The relationship between sales and trading desks has always been interesting. Many years ago, I arranged a friendly cricket match between Midland Bank’s traders and its FX sales staff. The match was always likely to be competitive, but I was amazed how quickly it moved from affable rivalry to outright war.
Cricket may look a soft and genteel sport to those unfamiliar with it, but a hard leather ball can do a lot of damage when it comes directly at your head at speed. After several bouncers and a few beamers were delivered, the traders won the game by several wickets and a few retired hurts. Our view was that whacking a few sales guys would not affect the business in any way – in fact, many of us took the view that braining some of them could only be a good thing by knocking some sense into them. Needless to say, the powers that were didn’t share our outlook, and we were immediately banned from similar intra-staff matches that required physical contact.
Midland introduced the system of sales credits in the late 1980s. From day one, most of us realised there was an obvious flaw in the system. Some of the sales guys would try and clinch a deal regardless of whether or not the bank had any hope of making money from it. I remember well the time on a Friday afternoon when I was forced to show an offer below the market bid in what was then a very big amount for the World Bank, with the salesman adding: “We have to get this business.” After I’d bought the quarter of a yard of dollars back for an inevitable loss, I called the salesman back. “Do you want a sales credit for that?” I asked sarcastically.
Of course, the reality is that the sales staff was very much dependant on their traders, while many a dealer has been made to look better than they are by having good flow. But from what I hear, nothing has changed. Silly deals are still done for the sake of it and most banks still don’t know how to quantify the value a sales force brings in, despite the talk of flow analysis.
Generally, it seems that 2007 has been a good year for FX players. Sure, there have been a few wobbles – and funnily enough most of the talk surrounds losses in exotic option books. In 2006, there was a lot of buzz about two top 10 banks constantly being matched up by brokers, who knew which options they quoted differently. I’m told that certain hedge funds still take advantage of some banks’ inability to price particular options.
FX will inevitably get caught up in the cyclical culling we’re starting to see as a result of the credit debacle. The current woes being experienced by certain firms seem more pronounced in those institutions where the sales guys had the upper hand, such as Merrill Lynch. Good traders generally have an intuitive sense of how to manage risk. Of course, this doesn’t necessary mean they’ll make good business heads, and often they are not so good at the necessary schmoozing.
In the short term, banks will have hiring freezes; after a period of retrenchment, they will move on; in five years’ time we’ll all be talking about whatever’s caused the next implosion. If I could only work out which market it will be in, I could get in quick, make some money, and leave it to someone else to clear up the mess. If only…
