Expertise

The "Trading" Sector

Matterwise

 

The definition of narrow business sectors, E.g. Agricultural Machinery, is generally clear to everyone.

Some "wider sectors" are also well-understood, E.g. FMCG.
Everybody involved understands that there are large areas of commonality whether the Consumer Good that is Fast-Moving is shampoo or dogfood.
From the outside, the important things for the back office in that sector look to involve Supermarket-Manufacturer incentive payments, but we claim no expertise in that sector.

A wide sector which we do understand lacks a clearly agreed name.
We propose "Trading Sector" although "Trading House Sector" is another possibility.
Suggestions for alternative names are welcome, to rename . trading {at} matterwise.com

What do we mean by this?
Within banks, everyone understands the difference between the "Banking Book" and the "Trading Book".
Usage of "Trading" by Tax authorities muddies the waters - they mean "Trading" as distinct from "Investing" and so would include restaurants but exclude pension funds and possibly even hedge funds.
"Financial" sector is close, but not right, because there are some passive businesses within the Finance sector.

So, if we put the name to one side, how can we describe this sector?
"A business which has people called Traders" is an appealing rough and ready alternative definition, but somewhat tautological.
Our current working definition is "A business which voluntarily takes on exposure, at least on a gross basis, to a publicly-set market price."
The "voluntarily" is important because it distinguishes E.g. Shell and BP, which do have Trading Desks, from Exxon, which does not.
As BP and Shell show, it is not necessary that the whole of a Business is involved in the Trading Sector for it to be present in a Business.
And as Exxon (and airlines show) one can have exposure to E.g. the oil price without being a trading business.
That working definition also excludes airlines - they have an exposure to the oil price, but that is an inherent part of the business; not something they can choose to have or not.

Trading businesses have some very different requirements from other sectors.
Here are a few:
- While one may casually use the word "Profit Centre" the split needs to be a Division of the Balance Sheet as well, otherwise structured products.
- Generally the division of responsibilities within the balance sheet should be "vertical" rather than "horizontal".
- Profit Payway ("Internal dividends") are important (measure, currency, frequency) otherwise traders are rewarded in the current year for actions in prior years.
- Many processes should be daily in order for control to be robust.
- Segregation of duties is crucial, and not just regarding outgoing payments.
- The risk of procurement fraud is much reduced due to alignment of incentives.

Note that on our working definition, that "banking book" straddles "Trading" and "Other" - in some cases the exposure to interest rates (the publicly set prices) is driven by employees of the business making decisions, but in many cases it is set more by customer actions.


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