The Story Of A Capital Markets Journey

How It Begins


Once upon a time, in a suburb of Newgen City, there lived a young woman named Jane. She's a hardworking and ambitious person that's always careful with her finances. 


She manages her finances with apps on her phone and moves money around as needed (eg- AppleCard for transactions and bills, CashApp for payments, Robinhood for investments, Fidelity for retirement funds). After months of diligent budgeting, Jane found extra money in her account after paying all her expenses (subscriptions, rent, utilities, car payment, friends, daily costs, et al). 


Determined to make her money work for her, Jane began to explore the world of investing. She knew that she needed to find the right balance between her social values and her financial goals. Jane wanted to invest in companies that aligned with her ethical beliefs, such as sustainability and social responsibility.


Jane started her journey on her own by investing in what she was getting from financial news about Bitcoin and the potential of cryptocurrencies. She wanted some (as they say) just in case. She set up a recurring investment in her Robinhood account, buying a small amount of Bitcoin every Tuesday. As she became more comfortable with investing, Jane also explored Exchange-Traded Funds (ETFs) and common stocks in companies that shared her values.


As her portfolio value grew, Jane decided to start a portfolio strategy with a single initial simple rule she could use to manage her investments. She would sell a portion of her investments when the value had a 15% profit, using the profits to cover the initial cost of the investment (Rule #1). Once covered, the remaining investment would have a cost of zero- essentially "free," and any future profits would be pure gains.


Jane's strategy proved to be successful, and over time, she amassed substantial savings- an individual capital pool. She was not alone in her success, as many of her friends had also started investing and were seeing similar results. The group of friends decided to pool their resources and hire a dedicated portfolio manager to help them navigate the complexities of the financial world. Jane searched on LinkedIn and found Jack, a successful activist investment portfolio manager with several clients that have a similar thought process to Jane's and that her friends were also connected to.


Together Jack and Jane's people formed an investment group with a defined vision; A strategy (Rule #2) to invest in companies that shared their social values while (Rule #3) generating a predictable, profitable return. The group decided their business classification is a private equity firm (eg- private equity, hedge fund, or asset manager). The portfolio manager presented to Jane's group proposals for short-term and long-term investment portfolios as business objectives.


The portfolio manager may also seek out new investment opportunities to present to the group and to fine-tune the percentage of portfolio holdings that focus on the group's specific interests (fiduciary responsibility). The portfolio manager would need to engineer an investment strategy that adapts to the group's changing interests and needs. The portfolio manager has to consider each participant's cash interests, which include occasional cash deposits and potentially unscheduled cash withdrawals. 


Jane and her friends were determined to find a software platform that could support their unique approach to investing. They knew that a system that did not have an exact operational or functional match for their group might be more expensive and less reliable in the long run. They searched for a system that could accommodate their near-term daily processes and help them achieve their daily operational and reporting goals.


As the fund grew, the investors modified their near-term goals and used data mining functions to do predictive price analysis. The portfolio management system they used had a limited warehouse of market data, so they had to be creative in their approach to performance attribution and predictive trading models. Contracting with third-party data providers helps to round out the capabilities of most portfolio management systems as most have the software tools but lack the data the customer is accustomed to using.


Jane and her friends along with Jack's help continue working on their investment strategy that have both their social values and financial goals in focus. Jane continues to navigate the complex world of investing to become a savvy yet socially conscious investor. Jane's story about her investing journey could serve as a model and inspiration for others who believe that it is possible to do well while also doing good.


Consulting subjects:

A Day In The Life 

Of A Portfolio Manager

The Decision Maker

Jill enjoys getting deep into the weeds of capital growth and that led her to a career as a portfolio manager. It wasn't just the reward in knowing she could generate profit from a capital resource, both physical (eg- currency) and digital (eg- Bitcoin), but the likelihood that there could be a larger humane footprint left behind from individual investment decisions. Jill knows that her customers, the investors, are only (mostly) interested in bottom-line profit but they may balance an expected rate of return (eg- 4% interest vs. 4.5%) against a societal or environmental benefit (eg- wind power manufacturers vs. gas vehicle producers) that is provided by the company being invested in.

An example of this thought process comes with ESG (Environmental, Social, Governance) directives. Many investments, such as battery production, may have near-term social benefits. However, long-term maintainance of the source of materials needed to produce the efficiency could be more detrimental or problematic to obtain than the actiual benefits received.

Jill explores where her clients funds could best be deployed and executes a wide range of tasks and responsibilities to manage the investment strategy and report to investors on progress. A portfolio management system is used for the functions Jill needs to organize the existing portfolio. The portfolio management system is also used as a shadow accounting system for the fund administrators books and records so that various reports can be generated from the system to evaluate risk and exposure.

From the early morning hours, Jill is busy catching up on overnight news and global market movements and she reviews pre-market trading activity and analyst reports, looking for trends and potential trading opportunities.

Jill also works with Jim, a research analyst, who does risk exploration and discovery on the existing portfolio. Jim is working to understand the effects of global events on the companies where investors have placed their funds (eg- there may be a negative long-term impact on a battery company that has a natural resource supplier in a war-torn region.).

Jim also occasionally performs due diligence analysis on potential investments for portfolio compliance. Portfolio compliance implies that the rules set forth by the investors are adhered to (eg- don't invest more than 15% of funds to interests in Africa.). Jill has morning meetings with Jim (the "investment team") where they discuss overnight developments, review current portfolio positions, and debate potential trades. A significant portion of their day is dedicated to research, as they both read company reports, industry analyses, and economic data to deepen their understanding of potential investments. 

Jill may also attend meetings with company executives and research analysts while Jim meets with fund sales representatives. These meetings are to gain insights into companies of interest and learn about alternative opportunities

Strategic portfolio goals are affected by shifting geopolitical situations and will likely affect the expected value of existing individual positions or the need to acquire a new holding. The amount of capital to be committed is calculated in real-time and position adjustments are organized for the portfolio manager to act on.

Tony is the execution trader responsible for the workflow required to spend the capital on an investment directed by the portfolio manager. Jill, the portfolio manager creates orders in an order management system that are sent electronically to Tony who receives the orders in an execution managment system. Tony's job is to monitor market trends and seek out opportunities to acquire or liquidate positions as needed or expected by the portfolio manager.

Client communication is also a crucial aspect of the portfolio managers job. The portfolio manager discusses with investors, either through personal meetings or monthly reports, the current state of the portfolio strategy with anticipated portfolio changes in a clear and transparent way.

Throughout the day, the portfolio manager analyzes overall portfolio performance, looking for areas of potential risk or optimization and may develop action plans in response to market shifts.

Jill spends her evening hours preparing for the next day by reviewing the day's trades and market close analysis. She continues to monitor trading after-hours for any major price movements and create to-do lists and prioritize tasks for the coming day.

A day in the life of a portfolio manager is a blend of analysis, decision-making, client communication, and market monitoring. It requires a strong understanding of the financial markets, excellent communication skills, and a commitment to staying up-to-date with the latest developments in the industry.


Consulting subjects:

A Day In The Life 

Of An Execution Trader

Facilitation

Tony, a trader on Goldman's outsourced trading desk, is a high-strung individual who thrives on the stress of handling numerous customer orders in volatile global markets.

A typical day:

Pre-Market Preparation: Before the market opens, Tony is already up and analyzing market-moving news, overnight events, and pre-market trading activity. He pays close attention to economic data releases, company announcements, and global events that could impact market sentiment.

Market Open: Executing the Trades- Once the market opens, Tony's focus shifts to executing trades. He maintains constant communication with brokers to negotiate prices, understand block order availability, and assess market conditions. Tony also updates the portfolio manager on trade execution progress and any challenges.

Throughout the Day: Trade Management and Problem Solving- Throughout the day, Tony keeps a close eye on market conditions, adjusting his strategies as needed to protect the best interests of the portfolio manager. He also identifies potential short-term market dislocations or arbitrage opportunities that could be exploited within the firm's risk appetite.

Tony speaks with Jill, the portfolio manager, several times a day whether there are live orders or not. 

The conversation could be about trading opportunities such as when ample trading quantity becomes available (e.g., from a broker advertised IOI) of a thinly-traded stock which Tony knows Jill had an interest in. Tony may also discuss with Jill seemingly unrelated news of geopolitical events that could affect the portfolio. For example, supply chain stories of mining cutbacks in lithium affecting electric vehicle manufacturers.

Periodically, they'll discuss asset trends such as how a specific investment holding is becoming overweight in its share of the portfolio and the cost/benefit of liquidating the holding or rebalancing the portfolio.

Asset managers with less impactful orders can have an arrangement where the portfolio manager routes an order to a prime broker's trading desk. Or as in Jane's case, use an execution partner such as Tony that has previously performed well.

Larger ("size") orders have a greater potential impact due to information leakage on market pricing and as such commands more of the trader's attention. The pressure on the price comes from the market being unsure of why a large quantity may be available. Information leakage occurs when a large order (large quantity to buy or sell by a single trader) is revealed through institutional merchandising systems (e.g., Bloomberg IOI, Directed FIX IOI) to other traders who take actions to prevent adverse trading situations. Faster completion time reduces the initial impact. Simple laws of supply and demand take hold.

About Traders

A trader's stress is a function of how much time is available to digest market events and to decide on an order attack profile relative to the amount of warning given that the order is coming and the time allotted for completion. 

It's also likely that the greater the value of the assets, the more intense the stress level associated with managing those assets. Traders can choose their stress level by working with a firm that has a desired value of assets under management (AUM)

Tony wanted to work with many portfolio managers in different markets, so he opted for an outsourced trading desk that has customers who are portfolio management firms. A larger asset manager has a similar organization. A buy-side firm could otherwise maintain a trading desk and employ execution traders to complete portfolio manager orders if there are a large number of position adjustments on a regular basis or portfolio rebalancing is complicated by compliance rules. Maintaining a trading desk has costs associated with operations that may warrant using an external desk.

Key Traits of a Successful Portfolio Execution Trader:

Consulting subjects:

Consulting Subjects

About Chandler

It was 1983 when I left an upper east side 5th floor walkup and a job in the Met bookshop to move to San Francisco and see what I could be. Not quite. I had no contacts, no place to live, no job, and just $2,000 in traveler's cheques. I had toured the west coast with a friend, so my plan was to take People's Express to SFO, find an apartment, get a job at the DeYoung, and boom - done. But, as you might have guessed, things didn't go as planned.

After an early dawn Super Shuttle ride from SFO, I arrived at Union Square, where I stashed my duffle bag in a locker and set off to find an apartment. To put it mildly, it didn't go well. I ended up staying at the YMCA for an extended period, eating Arby's, walking the city, and looking at want ads for jobs. After talking with a temp agency, I didn't expect to be placed, but I received a call that needed me there before dawn and gave me afternoons free. I took the position, which paid very well for this kid from Brooklyn.

Over the years, as the business became more regulated and automated, I moved from physically trading to designing what the traders were looking at. I spent time after the market talking with programmers to give traders and management a faster and better way of seeing what was going on. Much of what I did was to educate on the workflow so the engineers knew what they were coding for. That knowledge, at times, influenced the approach and produced better programs.

From free-format trade entry to graphical sector profit-loss and account penetration reporting, many of the technology solutions started to show financial rewards and highlighted competitive advantages. Technology was removing the inefficiency of delayed human reactions.

As time went on, faster communications facilitated trading algorithms, which then became all the rage. It appeared that a call to one of the streets market makers or floor brokers from my turret was no longer recommended. That meant there was no need to size a pink sheet market or hit a stock down to the figure. The machines imposed the regulatory order and control over increasingly fast markets and with it fleeting opportunities.

But the headwinds were growing against the sell-side, perceived to be ripping off the retail and giving haircuts to the institutions. In real life, when there was a large institutional trade, more often than not the retail was taken along at the same prices. But the regulators got rid of fractions in favor of more precise decimal pricing, chatter between traders was reduced by forced electronic order routing between trading desks, and eventually traders' seats were reduced by continuing automation. See what it was like.

Enter the buy-side. The customer of the sell-side. These are all the high-net-worth individuals, private equity, hedge funds, asset managers, and institutional investment advisors. After leaving the sell-side, I worked with a few technology vendors and a large buy-side firm that each understood the value of direct hands-on experience. I had thought early in my career that I should have learned to program. Not only has artificial intelligence replaced the need for coders, but I had one engineer tell me that if I thought like a programmer, then my value thinking like a trader is diminished. Trading was a personality business that had the fun regulated out of it.

Working with a buy-side trading desk showed me that there was very little difference in the actual trade. The difference was in what happens leading up to the trade. Of course, there's a great deal to say about that, and so I'm developing this site.

Closer to the end of my career than the beginning, I stop to reflect on what I've accomplished and to what end I have toiled. This site will serve as the repository of my professional life experiences, which I hope will give aid to those seeking the knowledge of my time.

As the investment business continues to evolve, leveraging technology to navigate the ever-changing landscape of assets and avoiding the consequences of man's need for greed will remain crucial.

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