The Different Trading Desks of an Investment Bank

A sector in an investment bank is referred to as a trading desk. Depending on the investment bank, trading desks are likely to be split up among sectors differently. The four main sectors are foreign exchange or forex, fixed income, equities and commodities. Each of these sectors can be further subdivided. For instance, fixed income is a very broad category and can deal with anything from ultra-safe U.S. Treasurys to ultra-risky, low-grade company bonds also known as junk bonds. Larger investment banks may subdivide their trading desks to specialize in narrower categories within these main sectors.

Nearly every large investment bank has some form of forex trading desk. The forex market is the largest in the world, dwarfing equities and fixed income. The Bank for International Settlements (BIS) estimates forex trading at an average of $5.3 trillion a day. Most of this trading is done by institutional investors such as investment banks. Traders are drawn to forex trading because it is highly liquid, meaning they can take on large positions and get in and out of trading positions with ease. Forex contracts are quoted in currency pairs. For example, traders take bets on whether the dollar will rise or fall in relation to the yen (USD/JPY). The U.S. dollar is the most heavily traded currency, taking up about 85% of forex trading volume; next is the euro and then the Japanese yen. Traders on a forex trading desk usually deal in the spot exchange rate of a foreign exchange contract.

Fixed income generally refers to anything that has an income stream, from government bonds, such as U.S. Treasurys, to corporate bonds. Credit default swaps (CDS) are derivatives that insure against default by the issuer of corporate bonds or sovereign debt and can be traded on fixed-income trading desks. Sometimes an investment bank subdivides its fixed-income trading desks so the derivatives desk dealing in CDS is different from the trading desk dealing in the less-risky U.S. Treasury bonds, or the desk dealing in the riskier corporate low-grade bonds also known as junk bonds is separate from the desk dealing in higher-grade corporate bonds. Debt issued by developed countries may also be traded on a desk that is different from the desk that deals in the sovereign debt of developing countries.

The equity trading desk of an investment bank can cover anything from equity sales or trading to equity derivatives trading and exotic options trading. Sell-side traders on equity trading desks use information from research analysts' reports to try to generate sales ideas among their clients. The trading desk gets a commission from trades placed through it. Equity sales desk traders execute trade orders for clients. Often, the trading desk is divided into those that execute trades for institutional clients and those that institute trades for hedge fund clients.

Commodities can include anything from hard commodities such as crude oil, gold and silver to soft commodities that include agricultural products such as cocoa, coffee, soybean, rice, wheat and corn. The main difference between the two is that soft commodities have short shelf lives and hard commodities have much longer shelf lives. Investment bank commodities trading desks can be split into separate desks for hard and soft commodities, but depending on the amount of trading done by the bank, they could be further split with some banks having trading desks dedicated to a particular commodity such as crude oil.

Trading can be done by way of futures trading or spot trading. Spot trading is done when the price and also delivery of the commodity take place shortly after the contract is completed. With futures trading, the price is agreed upon immediately but delivery is for a certain time in the future. Trades are done on behalf of hedgers or speculators. Hedgers are usually large commercial concerns that want to hedge the price of a commodity they use in their businesses. For example, an airline might want to hedge the price of oil for future use, or a farmer might want to hedge the price he gets for his wheat that will be available for delivery months in the future.