How do Equity Trading Desks Think?

Trading can seem like a daunting world filled with complex jargon and strategies. However, understanding the fundamental theories behind trading can empower new traders to navigate this landscape with confidence. This blog post will break down the essential concepts of trading theory and how professional traders think, providing you with a solid foundation to build upon as you embark on your trading journey.

A stock market chart illustrating price movements over time.

Client Flow is King

• Clients include...

  • Hedge funds

  • Asset managers

  • Pension funds

• If a hedge fund wants $150M of stock

  1. Fill immediately

  2. Assess Risk

  3. Decide

  - Hold? Hedge? Offload?

Inventory Management

• If the desk is...

  1. Net long inventory

  - Sensitive to downside shocks

  - May quote wider on bids

  - May encourage selling flow

  2. Net short inventory

  - Bids more aggressively

  - Sensitive to upside shocks

• Inventory dictates behavior!!!

Information Edge

• You can't front run clients -> ILLEGAL!!!

• Instead you observe

  - Persistent buying patterns

  - Sector rotation

  - Hedge fund positioning

  - Volatility skew shifts

• Flow indicates where pressure is building!!!