How it works (worked) on the Trading Floor

In Inventing Money, Nicholas Dunbar takes us on a tour of how a hedge-fund trading operation works (or worked, at Long Term Capital Management, before it cratered in 1998).

In a car factory, we separate the white-collar designers and managers who conceive and plan new cars from the blue-collar workers who actually build them.  It is the same in finance.  Suppose Greg Hawkins is at the apex of a pyramid.  Who is beneath him?

Directly under Hawkins are those senior white-collar types who share his PhD-level education in finance, and perhaps have a trading background too, but are younger and less experienced.  At LTCM, they were called strategists, and during LTCM's life, several of them would be promoted to principals. We can think of them as apprentice money-machine designers.

Under them, we find a junior white-collar level of traders, risk managers .... and software designers. The traders are the men who execute the trades; constantly on the ;phone, they wear headsets and talk in the slang of the Street.  Greg Hawkins and his strategists tell them what to do each day .... Hawkins will not tell the traders everything about the money machine he has designed--particularly its size or timing. At this level, a lot of people change jobs regularly.  It wouldn't do to have them take secrets to a rival firm.  However, they do need a good understanding of the components of money machines.   Indeed, many of these traders have PhDs, although often the subject is not finance, but physics or mathematics. ...

Below the junior trader level is the key white-collar/blue-collar divide.  At the top of the blue-collar pecking order are the pit traders.  In our analogy, they are like skilled machinists on a car production line. ... The pit trader doesn't ask questions, and he probably doesn't even have a college degree, let alone a PhD.  Instead of a boiler suit, he wears a stripy blazer with his firm's logo on it. ...

Below the pit trader in the hierarchy--who has his own team working for him--is a much larger layer of people who know virtually nothing about money machines, although their role is no less important. They are the workers who do the most repetitive production line jobs.

Known variously as clearing, settlement or operations, the unglamorous status of this bottom layer is summed up in an expression often used, "the back office."

 Comment:  Inevitably, all this has changed in the 13 years since but I wonder exactly how?  Are the math PhDs all in the back room designing algorithms (shredding algorighms?) that will execute themselves?   And do they still wear blazers?