How the Trading Floor Really Works

Trader Capital Allocation

All of these trading decisions ultimately revolve around the risk limits (or capital) that traders (both market makers and proprietary traders) are given. Another way to think about a risk limit is that it is an amount of money that each trader can lose. If a bank consistently takes a certain amount of risk and thus can lose a certain amount of money, it is required to put capital aside to compensate for that possible loss. Today, after the credit crisis, this is even more important than before. A trading desk is assigned a particular amount of capital to put at risk each year based on what amount of risk was taken the previous year. Simply put, this is a specific amount of money that a trading desk can lose. Although ...