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Does anybody know exactly whether banks also trade like traders? Anyone saw or read about it previously and have a firm answer?

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    Who do you think the traders are, if not banks? Almost all forex is interbank trading.
    – AKdemy
    Commented Jan 26, 2023 at 8:21

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Banks have entire desks - dozens of people - devoted to trading all kinds of instruments from Fixed income to commodities and including FX and FX derivatives. I work for a provider who calculates risk metrics for trading floors and used to work for a provider of trading surveillance so have spent the almost the entirety of the last ten years dealing with these guys. At most banks you'll hear them called "prop traders" if they trade with the bank's money (otherwise known as the proprietary or "prop" book). They are called retail traders or just traders if they trade with client money either on an instructed or discretionary basis.

Almost all (well above 90%) of the volume traded each day will have a bank trader on one side. They trade in pretty much the same way as retail traders only with much more money and data behind them. They are also starting to automate the trading so that they can have more time to make macro trading decisions.

Here's a job spec for one such role at Barclays (neither my bank nor a customer of mine) for partial proof is such is needed. https://search.jobs.barclays/trading-at-Barclays

To address some further questions from comments:

so they trade like traders? Pretty much, they have stricter oversight (see below) but they use the same basic models and techniques as retail traders just with a lot more sophistication to the models and access to a lot more capital and security types - they will commonly use FX swaps and cross-currency interest rate swaps to manage risk as well as spot, forwards futures, and options open to retail.

But who are the traders? They have contract with bank? They are employees of the bank, trained by and totally under the control of their employer. Many of them have advanced degrees in mathematical disciplines, especially maths, physics and computer sciences but also some economists.

Do the banks define any threshold? Do they lose money also? The banks have multiple thresholds across the different desks and at the trading department level. They also have dedicated risk and compliance teams who check that their risk-weighted exposure is within limits and sufficient limits. They lose some and win some but generally win more than they lose because they have cashflows, assets, and liabilities in multiple currencies across the bank so they have a lot of currency risk to play with. Remember that if you transfer funds from your EUR account to your GBP account at the same bank they have cross currency assets and liabilities from that transfer. Now multiply that by the number of clients the bank has and their investment banking departments too and you can see how large their FX risk is before the traders trade that away. Their only riskless capital is that in the currency they do their accounts in. They usually win on aggregate by making on the currency trading what they would have lost on their non-trading business and vice versa.

Do you have any source that I can know about it? We don't really do recommendations here and I probably shouldn't anyway but unless you want to do it for a living I can't really recommend any decent books (the one I like isn't even on Amazon any more!).

Professionally I mostly use Structured Products Volume 1 by Satyajit Das.

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  • @ MD-Tech so they trade like traders? But who are the traders? They have contract with bank? Do the banks define any threshold? Do they lose money also? Do you have any source that I can know about it? Commented Jan 27, 2023 at 14:25
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    @AhmadTurani You can imagine that a bank is not trading to gamble like a lot of retail traders do - they are trading to avoid gambling. For example if a bank in the EU has given out a loan in US$ they might want to trade some EUR/USD positions to protect themselves from exchange rate changes. The bank wants the nice safe predictable interest from the loan - they don't want to lose money because of the exchange rate - so they make the exchange rate someone else's problem. Commented Jan 27, 2023 at 19:25
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    There might be a department in the bank that does riskier trades, but it's not usual. Usually, banks want safe profits even if the profits are smaller. Firms that make risky trades are often called "investment banks" and "hedge funds" Commented Jan 27, 2023 at 19:26
  • @AhmadTurani I updated my answer to specifically cover your questions. You're starting to get into asking questions where I'd have to write a book not an answer here to answer though.
    – MD-Tech
    Commented Jan 28, 2023 at 12:51
  • @MD-Tech Thank you very much Commented Jan 29, 2023 at 7:37

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