At least it's easy to see how they could have "lost" in May: short US Dollar ....or short bonds ...or short equities. Pretty simple stuff. Directional mistakes always costly.
Michael- Risk capital attempts to reflect risk that occurs, based upon some arbitrary mark to mkt concepts. The ability of traders during the course of a day to exceed limits, capital requirements etc is well-documented. Risk capital also does not reflect the risk of dealing with lower credit quality counterparties versus higher quality. Thats what should scare the hell out of senior managers but doesnt - keep in mind JPM has a history of losses in these products, eg, a few years ago their mortgage head was creating his own mark to mkt number which resulted in a $50MM loss, but he did get fired. Its also curious to note when a spec has a bad trade and gets blown out, its his fault, when a house trader does it, its called a bad market etc. I dont have any sympathy for JPM traders and dont believe they have any superior trading skills, only more house money to play with, and they get to run customer orders to make money. I'd bet there are 20-30 lot traders here who routinely make more each year than desk traders who run 10,000 lot positions.
good points, definitely ANY senior mgmt of any trading group, that thinks there is a risk limit (based on end of day) of X, but intraday their trader actually takes risk of a multiple of X (as long as it is back to X by the close) is clearly not seeing the whole picture and headed for trouble
"I'd bet there are 20-30 lot traders here who routinely make more each year than desk traders who run 10,000 lot positions." What are the returns that the big house traders are able to generate for their firms? Also, does their payout depend on how much they exceeded the S&P500 or other indicies or plain simple percentage of returns produced.
No, but you are forced to allocate a credit haircut for every counterparty trade. A few desks are using this to their advantage and are trading their swaps book as a CDS book. I don't know much about equity world, in the rates world you can't live without actually taking a market view. Practially all clients are trying to get their orders at the mid, and even then you'd see a lot of trades done away. Anyone who tries to live purely on the flow these days is not making any money, or even loosing some on managing the positions. No risk, no reward. I see a lot of flows from JPM Prop on daily basis and have a clue on what they are trying to do, it's rather tricky relative value stuff. They do have special skills, such as vast experience and good brains. In general, if we are talking about derivatives world, the people who are trading these products are smarter and better educated then the general population. They also make a fair bit of money. No reason denying it. mezz vs equity tranches? lot's of people got carted this year on that one
ok i think this discussion is getting a bit muddled with respect to the profitability of prop traders and market making desks... there is a very distinct difference between their contributions and risk parameters. prop traders are allocated a very specific amount of capital with which to wager in the markets. they have immutable daily, monthly and yearl drawdown limits and the overall size oftheir positions at any given time is imited by their allocated capital... generally, the more succesful a prop desk's track record, the higher the allocated capital. now jp chase's prop desk has had fantastic returns over the years so their allocated balance sheet has grown to mind-boggling proportions. so given an extrodinary amount of capital, large absolute rerturns such as 800mm USD may not be at all that impressive. consider the disaster that was Long Term Capital Management - the size of theit capital base including the leverage that they coerced made their returns seem huge on an absolute basis but their results were in actuality positively laughable when scaled against their carry base. It is a fact that givien LTCMs leverage, they would have done significantly better if they had taken no bets on swap spreads or merger arbitrage or whatever, and had simply put all their capital into relatively safe fannie mae discount notes and gone to lunch.... fnma debentures have a nominal yield pickup to government repo rates, and the mutiplier of their ignorant an irresponsible leverage levels would have given them better returns then their oh-so-clever "carry" trades. sorry for the wordiness but i hope this helps
you're welcome - if you are interested in more details of the LTCM blowup there is a wonderful book called "When Genius Failed".... i think the author's last name is Lowenstein.... it is a fantastic read....
No. Repeatable edge means where the profits come from. The trading technique or method that can be relied upon to produce positive returns. Arbitrage opportunities (buy at 6.00 in one market center, immediately sell the same thing at 6.10 in another market), is an example of repeatable edge. Even if it's not that simple, I believe some of the desks have many quarters in a row of profitability, indicating consistency in profitability. What edge are they exploiting to produce these consistent results?