Its simple, they are not all making money from trading. Thus, some are profitable via other financial business models. Last of all, it seems very strange you say you "know a few your guys...working on trading desks" and you go on to say you talk to them about their trading. Now you're wondering if someone can explain to you what is it like in the professional level. Why not just ask the people you already know or become friendly with your broker and ask him/her ? Just remember, do those young guys you know ever ask you to show them your broker statements when you say "I make money" when you're comparing yourself to them with all those fancy equipment, access to order flow, daily market update meetings ? Seriously, professionals are on salary. They have health/dental insurance, payed vacations, payed sick leave whereas you as a retail trader has none unless you're paying out of your own pocket for private insurance or you're just a part-time trader with a real job somewhere else. Its one of the big advantages they have over us retail traders and they can easily move into other departements at their firms for better job opportunities...something us retail traders can not do. Anyways, its just odd that you're comparing what you do to major banks and funds that have a completely different business model than you and they employ thousands of people. wrbtrader
Bank pnls are really a fee for a service of either execution, balance sheet, research, etc. This is true whether it’s commissions, market making, or direct charges. Institutional investors pay this fee in order to conduct their business. It’s no different than paying an insurance broker or your mortgage lawyer when you buy a house. Btw - prop trading isn’t dead. It’s just hidden. The prop desks that you see spun out were not where the risk was taken. It was embedded in the customer flow.
GS, JP, CS, MS front run their clients orders that are emailed or phoned in. Their smallest clients have at least $3OM & some are large corporations. They also prey on intra-day traders, they are very good at what they do.
That’s how Bank Trading Desks make money - they quote customers and counter parties bids to buy and offers to sell specific securities. These securities are almost always Over The Counter Derivatives like Interest Rate Swaps. And Swaps can be “plain vanilla” or quite exotic in nature. Bank desks maintain software models that help them accurately price a derivative quote and to hedge their delta exposure and maintain their position inventory. Many exchange cleared products are not sufficient for the specialized requirements that a Corporate Treasurer or Risk Manager is seeking. And the big IB’s fill that niche. Investment Bank trading desk Managers are NOT going to allow some punk kid fresh out of Wharton to wing around 2000 lots in ES. That’s NOT what they do. They buy bids, sell offers, and collect the bid-ask spread for OTC products. So if you need a market on a 36 month floating rate Receiver Swaption you call GS, JPM, or MS. They’ll quote you. But don’t for one second think that they’re trading just like you only bigger. Another ball game completely.
Yes and no. Most of the OTC products that an Investment Bank desk will make a market in for customers are NOT a liquid product that has collectible inventory that you can consolidate and front run. It’s a real challenge just to properly quote and hedge some of that stuff. But to your point - I’m sure that if eight different Fortune 50 Corporate Treasurers have bought 2 year floating rate volatility from a desk the same day then maybe that Bank Desk Manager steps out and buys a couple thousand Sept ‘21 straddles - sure why not. IMO the “front running” and flipping and games you’re seeing in regulated electronic exchanges are prop firm Algos - not IB’s. There’s a lot more $$$ in collecting 2 basis points on huge size fifty times per day than monkeying around with 500 or thousand lots in ES for a tic.
If you want to trade size in many payoffs - the biggest market can be upstairs. SPX options, volatility products and size trades in single name options are frequently done upstairs. As others have mentioned these are facilitation trades and still allowed under the Volcker Rule. You pay up for accessing this liquidity. With the exception of GTH Spy very little retail.