Sales and Trading Vocabulary

agency trading

NASDAQ agency traders execute orders in stocks that the firm does not maintain a market in “on an agency basis.” Customer trades executed by the firm’s position traders are executed on a principal basis.

algorithmic trading

A trading strategy in which computers and advanced mathematical models are used to process vast amounts of data and make rapid purchases and sales of securities (sometimes with a holding time of less than a second). Also known as high-frequency and quantitative trading.

alternative data

Nontraditional and non-market economic and financial information, such as weather patterns, satellite imagery, business performance metrics, online reviews, consumer spending/lifestyle data (including payments data), and social media trends used by traders and other investment professionals to obtain investing, operational, or other benefits over their competitors. Also known as next-generation data.

arbitrage

Trading stocks, bonds, commodities, or other assets in two different markets to take advantage of pricing differences to make a profit.

barbell

A bond trading strategy in which the trader holds long-term and short-term bonds. In this case, the trader is anticipating a profit based on the view that long- and short-term bonds will outperform intermediate-term bonds.

bear market

Any market in which prices exhibit a declining trend for a prolonged period.

Black-Scholes option pricing model

An options pricing model that prices options according to the current stock price, the time until option expiration, the option strike price, the risk-free interest rate, the standard deviation of stock returns, and the cumulative standard normal distribution.

Key Assumptions for Black-Scholes model

The stock pays no dividends during the life of the option

European exercise terms (option exercise at expiry only) are used

Efficient markets

No commissions

Constant and known interest rates

Returns are lognormally distributed.

blockchain technology

A distributed ledger database that uses advanced cryptography to maintain a continuously growing list of financial records that cannot be altered.

bond

A long-term debt instrument with the promise to pay a specified interest and return of the original investment on a stated maturity date.

bond equivalent yield

Doubling the semiannual yield.

bond rating agencies

to provide an unbiased opinion of the issuer’s credit-worthiness. Arguably, this analysis is more objective than equity analysis, since the sole criteria that is applied is the ability of the issuer to repay its debts.

investment grade bonds

those assigned to the top four quality categories by either Standard & Poor’s (AAA, AA, A, BBB) or Moody’s (Aaa, Aa, A, Baa). Generally legal for purchase by banks.

junk bonds

all bonds with Standard & Poor’s ratings below BBB and/or Moody’s ratings below Baa. Usually offering a higher rate of return and higher default risk.

junk bond ratings

BB, B, CCC, CC, C and D

BB-rated bonds have the lowest degree of speculation (among junk bonds) while a D rating is assigned to an issuer in default of payment.

bond spreads

The difference between the yield of a corporate bond and a U.S. Treasury security of similar time to maturity.

bullet

A regular coupon-paying bond with a single repayment of principal (the bullet) on the maturity date.

bull market

A time in which the prices of stock in the market are rising or are expected to rise.

buy side

Asset management firms that work for individual and institutional investors, making buy or sell decisions and acting as agents for their clients.

Chinese wall

The separation between public and private sections of an investment bank, including sales, trading, and research from corporate finance. Many banks even have physical barriers and/or e-mail restrictions to support this effort.

commodity

A tangible good or item that can be bought or sold

convertible bond

Can be exchanged for a pre-specified amount of common stock in the issuing firm. The conversion ratio indicates the number of shares of common stock that the holder of the convertible has a claim. The conversion price is derived by dividing the par value divided by the conversion ratio.

current yield

= Annual dollar coupon interest/price

dark pool

A platform that allows trades of large blocks of securities (most commonly equities) away from the public exchanges; prices are disclosed only after the trades have been completed.

delta hedging

A strategy designed to reduce the risk associated with price movements in the underlying security, achieved through offsetting long and short positions of calls and puts. The dynamic strategy involves the portfolio being rebalanced periodically to maintain a targeted delta. A hedging strategy that is never rebalanced after the initial hedge is initiated is called static hedging.

derivative

A financial contract that derives its value from an existing bond, share, currency, or commodity. They will move in direct relationship to the price of the underlying investment.

duration

The sensitivity of a bond’s price to a change in yield.

effective duration

A duration measure that quantifies the price sensitivity of the bond while also allowing for changes in the bond’s expected cash flows. The methodology for computing effective duration requires the use of a binomial interest-rate tree.

equity

A share of a corporation representing a claim over a proportion of its assets and profit.

Euroclear

A settlement system for domestic and international securities transactions, covering stocks, bonds, and a variety of investment funds. Acts as the central securities depository for several European markets.

Eurodollar

An American dollar held by a foreign institution outside the U.S., usually a bank in Europe.

“exchange-traded funds (ETFs)”

ETFs are a basket of securities designed to track an index and trade like a single stock.

ex-dividend date

The day a stock trades without the dividend. Technically, the price of the stock should adjust downward by the amount of the dividend that will be paid out on the payment date.”

execution management system

Software that provides traders with real-time access to market data and access to various trading avenues.

hedge fund

A private, unregistered investment pool encompassing all types of investment funds, companies and private partnerships that can use a variety of investment techniques such as borrowing money through leverage, selling short, derivatives for directional investing, and options.

financial engineering

The application of mathematical methods and tools (such as applied mathematics, statistics, computer science, and economic theory) to solve problems in finance. Also known as computational finance, financial mathematics, and mathematical finance.

fixed-income product

Interest‐bearing bonds, bills, and notes that pay a specified percentage of interest over the lifetime of the loan. They are typically issued by governments, corporations, and municipalities.

futures

Contracts for the sale/purchase of a specified quantity of a currency, commodity, or financial instrument at an agreed-upon price on a given future date. Available for stocks, stock indexes, U.S. Treasury debt, foreign currencies, Eurodollar deposits, and other financial instruments.

hedge

To balance a position in the market in order to reduce risk.

indication

an estimated price

interest rate product

A financial instrument (an asset that can be traded) with a value that increases and decreases based on movements in interest rates.

league table

A ranking of companies based on a set of criteria such as revenue, earnings, deals, or any other relevant criteria. Used for comparing companies within a group for investment research or for marketing purposes.

LIBOR

The rate is the interest rate that the largest international banks charge each other for loans.

marked-to-market

A trader’s profit and loss (P&L) statement. This refers to the daily valuation of the trader’s account to reflect current market prices. The goal of every trader is to make his P&L statement as large and positive as possible. Sometimes, traders will make money trading but will lose money because a large position goes down.

medium-term note

A program of bond issues for a specified total amount of bonds over a specified period of time. They are usually unsecured, fixed or floating rate, non-callable debt securities. They save issuers time and money by allowing them to register a program of issuance rather than a series of separate bond issues.

momentum trading

Seeking to exploit the very short-term momentum in the market.

Money market securities

They represent the market for securities maturing within one year. These include short-term certificates of deposit, repurchase agreements, and commercial paper (low-risk corporate issues), among others. These are low-risk, short-term securities that have yields similar to treasuries.

mortgage-backed bonds

Bonds collateralized by a pool of mortgages. Interest and principal payments are based on the individual homeowners making their mortgage payments. The more diverse the pool of mortgages backing the bond, the less risky they are.

municipal bonds

Bonds issued by local and state governments

mutual fund

A professionally managed investment pool sold to the public through the sale of shares representing an ownership interest. These funds have a board of directors or trustees to make sure they are managed for the benefit of investors.

on-the-runs

Bonds most recently issued in each maturity. Itwill trade at a slightly lower yield than the comparable off-the-run bond. This difference in yield reflects the liquidity premium offered by trading the most current bond.

option-adjusted spread

A fixed-income security’s implied risk premium above the risk-less rate. The spread above the risk-free rate that makes the average present value of the security’s cash flows equal to the market price of the security. The spread of a risk-free security is zero.

option-payoff diagram

Indicate the expected profit of an option strategy at expiry. Options allow investors to hedge risk in long and short positions. Combining options can create the desired risk-reward profile for the options trader. Option strategies that are worth knowing are the butterfly spread, condor spread, bull and bear spreads, calendar spread, straddle, strangles, and portfolio insurance.

P/E ratio

Measures the current price of the security divided by a full year of earnings. Forward EPS is the expectation for the next 12 months of earnings. LTM (last 12 months) is trailing earnings. Since most firms are growing their earnings, forward P/E ratios will normally be lower than trailing P/E ratios.

preferred stock

Shares characteristics of both common stock and debt. Stockholders are entitled to dividends as a specified percentage of par. If these dividends can accrue until they are paid, the stock issue is called a cumulative _____ stock. If the dividend payment can be missed, then the stock is called a non-cumulative _____ stock. Dividend payments on the stock are not tax deductible to the issuing corporation.

price value of a basis point

This is a measure of price volatility for a bond. It measures the change in yield for a one-basis-point change in price.

primary dealer

A designation awarded by the Federal Reserve to commercial banks or broker/dealers who meet specific criteria, most notably capital requirements and participation in Treasury auctions.

prime broker

An investment bank that provides financing and other services to institutional clients, typically to hedge funds. Services can include securities lending, leveraged trade executions, and cash management.

proprietary trading

Profit-oriented trading in the financial markets using a bank’s own capital, as distinct from trading with funds contributed by investors.

put/call ratio

the number of put options contracts traded in a given day divided by the number of call options contracts traded that same day

redemption classification

Most bonds are bullets, but sometimes bonds have embedded options that alter the structure of a bond such that the principal may be repaid prior to maturity.

callable bond

Gives the issuer the right but not the obligation to redeem a bond at strike prices and dates before the bond is scheduled to mature.

Putable bonds

Give the investor the right, but not the obligation, to put the bond back to the issuer.

sinking fund bond

Sinking fund bond retires a portion of the principal according to an agreed schedule. A series of call options that the investor writes to the issuer, except that a sinking fund provision is obligatory rather than just a right.

Perpetual bonds

Pay a coupon to the investor forever. Call options are often embedded within the bonds to give the issuer an opportunity to return this obligation.

securities

Financial instruments that represent some type of financial value.

sell side

A term for brokers who sell bonds and shares to customers and the research departments of investment banks that make recommendations to their clients.

short interest

Refers to how many shares are sold short in a given stock. It is normally interpreted as a contrarian indicator.

days-to-cover ratio

the number of shares short divided by the average daily trading volume. The larger this ratio, the more likely the stock is setting up for a short-squeeze.

spread

The difference between the price at which a financial institution will buy a bond or share and the price at which it will sell.

Treasury bills

Maturity of up to one year

Treasury Notes

Maturity up to 2-10 years

Treasury Bonds

Maturity up to 20 or 30 years

triple witching (hour)

An event that occurs four times a year: the 3rd Friday of March, June, September, and December. On these days, contracts for stock index futures, stock index options, and stock options all expire on the same day.

warrants

a derivative security that grants the holder the right (but not the obligation) to purchase stock from the issuer at a specific price within a certain period of time.

yield

The annual return on investment.

yield curve

Graphically represents the relationship between the yield on bonds of the same credit quality but different maturities.

yield-to-maturity

The interest rate that will make the present value of the cash flows of the bond equal to the price of the bond.