Head Trader

Key Takeaways

• A head trader manages employees, positions, risk, and profitability in a trading business.
• They ensure compliance with regulations and internal policies in trading operations.
• Head traders play a crucial role in trade execution and maintaining broker relationships.
• The role is evolving towards more compliance and supervisory responsibilities.
• Familiarity with trading patterns is essential for executing orders effectively.

What Is a Head Trader?

A head trader is the manager of a trading business within a registered securities firm. They are responsible for the positions taken, the risks involved, and the business' financial performance. The head trader manages all other traders as well as the fulfillment of compliance and regulatory requirements by the entire department staff. They may report to a chief investment officer or portfolio manager.

A head trader should be among the individuals at a firm who are the most knowledgeable about the markets and the trading architecture/environment.

The Role and Responsibilities of a Head Trader

Any head trader in a securities operation with supervisory and/or approval responsibilities must be a registered principal, meaning they must hold all of the basic securities licenses and possess one of the following certifications:

Series 4: Registered Options Principal Exam (OP)

Series 9 and 10: General Securities Sales Supervisor Examination

Series 23: General Securities Principal Exam - Sales Supervisor (GP)

Series 24: General Securities Principal Exam (GP)

Series 51: Municipal Fund Securities Limited Principal Examination

Series 53: Municipal Securities Principal Examination (MP)1

The exact principal exams required depend on the head trader's responsibilities. In smaller firms, there may only be one or two head traders, but in large firms there can be many head traders, each in charge of a specific market. The head trader for municipal securities, for example, would have at a minimum a Series 53 license.2 Different licenses apply for futures and commodities trading operations. A registered options principal, for example, will hold a Series 4 license.3

Core Duties of a Head Trader

In many environments, such as wealth management companies or money managers, a head trader may report to a chief investment officer and a chief operating officer and will have a key role in fulfilling and executing individual trade requests. Head traders may also be responsible for creating and maintaining relationships with external brokers and custodians. A head trader should be among the most knowledgeable individuals at a firm regarding the markets and trading architecture/environment. Some specific head trader job responsibilities may include:

Managing trades from inception to post-trade analysis, including building trades, pre-trade analysis, execution, and settlement.

Ensuring compliance with regulations and that best execution policies are adhered to.

Designing trade architecture, trading policies and procedures, as well as broker evaluation and trading record keeping.

Assisting portfolio managers with rebalancing and asset allocation tasks.

How the Head Trader Role Has Evolved

As rapidly changing regulations alter the day-to-day responsibilities of head traders, their role has shifted away from actively trading and toward more of a compliance and supervisory role. In Europe in particular, the MiFID II regulations are shifting head traders' daily priorities away from trading and toward market structure and regulation changes rather than keeping abreast of what the markets are doing.4 While being a seasoned trading expert is essential to becoming a head trader, the role now may allow for only a small amount of time actually trading securities.

An Example of Order Execution by a Head Trader

Let's say the head trader of a mid-sized hedge fund is given a stock order from the portfolio manager. The order is to buy 100,000 shares of ABC stock "best way." Because the head trader knows that ABC is a thinly traded stock and typically trades 150,000 a day on average, they decide to put 50,000 shares to buy in a dark pool in order to not impact the stock price. From here, they may also look at dealer indications of interest in the ticker to see if there is a natural seller available. This transaction would be a cross trade.

Because the head trader is familiar with how ABC stock trades, they know that it is not the best idea to work the order in the machines because the order size is too large. Knowing this information is critical to best execution and comes with years of experience.