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Proof that the worst traders on Wall Street work for European banks?

Banks are cutting traders on Wall Street. Deutsche Bank's cuts have been well-documented, but it's not the only one trimming: Bloomberg reports that Nomura is cutting 28 global markets traders in the U.S. too. Securities professionals in New York City might want to watch their backs - or head for the banks with the best traders in the market.

Thanks to the Federal Financial Institutions Examination Council, it's possible to get an idea where the best traders are to be found. The council, which prescribes principles for five different financial regulatory bodies in the U.S. requires banks to publish quarterly reports on their risk exposure and the performance of their trading businesses in America. It was one of these reports that highlighted the trading irregularities at Deutsche Bank's U.S. business,  for example.

The reports illuminate the extent to which traders at different banks had loss-making and profit-making days in the three months to March 2018. The results, which are shown below, clearly reflect the tendency for traders at European banks in America to have a lot more loss-making days than their traders at their U.S. counterparts.

As the chart below shows, the U.S. trading businesses of HSBC, BNP Paribas and UBS all had far more loss-making than profit making days in the first quarter.

By comparison, the profit-making days at both J.P. Morgan and Morgan Stanley far surpassed the loss-making ones, with both U.S. banks making profits on 42 days and losses on just 22.

The information isn't infallible. We don't know, for example, whether the profits that were made on the profit-making days far outweighed the losses. Goldman Sachs' traders made profits on the same number of days as Deutsche Banks' - even though we know that on one of the 27 days that DB traders made a loss, the loss was a huge 1,197% of that day's expected value at risk.

Nonetheless, on balance, U.S. banks' trading divisions look like the best places to be on Wall Street - with J.P. Morgan and Morgan Stanley's the best of the lot. Meanwhile, Deutsche may not be the only bank with a U.S. risk management problem - HSBC and BNP Paribas also had days when their U.S. businesses made losses that exceeded estimated Value at Risk in the first quarter, although at 166% and 108% of expected VaR, the miscalculations weren't nearly as extreme as at Deutsche Bank.

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AUTHORSarah Butcher Global Editor
  • nu
    nucTrader
    28 June 2018

    While the article covers the title concept well, I just wanted to point out a couple points in regards to VAR models in case people are confused. VAR or Value-at-risk models are a measurement of losses that a book of assets/derivatives would be calculated to be the max expected loss for a given percentage of the time. A VAR95 model with a VAR of -10M would mean that the book of assets would be expected to lose no more than 10M$ on 95 percent of its trading days. The unfortunate drawback is that this measurement doesn't take into account how wide the tail of the distribution might be (nonlinear exotic products/structures make this an especially dangerous omission). So a bank could hypothetically be completely correct with its VAR calculation, even in the event of a 12x VAR loss, or the mentioned loss of 166% of VAR (though events like that are rare, and in the case of DB it is rumored to have been offset abroad anyway), provided the book performs better than VAR at least 95 percent of the time. The general justification for still using VAR as a measuring stick for risk is that many believe there is no way to model an 'act of god' asset dislocation, so it is best to measure risk under normal operating conditions and have other contingencies in place to try to hedge/prepare for unknown fat-tail exposure. Also, take a little comfort in the fact that although VAR is still a reported risk metric, most all trading teams/desks that use it as an internal risk measure, also employ significantly better tools in addition to it in order to better measure and understand the risk on their books.

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