Trading is a lot like waging war. Traders try to protect their profits while inflicting harm on their competitors and working with their allies (the salespeople) to win major objectives (the client order). Like soldiers,
The Traders traders and salespeople also have terse conversations that are laced with jargon. If you re unfamiliar with this lingo, then you probably won t have any clue what s going on when watching a trading desk in action. For this reason, new analysts and associates often struggle for weeks just to get a clue. What follows is a description of some of the most widely used jargon that you ll hear on the trading desk. This will give you a jumpstart on your first job in the industry.
When a trader is going long, this means that he s buying shares of stock and makes money when the stock price rises. If a trader is buying a lot of stock, he may say, I m going long and backing up the truck. This means the trader is buying a lot of stock because its at a level that he thinks is favorable, and he d like to buy as much stock as possible.
When a trader goes short, this means he s selling stock without actually owning it. He ll eventually cover the position (buy the stock), at which time he will say that he s flat.
How do you stand?
Salespeople will ask traders how they stand throughout a customer trade. For example, if the salesperson and trader have taken a customer out of 1 million shares of stock and complete the order, the salesperson may then ask the trader How do you stand? to get the trader s position. It s implicit that the salesperson will not pass this information along to the seller. Normally this is an unnecessary question, since the trader s position can be displayed on the internal position monitors, but some desks disable this function for salespeople, to prevent them from playing stock market with the trader s positions. (A salesperson does not know the nuances of the market for a stock. If, for example, he knows that the trader is long a stock, he may believe he is doing the trader a favor by selling it, without knowing that there is a reason the trader is keeping the inventory.) To be sure that the salesperson is not misusing this information by passing it along to the customer, the salesperson may add something like, Just me asking.
The trader with no position in the stock is flat. Being flat is the best place to be at the end of the day. Sometimes, a suspicious salesperson thinks a trader has gone ahead and sold stock ahead of a customer and will ask the trader how he stands. (Getting stock sold or bought ahead of you means someone beats you to the trade. In this example, a salesperson may suspect that the trader sold stock through an
Sales and Trading Basics electronic network before allowing a client to buy it through the salesperson.) The most common answer to this question is I m flat, which communicates that the trader hasn t done anything unsavory.
This is always a source of confusion for neophytes. The bid is the price on the left and the ask is the price on the right. The bid is the price that the dealer is willing to buy at and the offer is the price that he s willing to sell at. To hit the bid means you re going to sell to the dealer at his indicated bid price. If the bid size is less than your total order size, then after the displayed quantity is filled, the bid will go down.
To take the offer or to lift the offer means you re going to buy from the dealer at his indicated offering price. If your order size exceeds the displayed offering size, then after the displayed quantity is executed, the balance of your order will cause the offering price to increase. Don t confuse the bid and the ask prices. If someone tells you to hit the stock (sell the stock remember, you ll end up taking the stock price down) and you go out and bid every dealer for stock, you re going to have a problem. To say that I m going to take the bid or I m going to hit the offer is an improper use of trading terminology and could earn you several undesirable nicknames.
Traders like to be tough guys. This mafia-inspired lingo refers to a situation where another trader bids you (offers to buy) some quantity of shares and our offering dealer sells him the entire volume of what he s bidding for (offering to buy). Normally dealers won t sell more than their display size, but if the offering dealer happens to be making a stand in the stock or is working a customer order, then he s going to stand on the offering and plug the bidding dealer (e.g., He bid me for 10,000 shares and I plugged him ).
Fading another dealer means that the bidding dealer bought all the stock that he got hit with (bought). If a dealer has stock for sale or is trying to get the price of the stock down, he may have to go out on the street and hit dealers with a good slug of stock. Normally, if you hit a dealer with enough stock (offer to sell a bunch of stock), the bidding dealer will buy the minimum quantity and adjust his bid price lower (also known as getting out of the way. ) If instead, the bidding dealer buys all the stock that was thrown at him, he is standing firm on the bid and is said to have faded the other guy.
Sales and Trading Basics
Dealers are continuously posting and updating their quotes. If a dealer fails to provide a trade at his bid or offer, then he has backed away from his quote. Backing away is essentially false advertising in trading. If a dealer shows a market and fails to honor the market, then he has basically sold the rest of the Street a false bill of goods. Often in fast-moving markets, dealers will accuse each other of backing away, when in fact a customer or competitor was able to beat the dealer to the bid or offer. In this case the dealer being accused of backing away may indicate customer ahead or competitor ahead, in order to explain why he is no longer honoring the market he advertised.
When stocks are surging or getting crushed, it s often because a dealer is moving the stock. If a salesperson is working an order with a trader, the salesperson will ask to know why the stock price is moving so much. The trader may shrug his shoulders and say someone s hitting the stock. The salesperson will then ask the trader to give him a name. This is necessary information for the salesperson to report back to the customer. If the stock gets hit and his trader can t make any sales, then at the very least the salesperson wants to be able to tell him who s crushing the stock.
Sometimes traders are working orders for which they know that the customer is going to expect to have bought or sold some stock, even if the stock price is in motion. If the trader gets hit by another dealer (gets an offer to buy from a dealer), this is like a tripwire. The trader will bark the selling dealer s name to the salesperson and then growl I m out there with him, meaning that the trader will also take a whack at the stock (advertise that he wants to sell the stock). Even though he doesn t sell anything, at least he ll be able to get a lower price on the stock he s going to have to buy from the customer.
That was a fast call (or bad call or pickoff call)
A fast call is the derisive term for an account that picks off the firm s trader on a regular basis. Generally, if the account calls up when the price is moving up (or down) quickly and tries to buy (or sell) a nuisance of a quantity (i.e., five or ten thousand shares), the trader calls the account a fast call. Salespeople who have too many fast call accounts tend to have poor working relationships with the firm s traders. A fast call is never a good call.
This knucklehead is locking the market.
Market makers are responsible for maintaining orderly markets. Part of this responsibility is to maintain a quote that does not lock the market. The bid price is the price at which the dealer is willing to buy stock, and the selling price is the price at which the dealer is willing to sell stock. Dealers are in the business of making money, so it should always be the case that the bid price is below the offering price. A locked market looks like this:
If the bid price matches the ask price, the market is locked and theoretically a buyer or seller could transact without paying the bid-ask spread (the implied cost of trading which equals the offering price minus the bid price). Dealers are always playing games with each other, but locking or crossing the market is unacceptable conduct, even for traders.
Crossing the market is when the bid price actually exceeds the ask price. Getting back to our ORCL example, a crossed market would look something like this:
Theoretically, in this situation, a customer could hit the 18 cent bid and take the 12 cent offer and make a riskless 6 cent profit per share. Crossing the market is normally done if the person on the bid or offer does not respond to repeated bids or offers the trader crosses the market to get the non-responsive dealer s attention. If no warning shots have been fired, so to speak, then crossing the market is highly unacceptable conduct. Traders can be fined for crossing or locking the market.
Traders are always playing games in the market to confuse competitors and to try and gain access to customer orders. The way to attract business is to bid or offer stock aggressively. Pizza restaurants offer buy one get one free offers to get new patrons in the door. Similarly, traders can bid and offer insane quantities of stock to hook into a customer order. Typically, in response to a trader s aggressive market, a client will call and ask what s going on. The client may be trying to sell stock and may have been doing so at a competing firm. At this point, the client will want to know if the trader is real or not. If the trader says that he is real, it means that he s representing a customer bid. If the trader is not real (or says, it s just me ), then the trader
Sales and Trading Basics is bidding around with the firm s capital, and does not yet have the opposite side of the trade that the seller is looking for. Sellers will normally not be excited to hit a trader s bid, because once the trader buys that first piece of stock everyone sees a big chunk of stock on the bid and it s not too long before its a panic for the exit. A natural buyer, on the other hand, presents an opportunity for the seller to unload his position with minimal disruption to the stock price. There is also the possibility that both the buyer and the seller will expand their order sizes.
Orders that institutional customers leave for the trader to work over the course of the day are called working orders. If the client is trying to sell 100,000 shares of a stock that trades 7,000 shares a day, the normal protocol calls for the trader to execute a small portion of the order and the client will then leave the balance of the order on the desk for the trader to work. It s important to note that working orders have to be earned. If the seller is trying to sell 1 million shares, you as the trader can t just hit all the bids and say, Thanks, I ll call you back. The seller sees the bids disappearing and it s very obvious to everyone what you re doing. You have to make a bid on a piece of the order and if that bid is hit, then you earn the right to work the order. More nettlesome clients will try and micromanage the orders. Working orders can be market orders (where the client tells the dealer to simply execute the orders at market prices), but more often than not they re market orders with strict limits. For example, the seller may have the following instructions, Make sales in here, but I don t want to lose stock below $25. Other times the seller may say, I need to make sales, I m in your hands. The second set of instructions appears to be giving more freedom for the trader to operate, but in fact its a very mixed blessing. If the client says that he s in your hands, then the nettlesome client can be more inclined to complain about every print (execution) that you provide. On the other hand, if the seller gives you an ultimate low limit and stock doesn t trade, then you can turn the limit back on the seller s head and say that a limited quantity of stock traded above $25. Of course, the tape of the market activity that day better tell the same story.
Traders giving a report back to the salesperson will say something like,
You sold 25,000 shares at $11.12, and I m working the balance in here.
I m crossing 500,000 shares 24.02 24.08.
This is the moment every trader lives for. He has a customer buyer who wants to buy the stock at 24.08 and a customer seller who wants to sell the stock at 24.02, so the trader collects 6 cents on 500,000 shares (and the salesperson gets his sales credits) without committing a penny of the firm s capital. Often, if the trader is working a seller out of his last piece of stock, then buyers will appear out of the woodwork. Nobody wants to step in front of a freight train, but if the seller has been selling persistently and is completing his order with the last trade, then the trader will often want to keep some shares in his own inventory, in anticipation of the stock price increasing ( doing better ) after the seller stops leaning on the stock.
Can I get in on that print?
With large block trades, the trader needs to make sure that he doesn t step on anyone s toes. Before executing the trade, the trader will tell the salespeople what his situation is, and will give them the courtesy of making calls to their customers as a heads up. If the trader is cleaning up the seller (buying the seller s last portions of stock), then other buyers will call up frantically trying to get involved (i.e., trying to get in on that print. ) If the trader is cleaning up a buyer, then other sellers will want to get involved. This is Murphy s law of trading. The worst situation for the trader is if he takes a seller out of his last piece of stock and customers are demanding more stock than he has for sale, forcing the trader to go short a stock that everyone knows has no place to go but up.
The opposite of winning a customer trade is to have the bonds trade away at another dealer. Often, dealers will be asked to bid competitively against other dealers. The buy-side seller will ask for three bids in competition, and will sell to the highest bidder. Generally speaking, traders don t like this kind of treatment from their customers, and occasionally (or frequently), the trader will bid to miss. This means the trader goes along with the game and furnishes a seemingly respectable bid which he knows the seller will not hit.
It used to be that stocks traded in eigths, sixteenths and even thirty-seconds of a dollar. If there was a sizeable bid at 1/8ths, a trader seeking to buy the stock immediately could step in front of this bid by paying 3/16ths or V. With the decimalization of the market, the minimum increase or decrease in a bid or offer is now one penny. If a large bid is indicated at 12 cents, anxious traders can now place a 13 cent bid (rather than an 18 cent or 25 cent bid) which will have higher
Sales and Trading Basics order priority than the 12 cent bid. The trader trying to buy stock at 12 cents who loses out to a dealer buying at 13 cents will say I just got pennied. If this happens all day long, he ll probably say something like, I m getting pennied to death. Trading for pennies means that the small investors can get better prices for his trade, but the bad news is that this system is also subject to manipulation by specialists who can step ahead of a displayed customer order by improving on the existing bid or offer by one penny.
The practice of a specialist stepping ahead of the customer and taking away the customer s trade is called front-running. This practice is illegal; the current investigation into specialist firm trading activities centers on this alleged practice.
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