 How Banks Work? Part 8 – Sales and Trading In previous episodes in our mini-series on How Banks Work, we have discussed the role a bank plays in debt and equity issuance facilitation. In this episode, we are looking at the essential role that major investment banks play in creating and sustaining well-functioning markets. Simply, the role of sales and trading teams is to provide institutional investors with the very best trading ideas, strategies, pricing and execution. Firstly, sales people act as an important intermediary between clients and trader. Their role is to generate new client business and deepen relationship with the existing clients by offering excellent levels of service and delivery. Far from being a simple sales role, sales people on the desk need to know both their clients and their bank's trading products intimately and be able to come up with new trading ideas and strategies for clients. Traders fulfill essential market making, liquidity and execution functions to ensure that financial markets work smoothly and efficiently. A large investment bank will structure its sales and trading operations into major asset classes. Fixed income, equities, commodities and currencies. Depending on the size and specialism of the global markets division, specialized sales and trading teams will support various regions and strategies. In addition to asset classes, there are different types of traders. Flow, agency, quantitative and proprietary. A flow trader is the most common type of trader in an investment bank. The role of a flow trader is to provide a market with liquidity and depth, whilst also making a market for a particular security, providing a client with a bid and offer alongside an order volume. Flow traders make money off the spread between bid and offer. The tighter the spread, the more chance of winning business, however a tight spread is less profitable for the trader and the bank. Agency traders, also known as sales traders, execute trades on behalf of their clients. They're not market makers and they often operate in highly liquid markets, for example major currency markets, where there is no need for a market maker. Quantitative or algorithmic traders provide automated rules-based trading strategies sold to clients who want to benefit from a low-fee structured trading product. And finally proprietary trading involves banks using their own account to make certain types of speculative investments. In the wake of the 2008 global financial crisis, the Volcker rule restricted certain trading activities which would cause a conflict of interest with bank clients all present a material risk to wider banking operations. Now it's important to note that banks are still allowed to hold securities as part of their essential market making activities. Banks also hold significant liquidity asset buffers made up of various high quality securities. Therefore the line between flow trading and proprietary trading remains blurred.