How the Trading Floor Really Works

Conclusion

Different products and different markets create different complexities for a bank. One broad distinction we can make is between cash products and derivative products. The key differences to highlight are counterparty credit risk and operational risk. While both products have these risks, they are minimal in cash products and monumental in derivative products.

Another distinction we can make is between liquid and illiquid products. The more liquid the product, the less the trader struggles to price and hedge his position. The less liquid, the more the trader is relying upon a model to help him determine what the right price and hedge might be. This is the same across cash and derivative products. The one distinction to make is that ...