What Do Top Trading Firms Do in Australia?

It's no secret trading firms pay through the roof. But what do these mysterious institutions actually do? Let's find out.

What do trading firms do?

#1 They buy low and sell high

• Trading firms buy and sell financial instruments such as stocks, bonds, commodities, currencies, and derivatives.
• They make a profit by exploiting the price differences in these assets across different markets, a practice known as arbitrage.

📣 Hear from a grad

Simply put, a trader’s job is to make money by buying and selling. Traders can make money trading all sorts of things including stocks, as well as the prices of things such as a barrel of oil or a pound of pork. I work on a team that trades Japan and Hong Kong markets which consist of indices of stocks you may have heard of such as Sony and Alibaba. I [spend] my day watching how the markets move and forming opinions about the markets, and then trading options both over voice with real people as well as electronically. – Trader @ Maven Securities

#2 They keep the markets moving

By buying and selling things on the financial markets, trading firms keep the markets moving. In fact, they're so important, they're called market makers. This means:

• They act like an additional buyer and seller in the financial markets, ensuring that buyers and sellers can always find a transaction partner.

• They provide liquidity: Imagine you're at a music festival and you want to sell your extra ticket. If there's only one buyer (low liquidity), you might have to sell at a lower price. But if there are lots of buyers (high liquidity), you can get a better deal. Trading firms are like these buyers, always ready to buy and sell.

• They help maintain reasonable spread sizes (the difference between buying and selling prices).

📣 Hear from a grad

Citadel Securities is a market-making firm, which means we constantly quote prices to the market on all the assets we trade. Our primary function is to provide liquidity in the market which allows participants easier access to the markets for when they want to trade. – Trader @ Citadel Securities

#3 They play with their own money

Trading firms tend to engage in proprietary trading (or prop trading for short), which means they use their own money to buy and sell things. This means:

• Trading firms act on behalf of themselves – not clients. Since they're not investing client funds, they don't need to consult with clients on any of their trades and can act more swiftly and take on greater risk for potentially higher rewards.
• Trading firms don't make money from commissions or other fees the way investment bankers and fund managers do. Their profits come directly from successful trades, meaning that they don't have to share their spoils with anyone else, but on the flip side, whatever losses they incur come out of their own pocket.

📌 Note: Trading firms aren't the only ones who do prop trading. Investment banks and hedge funds also have prop traders, though this depends on the region and their approach and focus can be quite different.

How do trading firms do what they do?

#1 They operate on short time horizons

Whereas other financial institutions may make long-term investments, depending on their strategy, trading firms are first and foremost short term-focused. 

• Trading firms often close out positions within the same day to avoid overnight market risk.
• Trading firms can make trades in the blink of an eye – a practice known as high-frequency trading. This allows them to pounce on even tiny price differences, and when you're making thousands or millions of trades, those pennies add up.

#2 They rely on advanced technology

Trading a high-stakes game where every millisecond counts, so a firm's tech setup can make or break its success. Here's a glimpse into the kind of tech we're talking about.

• Instead of manually making trades, firms use computer algorithms and machine learning models to analyse heaps of market data faster and identify opportunities faster at lightning speed – a practice known as algorithmic trading.
• Risk management software monitor the firm's exposure to various risks, like market volatility or potential system failures, and can automatically stop trading if certain thresholds are reached.

• FPGA: This stands for "Field-Programmable Gate Array" – a hardware circuit that you can customise to perform specific tasks, like complex calculations. As a result, they can process data and execute trades faster than traditional CPUs (the brain of the computer).

📣 Hear from a grad

I've been addicted to the markets for years so having at my disposal all of the technology that one would expect of a proprietary trading firm is certainly my favorite part of the job. – Trader @ Flow

#3 They trade in exciting markets

It's also worth mentioning that most of the trading firms here aren't trading on the Australian Securities Exchange (ASX).

• Trading firms are like surfers looking for the biggest waves to ride. Right now, those waves are in places like Hong Kong, Tokyo, Korea, the US and Europe so those are the markets Australian trading firms are most active on.

• By comparison, the ASX is a much quieter patch of sea – not enough action for trading firms to make quick profits, though there are some who focus on it.

• Conveniently, Australia's time zones overlap with those of Asia, allowing traders to cover markets in large Asian economies while they're actually open – one reason global trading firms have started setting up regional hubs here.