NEWS

Repo Trader – Overview of the Role and the Repo Trading Desk

A repo trader operates in a relatively niche corner of the money markets, principally involved in activities related to the Federal Reserve’s overnight repurchase program.

Repo trading is generally slower and less intense than other trading desks. This can be a pro or a con depending on your personal preferences, although life as a repo trader is relatively more secure than other parts of Wall Street.

Primer on the Repo Market

The repo market is an obscure but critical part of the global financial system. On average, Between $2 to $4 trillion worth of repurchase agreements are traded every day.

A repurchase agreement is basically a short-term collateralized loan. One side of the trade sells securities to the other side, while agreeing to repurchase those same securities later at a higher price (often as soon as the next day). The securities serve as the collateral, while the difference between the initial price paid and repurchase price is considered the interest paid on the loan, called the repo rate.

Another key term to understand is the reverse repurchase agreement. In this case, one side of the trade will purchase securities from the other, while agreeing to sell them back at a higher price in the future.

A picture of the Federal Reserve Bank of Chicago which helps facilitate the overnight repurchase program that a repo trader operates in.

So What’s the Point of Repo Trading?

There are two primary reasons that the repo market is so important:

  1. First, it allows financial institutions with significant balances of securities to borrow cheaply, while also allowing counterparties with large spare cash balances to earn a nearly risk-free return. As an example, an asset-rich cash-poor hedge fund may need to borrow cash to finance trades, while a money market mutual fund would like to earn a return on its significant cash balance (which otherwise is expensive to hold as it does not pay interest).
  2. The Federal Reserve also uses the repo market as a monetary policy tool. By buying securities from a seller, the Fed is injecting additional liquidity into the system. This works the other way as well – the Fed can drain liquidity from the system by selling securities into the repo market.

Life as a Repo Trader

Now that we’ve covered the repo market, let’s touch on the role of a repo trader.

Most repo desks are with large banks that have commercial branch exposure as they have the requisite balance sheet for the business.

The role does vary across different banks depending on how they view the repo trading business. Some institutions sit the repo desk under Treasury control, with repo traders in this case having less of an emphasis on trading profits. This setup is commonly referred to as a funding desk, with traders most focused on securing cheap funding for firm inventory.

Other banks give repo traders broad responsibilities across market making, liquidity provision, funding internal firm inventory, and risk management of the collateral liquidity. Traders with a role in market making activities are generally more focused on trading profits (compared to funding desks).

Repo is an area that is exempt from the Volcker rule, so desks are allowed to engage in proprietary trading. Some firms drive a majority of repo desk profits by taking views on borrowing volumes against collateral, informed by rates, client needs, and macro drivers.

That said, generally repo trading is more laid back than other trading desks. The product is straight-forward, with much less nuance than other products. This has given it a reputation of being a somewhat boring place to work, particularly on desks that are primarily funding-focused.

However, that also means a repo trader is generally safer in the event of economic or market turmoil. More exciting is not necessarily always better (though it does likely mean lower compensation).

Firms exiting the repo business has created opportunities for others, particularly with the death of dealer balance sheets post-crisis. There has also been some spread widening bolstering the business, largely related to increased regulatory constraints and credit tiering. That said, the business is essentially just renting out the firm’s balance sheet to highest bidder.

Over recent years electronic trading volumes have also skyrocketed. One of the last bastions of old-fashioned phone calls and trading floor shouting, the repo market had historically been slower to embrace electronic markets. Now, however, a majority of repo trades have shifted to electronic execution.

Most large banks have repo trading desks.

Repo Trader Exit Opportunities

With the finance industry’s obsession with exit opportunities, it only makes sense to quickly cover here.

While some people avoid repo trading for the reasons highlighted earlier, it can be a great place to start a career. You’ll pick up relevant skills that can launch you into other roles, if that’s what you’re looking for.

Some repo traders find success in moving to rates desks. This is particularly true at the shorter end of the rates spectrum (as it most closely aligns with repo trading).

Relative value-focused hedge funds are also an option. Firms using a relative value strategy often leverage through the repo market, so it makes sense that they would value an experienced repo trader. This can open the door to the buy-side and provide additional opportunities down the road.

There are also ample opportunities on the public side that would value the skill set. Primary options include the Fed or the treasury.

Otherwise, a career on the repo desk is not a bad thing!

Sam Hillier

Sam Hillier is a reporter at Transacted covering private equity and investment banking. He previously spent time as an investment professional focused on direct buyouts, as well as an earlier strategic advisory stint.