intra-day market movements;
fund managers are more interested in fundamental and time proven
attributes of investments that will enhance their portfolios although
they also need to look at real time information so they can pick up any
market changes that may call for a strategy change. Fund managers are
more likely to study historical price series and reports.
Most fund managers’ performance is measured on a return basis
against a given level set by the fund trustees. Alternatively the fund
manager may have to better a specific benchmark such as the Morgan
Stanley capital index.
Stock-picking approach Stock-picking is the more traditional approach to fund management.
The fund manager concentrates on researching the fundamentals of a
company or sector and drawing conclusions based on, for example, the
quality of the company’s management.
Fundamental factors include basic economic forces such as inflation
and interest rates, state of the economy, political background, and the
relative attractions of other markets and alternative investments.
Company annual reports are also analysed.
Quantitative approach Quantitative fund managers believe that all the information in a
company is reflected in its price. By aggregating countries or sectors
and performing complex regression and other analysis – for example, is
a company cheap given its current profit yields? – they identify
companies that are undervalued and whose shares are worth buying.
The fund manager forms a hypothesis about what makes companies in a
particular sector successful. He or she then applies this hypothesis, to
decide in which companies to invest. This form of fund management
takes a mathematical and disciplined approach, applying certain specific
techniques to data on all companies to reach conclusions.
Specialisms Within Fund Management

A fund manager is likely to specialise in a particular area and
instrument, such as UK equities or US derivatives, as shown in
Figure 0.1. The approach taken (stock-picking or quantitative) depends
on the style of the institution. American institutions tend to use
quantitative analysis whereas Scottish life assurance companies use
more fundamental techniques.
Fund Managers
Europe Americas Asia
France UK Germany
Fixed Equities Derivatives

Income
Passive Active
Figure 0.1 A fund manager is likely to specialise in a particular area
The fund manager is probably involved in the management of several

funds. Once research establishes the companies in which to invest in a
certain sector, that investment is spread over several funds. This
minimises research costs and commission charges.
Age difference There is a marked difference between the older and younger fund
managers. Older fund managers tend to work on the basis of who they
know, whereas younger ones are experienced computer users who are
highly numerate and perform complex data analysis.
Typical Employers
A fund manager can work for one of the following:
• a company which manages its own pension fund, for example Shell
Chemicals UK Ltd
• the fund management division of an investment bank, such as BZW
• a specialist fund management company, such as Mercury Asset
Management Ltd
• a life assurance, life insurance, or general insurance company.
Characteristics of Fund Managers
Career Path
Educational background Fund managers come from a wide variety of backgrounds.
Quantitative fund managers tend to have mathematics, statistics or
physics degrees.
Most traditional, stock-picking, fund managers have degrees, although
older ones have often worked their way up from the bottom of a
company.
Work experience Many prospective fund managers begin as trainees in an investment
institution. They spend some time working in each department to gain
an awareness of all aspects of the business, performing numerical
supportive tasks to learn how different aspects of the financial markets
work. During this time, when aged 25 or 26, they probably sit
accountancy exams and qualify as chartered accountants.
Trainees are likely to spend time in the institution’s foreign offices, for
example, spending a year in the UK, a year in the US and a year in
Japan. Foreign language skills are important as they enable the fund
manager to attend briefings given by companies overseas.
Figure 0.2 shows the working relationships fund managers are likely to
have external to their own institutions.
Broker’s
Broker
analyst
decision to
invest
investment request for further details of
recommendation further proposed invesment
details
information on
monitor company
Third party performance performance
Fund Manager Companies
assessor
set fund performance

benchmark reports
Trustees
Figure 0.2 Fund manager’s external relationships

Brokers A fund manager probably has three or four preferred brokers. Broking
companies are known for the quality of their analysis in particular
market sectors and the fund manager will use each accordingly.
Brokers recommend instruments to buy or sell that day, by phone, fax or
sending information by courier. Brokers try to encourage fund
managers to change their portfolios around because this generates their
commission.
Broker’s analysts A fund manager may phone a broker’s analysts to obtain further
information about an investment the broker has proposed.
Companies Fund managers are likely to visit the companies in which they have
invested or are likely to invest. They may attend presentations at which
the company puts forth its current strategy or earnings predictions.
Trustees The trustees’ job is to ensure that a fund is run properly. They set a
benchmark and review the fund’s performance against the benchmark
every three, six, or 12 months. A fund manager may be required to
report to the trustees on the performance of the fund.
Third party assessor Funds often use a third party to monitor independently the performance
of a fund.
Figure 0.3 shows fund managers’ working relationships with colleagues.
Chief
Investment
Officer
investment feedback
decicions
economic management
predictions of fund
Analysts and Fund Manager Other fund
economists managers
feedback on
proposed
investments
administration quality assurance
Back Office Compliance

department
Figure 0.3 Fund manager’s relationships with colleagues

Chief Investment Officer The Chief Investment Officer takes the final decisions as to where and
how a fund should be invested. These decisions are taken at the weekly
meetings which fund managers attend.
Other fund managers Fund managers with different areas of expertise work together to
manage a particular fund. Between one and ten fund managers are
typically involved. There is a lead manager and a second manager for
each fund.
Analysts & economists Fund managers receive economic predictions about their specialist
market sectors from analysts and economists employed by the
institution, before making investment decisions.
Back Office Staff in the Back Office are responsible for carrying out the
administration connected with the running of a fund, such as the
buying and selling of shares and checking the cost of transactions.
Compliance Department The Compliance Department performs a quality assurance function,
ensuring that fund managers comply with the Chief Investment
Officer’s investment guidelines. The department also checks that a fund
has not over-invested in any one stock, which would put the fund in an
exposed position.
The Workplace
Environment
Fund managers work in a fairly typical office environment.
They tend to use their computers at intervals throughout the day, to
monitor the performance of the contents of their portfolio.
Computer Systems
Variety of systems Fund managers use a wide variety of computer systems. Equipment and
software may be provided by brokers as a soft-dollar deal proportional
to the amount of commission generated by the institution. As a result,
equipment may be changed frequently.
Most fund managers have PCs, with several screens on their desk.
There are not many Triarch systems in use and few monitor terminals
remain.
Typical software The products that a fund manager use depends on the area in which
they specialise, for example equities or gilts. They are likely to have
many software tools, such as:
• Reuters Terminal
• products for the specific area covered, for example Securities 2000
for fund managers specialising in international equities and Equity
Focus for fund managers specialising in UK equities
• Reuters Enhanced Data Display (REDD) which emulates the
London Stock Exchange Topic system for retrieval of broker
research
• Reuters Graphics, to analyse performance
• charting products such as Reuters Technical Analysis (RTA)
• in-house evaluation spreadsheets and proformas to lay out specific
information in certain ways; also Reuters Excel Utilities
• other services, for example, Bloomberg or Telerate, Textline and
DataStream
• portfolio management system, to record the current contents of a
fund portfolio, performance, profit and loss, sales activity.
Typical screen setups Fund managers are likely to change their screen setups whenever they
change the contents of their portfolio which happens frequently. If, for
example, a fund manager follows futures contracts, he or she may wish
to change the screen setup to follow new futures contracts when older
futures expire.
Fund managers are likely to have several saved screen setups because
they follow too many instruments to display on one screen.
One screen setup is likely to contain the following panes:
• a list of instruments in the fund manager’s portfolio
• next to that, a News pane filtered to display headlines concerning
those instruments
• a more general News pane, for example, showing all Equities news
• foreign exchange rates permanently on display.
• Reuters Financial TV
Typical features used The functions fund managers use depend mainly on the contents of
their portfolios, but might include:
• looking at custom pages containing the instruments in the portfolio
• using sector displays to follow, for example, all publishing
companies
• using a sector news page to follow, for example, all news headlines
in the publishing sector
• retrieving broker research
• news
• graphing performance using Reuters Graphics.
Fund managers who are less computer literate tend to concentrate on
fundamental analysis and seldom retrieve information – a share price
now and again. They may also use a DataStream terminal to retrieve
economic and share price histories which they can graph and print.
Common Tasks
Monday Morning Meeting

The Monday morning meeting is the most important event of the week.
The Chief Investment Officer (CIO) of the fund management institution
holds the meeting to decide how much of each fund to invest in
different markets and instruments.
See Asset allocation The most fundamental decision when investing funds is to choose the
analysis on page 93 right geographic area and instrument type, not specific companies. For
example, a company performing relatively well in a UK recession will not
provide such good returns as investing generally in Hong Kong
equities, if that sector is buoyant. This decision is made using asset
allocation analysis.
The CIO canvasses the opinions of the fund managers, analysts and
economists present at the meeting to obtain their views on the events
of the previous week and to get a picture of the current position. For
example, the consensus view may be that the UK bond markets are
volatile and that US and Japanese equities are falling.
The CIO draws up a grill of geographic areas (including US, UK, other
European countries and Japan) versus instrument types (bonds,
equities, money market, and so on). Those present at the meeting
decide on the weightings, or proportions to invest, in each of the grill
elements.
In addition to economic factors, they also consider the types of funds
involved, the goals of particular funds, and any legal requirements
concerning the percentages of different instruments that a certain fund
must hold. For example, a pension fund takes a long-term view and does
not focus on immediate returns.
The process is iterated, with economists and analysts running
statistical models to predict the effects of current weightings, until a
satisfactory conclusion is found. This forms the guidelines used by the
fund managers when deciding in which areas to invest.
Receiving Calls from Brokers

Every morning, fund managers receive telephone calls and faxes from
brokers.
Brokers phone with details of products which they think fund managers
should buy on that day. They often know the contents of a fund
manager’s portfolio and make recommendations about what to do with
these instruments, namely, buy, sell or hold.
A fund manager treats a broker’s recommendation with a degree of
caution because the broker earns a commission on every deal
performed. The fund manager’s initial response to the recommendation
is governed by the guidelines decided at the Monday meeting or he
may refuse it outright. If the suggestion is plausible, the fund manager
may decide to buy straight away, although he is more likely to do
research first. This may include phoning the broker’s analyst for more
details of the proposed investment.
The fund manager may get back to the broker in the next few days.
Fund Management Styles
Active vs. Passive There are two main management styles, passive and active and the
difference between them is to do with how the fund manager is
remunerated.
With passive management, the fund manager is only required to match
the performance of an index, such as Morgan Stanley International, or
FT World, or FTSE-100. The manager will tend to invest in the whole
index, where practical, or a sufficient subset to match the index in
performance terms.
With active management, the task is more challenging. The fund
manager is required to beat a benchmark, or achieve a certain rank in
performance leagues, and is rewarded on this basis. As a result, active
managers tend to turn over their portfolios more often than passive
managers.
Analysing a Possible Investment

There are several ways in which an (active) fund manager may approach
a possible investment
Researching a broker’s The fund manager may ask an assistant to make some enquiries about a
suggestion broker’s suggestion.
For example, if the broker suggests buying shares in Mexico Chocolate
Company because he has heard that SwissChoc is about to launch a
takeover bid, the assistant may look through records of other takeovers
of confectionery companies and at how share prices have moved as a
result. This gives the fund manager something to work on when
deciding whether to follow this investment opportunity.
Asset allocation If, for example, a decision has been taken to make further investment in
Hong Kong equities, the fund manager must decide which companies to
choose.
There are two approaches to making investment decisions. Most fund
managers use a hybrid of the two.
Top down, or quantitative, analysis involves looking at performance
aggregates of countries and sectors. This could result in a decision to
pull out of Japanese equities in general and to switch to
pharmaceuticals and medical technology sectors if these are have good
growth prospects.
Information used in quantitative analysis includes:
• economic indicators from sources such as The Economist and
Reuters
• interest rates, both short and long term, for the countries being
considered
• currency cross rates
• economic fundamentals such as retail price index and relevant stock
exchange indices for countries being considered
• OECD and IMF forecasts and trend analysis
• Bank of England, Bundesbank and Federal Reserve forecasts.
Bottom up, or qualitative, analysis results in a decision to invest in an
individual company. This company will have been researched extremely
thoroughly, perhaps for two or three months, and a large quantity of
shares then bought.
Investing in foreign Trustees may limit the size of a fund’s foreign exchange position due to
currencies the volatility of these markets.
Fund managers may be required to forecast a certain total return in
order to hold a position in a currency. They may, for example, carry out
one-year currency forecasts focusing on the four main currencies,
dollar, sterling, mark and yen, and then use fundamental economic
analysis each month to rank the currencies in order of expected
performance.
Fund managers may hedge foreign currency positions to reduce their
exposure.
Assessing the Current Portfolio

Carrying out a detailed assessment of the current performance of a
portfolio is not a trivial task. Although fund managers may use
spreadsheets to track the current contents of their portfolios, complete
valuations require more computational power and are typically carried
out as a Back Office function using mainframe systems.
The complexity of calculations stems from factors including:

• the size of the portfolio – £20 million is not uncommon
• spreading the purchase of a large number of shares in one
company over a period of time
• variations in tax rates
• reinvestment of dividends.
Assessment is generally performed at month, quarter and year ends. A
portfolio may also be passed to an independent assessor to calculate its
performance.
When fund managers receive the reports on how their portfolios have
performed, they may need to rebalance them in order to achieve the
objectives of the funds.
Studying Broker Research

Brokers distribute their research material to their clients, including fund
management institutions. This may be in the form of paper reports or
distributed electronically via Reuters or competitor vendors.
A system such as First Call allows fund managers to access research by
over 200 contributors electronically. They can retrieve morning and
company reports for the previous six months.
Buying and Selling

Various factors influence the fund manager’s decision to buy or sell.
These are:
• the time of year – for example, at the beginning of the year a fund
manager might take more risks because it is the beginning of a
reporting period
• the amount of money coming into or going out of a fund – if there is
spare money the fund manager invests it
• the weightings in the investment grill – changes to these may give
the fund manager a larger or smaller proportion of the fund to spend
on investments
• when a company’s dividends are due – these are reinvested into the
fund, so a fund manager will not sell the shares until the dividend
has been paid.
• company results, revenue and profit projections and any relevant
news items for that company’s sector
Fund managers try to avoid extensive trading on their portfolio, called
churning the portfolio, because this is expensive in commission
charges and could swallow up a large part of the dividend. In some
cases, turnover is restricted by trustee or regulatory requirements. Fund
managers tend to act on their brokers’ recommendations, and buy with
a view to holding the position long term..
When a fund manager decides to buy he or she does one of the
following things:
• contacts the broker who suggested the investment and arranges to
buy or sell a quantity of an instrument at the best possible price
• uses Instinet to buy or sell shares
• instructs the institution’s own dealing department to perform the
transaction.
Having made a sale, a fund manager fills in a ticket with the details and
passes it to the Back Office for administrative processing and entry into
the portfolio management system.
Thursday Afternoon Meeting
This meeting takes place with the staff present at Monday morning’s
meeting. The Chief Investment Officer wants to determine progress
through the week and to discuss the coming week.
The meeting is held on a Thursday because little trading takes place on
Friday.
The information fund managers use in the course of their job varies
greatly from person to person. The degree of computer skill of the
individual has a fundamental effect on the information used.
Online Information
The information a fund manager uses depends on the geographic area,
market sector and instruments covered, but is likely to include:
• foreign exchange rates and derived cross rates
• consensus forecasts of key economic indicators
• consensus earnings estimates for equities in portfolio
• news headlines on equities in portfolio
• information on market sectors of interest
• news headlines on those sectors
• more general news, for example, all equities
• Reuters Financial TV
• broker research
• graphs of instrument performance
• performance evaluations
• Reuters or Telerate real-time price information (also Quick in Japan
and Quotron in the United States)
• DataStream historical financial information
• Textline historical text information.
Fund managers are likely to set low and high limits on equity prices so
that they are alerted when prices move outside these bounds.
Other Information
Magazines Financial magazines such as The Economist contain information such
as:
• asset allocation analysis suggestions by major analysts on the
performance of particular sectors
• world-wide economic indicators
• reports and studies of world markets, for example emerging markets
in the former Eastern bloc.
American analysts are likely to read the Wall Street Journal; other
publications include Barons and Forbes.
Broker research Some broker research is distributed in paper form, for example as a
weekly brochure of investment suggestions. Fund managers file articles
on the companies that they follow.
Third party analysis Third party analysis is also likely to be delivered in paper form. It is
likely to be of the quantitative type, or cover emerging or esoteric
markets which the fund management company does not have the
expertise to cover itself.
Glossary
all square Another term for flat.
analyst Researches a particular market sector or economy, forecasting future

performance and predicting good and bad areas of investment.
ask The price to sell an instrument. Also known as offer.
asset allocation A method of deciding areas of future investment. Can be performed

analysis in a top down or bottom up fashion. Often a hybrid of the two is
used.
at best A buy or sell order indicating that it should be carried out at best
possible price available at that moment.
autopilot A Reuters user interface term to refer to a dialogue box which breaks
down a complex series of actions which a customer needs to perform
into a smaller series of straightforward steps. A typical use would be
enabling the customer to set up a graph.
The equivalent Microsoft term is wizard.
Back Office A department of a bank or financial institution which processes

deals executed and handles delivery, settlement and regulatory
procedures.
Bank of England The UK central bank, located in London.
bid The price to buy an instrument.
bond A fixed interest security under which the issuer contracts to repay
the lender a fixed principal amount at a stated date in the future and
a series of interest payments either semi-annually or annually.
bond trader Trades a book of bonds on behalf of an institution, or occasionally

for his own account.
Also known as debt or fixed income trader.
Version 1.0 97 Glossary Reuters Guide to the International Financial Markets

bottom up A method of analysis resulting in a decision to invest in a specific
company. The company is thoroughly researched prior to the
investment being made.
Also known as qualitative analysis.
broken rate forward A forward deal for a non-standard period of time; calculated from the
two standard periods between which it falls.
broker An intermediary between a buyer and a seller in a highly organised

market, for example stockbroker, foreign exchange broker. Does not
hold a position but earns a commission on each deal arranged.
Bundesbank The German central bank, based in Frankfurt.
Business Briefing A Reuters product allowing search and retrieval of historic news text
from over 200 countries. Text comes from a wide variety of national
newspapers, news wires and specialist magazines world-wide.
buy side An institution whose primary interest is investment, such as a fund

management company.
See also sell side.
cable Jargon term for US dollar/sterling spot rate.
cash commodity A commodity sold on a commodity market for immediate or very

early delivery.
central bank The major regulatory bank in a country, usually government

controlled.
Chief Investment Within a fund management institution, ultimately responsible for

Officer how the contents of a fund are invested.
Chief Trader Has responsibility for a dealing group, such as foreign exchange
spot desk. Spends a large proportion of his or her time maintaining
contacts with corporate customers.
commodity A material traded in a commodity market. Commodities are those

required to satisfy production, food and ornamentation needs, for
example cotton, grain and precious metals.
Computer Based Interactive training modules provided as computer software.

Training (CBT) Granular computer based training provides short lessons which take
30 seconds to two minutes to complete. Each enables the user to
perform a particular task.

convertible currency One that is freely traded internationally and which can easily be
converted into other currencies.
corporate desk Within a bank, deals with institutional customers and passes on
currency requests to foreign exchange traders.
corporate treasury The department within a company which manages its treasury
operations.
counterparty The person on the other side of a deal.
cross rate An exchange rate for two currencies not normally quoted against
each other. Derived by using a common base currency, for example
US dollar or sterling.
In Reuters terms a cross rate is an exchange rate between two

currencies, neither of which is the US dollar.
DataStream A competitor service to Reuters in the historical financial

information market.
daylight limit The size of position that a foreign exchange trader is permitted by
his employer to hold during the day. See overnight position.
DDE Dynamic Data Exchange. Windows concept that allows linking of

information between applications.
dealerboard Sophisticated telephone switchboard used by traders in dealing

rooms.
dealer’s assistant See position keeper.
Dealing 2000-1 Gives access to a communications network allowing dealers to

conduct electronic conversations and arrange deals.
Dealing 2000-1 interprets dealing conversations and produces

dealers’ tickets. It also produces an electronic feed of information on
completed deals, which can be fed into Deal Manager.
Dealing 2000-2 Gives dealers access to a different communications network to

Dealing 2000-1. The network allows anonymous electronic matching
of deals via a central computer, which matches bids and offers of
both parties. After checking the credit lines of both parties, they are
notified that the deal has been completed.
Deal Manager A transactions database which captures deal information and

provides position keeping and credit control facilities. Can
automatically capture deal information generated by Dealing 2000.

deal ticket Pre-numbered paper ticket on which a trader records details of a
completed deal.
debt Term used to refer to the total loan exposure of an organisation, or

public authority, or to the choice of bonds rather than equity in
raising funds.
derivative A generic term for futures, options and swaps, that is, instruments
derived from conventional direct dealings in securities, currencies
and commodities.
discount The amount by which the future value of an instrument is less than
its current value. Opposite of premium.
economic indicators Barometers of a country’s growth. The major economic indicators

are usually issued monthly or quarterly by a government department
and include gross domestic product, consumer price index, money
supply, trade balance and unemployment.
The Economist A UK-based magazine with world-wide coverage of current events

including politics, economics and financial markets.
EMS See European Monetary System.
equity Commonly used to mean the ordinary shares of a company.
Equity Focus Provides a broad range of real-time information about equities traded
on the London Stock Exchange. Accessed via the Reuters Terminal.
European Monetary A monetary system among member states of the European

System (EMS) Community. Chief components are the European Currency Unit
(ECU) and the Exchange Rate Mechanism (ERM).
exposure Refers to the current financial risk compared to a defined limit.

Exposure consists of counterparty risk (a counterparty not paying
what they owe) and market risk (fluctuations in market prices
affecting positions held).
Federal Reserve The central bank system in the US, consisting of 12 regional
Federal Reserve Banks.
flat position A position where purchases and sales are equal, bringing the
balance to zero and possibly indicating no further interest in
dealing. Known as a zero position.
forward deal A currency transaction where an investor agrees to buy or sell an
amount of currency at a particular future date at a rate agreed
today. May be either a forward outright or forward swap deal.
forward outright Similar to a spot deal but on a date further in the future.
forward points The points added to or subtracted from the spot price to create a
forward rate for a forward deal. Forward points represent the
interest rate differential between the two currencies traded and are
quoted as a premium or a discount.
forward rate A rate composed of the spot rate plus or minus an adjustment in
forward points.
forward swap An agreement to exchange two currencies at a particular rate on

one date and to reverse the transaction, generally at a different rate,
at a future date. Most forward swaps have a spot and a forward
part but some are forward/forward.
forward trader A trader who specialises in forward deals.
front office Describes the front-line dealing operation of any trading

institution.
FT-SE 100 Index Index of stock market prices calculated once a minute. Covers the
100 largest companies by market capitalisation on the London
Stock Exchange.
fundamental analysis Analysis which estimates the future direction of prices. Differs from
technical analysis in focusing more on what causes markets to
move than on historic market behaviour.
Fundamental analysis captures the economic environment on a

domestic and international level using items like annual reports,
company budgets and financial statements.
See also technical analysis.
fund manager An institution or individual involved in investing funds, either on

own behalf or for others.
An individual tends to specialise in a particular financial market and

works with other specialist fund managers on the management of a
fund as a whole.
future A contract specifying delivery of a currency or other instrument or

commodity on a given date more than two days hence. A future
differs from a forward in that it is a standardised contract, tradable
through an exchange clearing house.
FXCalc Real-time financial calculator for traders in foreign exchange and
money markets. Runs within Microsoft Excel and adds value to raw
financial data.
GDP See Gross Domestic Product.
grill A table of instruments versus locations drawn up by the Chief

Investment Officer of a fund management company when making
investment decisions.
Gross Domestic The total value of goods and services produced domestically
Product within a period of time by a country.
hold a position To be either long or short in a currency or other instrument.
IMF See International Monetary Fund.
Instinet A Reuters product providing brokerage services to equity

investors. Allows anonymous electronic real-time negotiation and
execution of equity trades.
instrument A term used to denote any form of financing medium, most usually
those for the purpose of borrowing in the money market.
inter-bank offered rate Rate at which banks are prepared to lend to each other for specified
maturities within particular markets. For example, London Interbank
Offered Rate (LIBOR).
interest rate swap A transaction where two streams of interest payments are
exchanged, enabling a lower class borrower to benefit from the
better interest rate available to a higher class borrower. The latter
takes a small profit.
International Monetary Specialised agency of the United Nations which provides funds to
Fund member countries with balance of payments problems under certain
conditions of needs. Has a wide ranging brief to oversee the
international monetary system.
intra day Literally “within the day”. It is any point in market trading (between
the opening and close) at which a price or rate is noted.
L
life assurance Insurance which assures the payment of agreed sums of money on
a given date or on death, in return for the payment of regular
premiums.
life insurance Life assurance is the more accurate term.
long An excess of purchases over sales, in anticipation of a rise in

prices. For example, “long five quid in sterling/mark”: having an
excess of five million pounds. A long position can be closed out
through the sale of an equivalent amount.
See short.
loss reporting limit The maximum loss permitted on a position before a trader has to cut
losses and square or reduce the position.
macroeconomic Analysis of an economy using aggregates such as total

analysis employment, national income, investment, consumption, prices and
wages.
market maker Recognised financial institution or individual legally obliged to

make buy or sell quotations when asked.
maturity In money market and bond instruments, the date on which payment
of the principal is made.
“mine” Said by a trader to show he or she buys currency from the other
party.
money market The market in short-term (normally up to one year) financial assets
of financial institutions, namely outstanding loans, holdings of
financial bills, and interbank loans and deposits. The market is
wholesale, i.e. in large quantities traded by banks and other
financial institutions, rather than by individuals.
Monitor The Reuters financial information network and platform that

preceded IDN and the Reuters Terminal.
morning report An analyst’s daily forecast for his market sector with his resultant
buy/sell recommendations.
N
NASDAQ National Association of Securities Dealers Automated Quotations

System. A computerised inter-dealer system in the US, providing
price quotes for over the counter shares.
OECD See Organisation for Economic Co-operation and Development.
offer The price to sell an instrument. Also known as ask.
option A contract which gives the purchaser the right but not the
obligation to buy or sell in the future at a predetermined rate an
amount of a currency, equity or commodity.
Options can be traded over the counter (OTC) or on exchanges.

OTC options are generally negotiated individually; exchange
traded options are standardised contracts.
Organisation for Group of countries whose aim is to provide stable economic growth
Economic Co- and welfare.
operation and
Development
OTC See over the counter.
overnight position A foreign exchange position run from one day to the next. These
positions are risky hence are tightly controlled.
over the counter Any market which does not fulfil trades at an organised exchange.
An over the counter market is conducted directly between
counterparties via telephone and computer networks.
P/E ratio See price/earnings ratio.
points The two least significant figures of an exchange rate. For example,
for the US dollar/sterling rate 1.4850/1.4855, “50/55”.
Also known as pips.
portfolio manager Designated adviser who manages a portfolio of investments on

behalf of a purchaser, often with full authority to take decisions.
Known as acting on a discretionary basis.
position The amount of currency or other instruments a trader is long or
short.
position keeper Assists traders by recording their deals and helping with
associated paperwork. Similar role to a dealer’s assistant.
premium In forwards and futures currency and commodity markets, the

amount by which a future price exceeds a current price.
price/earnings (P/E) Calculated by dividing the share price by the company’s earnings
ratio per share. Measures the company’s earning power and is one of
the most important ratios in determining investment value.
Also referred to as multiples.
principal The total amount borrowed or invested.
Prism keyboard Keyboard that allows electronic switching between a number of

computerised services. Used to save space in dealing rooms.
profit and loss A summary of all the expenditure and income of a company over a
statement set period of time.
Also called an income statement.
quantitative analysis Complex regression and other analysis based on the hypothesis
that all information about a company is represented in its price.
Quick Competitor service to Reuters in Japanese real-time market.
Quotron Company now part of Reuters providing products that supply real-
time equity price quotations.
Retail Price Index A measure of the level of shop prices for goods.
In the US, known as the Consumer Price Index.
Reuters Enhanced A software emulator of the London Stock Exchange TOPIC system.
Data Display
Reuters Graphics Reuters product which displays charts and studies of real-time and
historic data. Provides core set of analysis functions for Reuters
Terminal users in all market sectors.
Reuters Technical Reuters product providing tools for technical analysis of
Analysis international currency and commodity markets. Offers greater
functionality than Reuters Graphics.
Reuters Terminal Software providing display, manipulation and analysis of wide

variety of Reuters data, including foreign exchange, bond, equities,
commodities, energy and news.
securities house A merchant bank, stockbroker or other financial institution that

organises a new issue of securities.
security Any instrument for investment. In Reuters, traditionally associated

with the equities market.
sell short To sell currency or other financial instruments one does not own,
in anticipation of a fall in price and buying back at a profit.
sell side An institution whose primary interest is in making sales, such as a

broker.
See buy side.
senior trader In a dealing group, has responsibility for his or her team of traders.
Controls positions held by the team as well as dealing and running
own position.
short A position showing an excess of sales over purchases in

anticipation of a fall in prices. A short position can be closed out
through the purchase of an equivalent amount.
See long.
short-term debt For a bond instrument, having maturity up to five years.
softs Soft commodities. Applied to most commodities other than metals

and energy, but chiefly refers to agricultural products such as tea
and wheat and to raised products such as wool and cotton.
spot desk The part of a dealing room where spot currency deals are
performed.
spot rate The exchange rate for a currency for settlement in two working
days. In Reuters terms, the spot rate always has the US dollar as
one of the currencies.
spot trader One who specialises in trading currencies at the spot rate of
exchange.
spread The difference between the bid and ask prices for an instrument.
stock-picking A fund management approach based on research of the

fundamentals of a company or sector, for example interest and
inflation rates, political climate and relative attractions of other
markets.
swap The exchange of one asset for another. Can be either a forward
swap or an interest rate swap.
SWIFT Society for World-wide Interbank Financial Telecommunications. A

credit transfer system between banks. Links some 1500 banks in 68
countries.
tally sheet Delineated pad of paper used by foreign exchange traders to record
their deals as they make them.
technical analysis The study of past market action, taking into account the market
price, volume and open interest, with the aid of charts. Also known
as chart analysis.
Telerate Reuters competitor providing real-time news and financial

information, particularly on US Treasury bonds and bills.
Textline A Reuters historic text service sold via third party and online
database providers.
third party analyst Independent supplier of analytic information, typically to buy side
institutions.
top down A method of analysis that results in a decision to invest in a

particular geographical market sector. The analysis involves
examining performance aggregates of countries and markets.
Also known as quantitative analysis.
two-way price A price consisting of a bid price and an ask price.
yield The percentage return on an investment, usually at an annual rate.
“yours” Said by a trader to show he or she sells currency to the other party.
Bibliography
The following books were used in the writing of Reuters Guide to
the International Financial Markets.
Introductory Books
Clarke, W.M. How the City of London Works (3ed), Waterlow

Publishers, 1991. ISBN 0-08-040867-2.
Coggan, P. The Money Machine: How the City works (2ed),

Penguin, 1989. ISBN 0-14-009147-5.
Gray, B. Beginners’ Guide to Investment, Century Business, 1993.

ISBN 0-7126-6026-7.
Detailed Analysis
Central Bank Survey of Foreign Exchange Market Activity in April

1992, Bank of International Settlements, Monetary and Economic
Department, March 1993.
Khan, H. & Cooper, C.L. Stress in the Dealing Room, Routledge,

London, 1993. ISBN 0-415-07375-8.
Reference Texts
Bannock, G. & Manser, W., Penguin International Dictionary of

Finance (2ed), Penguin, 1995. ISBN 0-14-051279-9.
Reuters, Reuters Glossary of International Financial and Economic

Terms (3ed), Longman Group Ltd, 1994. ISBN 0-582-24871-X.

Reuters Guide To The Financial Markets

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Reuters Guide To The Financial Markets

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Reuters Guide to the

Copyright © 1997, Reuters Ltd, 85 Fleet Street, London EC4P 4AJ

Reuters is a trademark of Reuters Ltd and is registered in more than 26

Bloomberg is a registered trademark of Bloomberg LP. Quotron is a

Document Change Log

Reuters Guide to the 08/1997 1.0 University Relations Migration to an external

Who’s Who in the International Financial Markets 5

Introduction to Financial Markets 13

Version 1.0 i Contents Reuters Guide to the International Financial Markets

Foreign Exchange Traders 33

Fixed Income Traders 49

Version 1.0 ii Contents Reuters Guide to the International Financial Markets

Sales People in the Financial Markets 59

Version 1.0 iv Contents Reuters Guide to the International Financial Markets

Of course, the markets comprise the obvious companies, such as

This Guide is provided for private educational purposes only

To ensure the fastest possible download time from the Internet,

University Relations Department

The document then profiles five customer groups, and provides an

• Foreign Exchange traders

Who’s Who in the

Figure 1 Roles in the International Financial Markets

Historically, markets have been physical places, a trading floor for

Over The Counter or Exchange Traded

The Foreign Exchange (FX) Market

Fixed Income Market

Risk Type Management Strategies

Back Office Support

Foreign Exchange Traders

The Foreign Exchange Trader’s Role

Specialisms Within the Foreign Exchange Market

buy and sell

Figure 0.1 Foreign exchange trader’s external relationships

Chief trader Senior

assistance in completed deal

Figure 0.2 Foreign exchange trader’s relationships with colleagues

Receive Analysts’ Predictions

Trade on the Markets

Complete Administration for the Day

Fixed Income Traders

The Trader’s Role

Specialisation Within Fixed Income

Where are the Bond Markets?

Fixed Income Unknown

Figure 0.1 Fixed income trader’s external relationships

Relationships with Colleagues

assistance in completed deal

Figure 0.2 Fixed income trader’s relationships with colleagues

Attend the morning meeting

Trade on the Markets

Sales People in the

The Salesperson’s Role

Specialisation Within Sales

Commercial Analyst &

Figure 0.1 Salesperson’s relationships with colleagues and customers

Understand Customers’ Requirements

Answer a Customer Enquiry

Call a Customer with an Opportunity

Scenario: A day in the life of a salesperson

Analyst Analyst Economist Economist Secretary

Figure 0.2 Schematic of Mark’s Office

The Analyst’s Role