Where do Trades Come From?

Martin Walker

The larger the number of people involved, the easier it was for them to delude themselves that what they were doing must be smart.

– Michael Lewis, Liar’s Poker

This chapter will explain why people trade, or more specifically how this helps a financial institution (or, in some cases, just the front office) make money from doing so. Although trading can be a highly complicated business, this chapter will break it down into its key elements. It therefore provides a foundation of most of the subsequent chapters in the book. For readers with a detailed knowledge of one or more trading businesses, it will still be worth reading the chapter to be aware of the broader context of a trading organisation.

UNDERSTANDING TRADING

One of the most intimidating things about trying to understand trading infrastructure is the trading process. Surely all those highly paid people must be doing very complex and intellectually challenging things that are beyond the understanding of mere mortals in IT, other support functions or even the real world? However, while the details of specific trades or trading structures may be complicated and require a great deal of technical knowledge, there is

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