Chapter 27: Working with institutional customers Flashcards
What does The investment industry generally consists?
sell side (dealers in the business of selling securities and other services to investors) and buy side (refers to investors, both institutional and retail)
What are the products and services that Sell-side dealers deal in?
- Trading, investing ideas, and research
- Investment advice
- Trade execution
- Corporate finance (to issuers)
- Securities (both new and existing issues)
what are the focus of the sell side?
investment dealers on the sell side
What are the major different types off firms within the investment dealer category?
- The breadth of capital markets activities that they involved in
- the range and type of services they offer investors
What are the different types of investment dealers?
- Full-service dealers (involved in almost every aspect of the securities markets, both retails and institutional)
- Investment banking boutiques (focus on a combination of debt and equity security underwriting, sales and secondary market trading, and M & A advisory services, only to institutional investors)
- Self-directed dealers (discount dealer) (offering secondary equity trading services to retail investors with small-to-medium-sized accounts who prefer to manage and trade their own equity portfolio)
What side do The various companies and organizations that connect and move capital between the suppliers and users of capital are in?
In well-developed capital markets such as Canada’s, these intermediaries are referred to as the buy side. Also known as institutional clients, they are concerned with asset management and are typically engaged in buying and holding securities on behalf of their clients
What is an institutional client?
An institutional client is a legal entity that represents the collective financial interests of a large group. The group’s financial interests are the objectives that serve their members’ goals. As such, institutional clients have a fiduciary responsibility for the millions of dollars of their members’ assets.s. Examples of group members can be shareholders, pensioners, or employees.
What are the example of institutional clients?
- Corporate treasuries
- Insurance companies
- Pension funds
- Mutual funds
- Hedge funds
- Endowments (An endowment is a pool of assets created from gifts and donations for the purpose of
creating income to help an organization achieve its specific goals) - Trusts (A trust is a pool of assets similar to an endowment. Unlike an endowment, however,
a trust is created by a settlor (a person or organization) for the good of another party, known as the beneficiary) - Investment management firms
- Investment dealers
What is direct electronic access (DEA)?
A new way of institutional trading directly to the marketplace without involving the dealer’s trader -> quicker and cheaper access to trading opportunities
what are the appropirate standard that the dealers must establish and control before offering DEA to a client?
- Sufficient financial resources to meet their trading obligations
- Knowledge of the order entry systems provided
- Knowledge of and ability to comply with all applicable marketplace and regulatory requirements
- Appropriate systems and procedures to monitor all DEA trading
How can the investment dealers ensure the standards are met?
, investment dealers require their DEA clients to sign a written agreement specifying that they will comply with marketplace requirements and with the risk and credit limits set by the dealer, among other things
What is the key part of the rules regarding DEA trading?
is s that all orders must go through appropriate and consistent pre-trade dealer risk and compliance controls before being routed to a marketplace for execution
In addition to pre-trade compliance controls, the dealer is required to conduct regular post-trade monitoring to
ensure compliance with requirements
What types of orders would be refused by investment dealers?
- Those that do not comply with applicable marketplace and regulatory requirements
- Those that exceed pre-determined thresholds
- Those involving securities that the DEA client is not authorized to trade
What are the primary occupational roles that Most medium-to-large buy-side firms divide portfolio management duties into?
- Portfolio manager
- Trader
(However, this division of duties may not apply to some small firms, where the portfolio manager often performs both roles)
What is the role of the portfolio manager on the buy-side?
• Create the investment mandate, investment goals, and investment guidelines and restrictions for each
portfolio, either independently or in conjunction with the fund sponsor
• Develop and execute the portfolio strategy for each portfolio
• Provide pertinent and timely information to the head of fixed-income and equity markets
• Supervise all portfolio management staff, including traders, assistant portfolio managers, and any associated administrative personnel
• Provide information to assist the firm’s marketing and client servicing personnel, including the following
The outlook for the markets, The positioning of the portfolios relative to the market outlook, Report of the periodic performance of the portfolios, including a detailed performance attribution analysis explaining the various sources of relative performance compared to the specific benchmark index
• Represent the firm at marketing meetings with prospective clients and at quarterly or annual meetings with existing clients, as well as industry conferences and interviews with the financial press, as required
What is the role of the trader in the buy-side?
• Provide the most effective execution of the portfolio manager’s desired trades
• Remain informed at all times of the portfolio manager’s detailed investment strategy
• Inform the portfolio manager about market conditions and trends
• Explain how market conditions can affect the portfolio manager’s investment strategy
• Be aware of trade opportunities that will further the portfolio manager’s objectives, either from reviewing sellside trader’s axe sheets or through regular conversations with sell-side sales representatives
• Maintain good, professional relationships with sales and trading staff of dealers with whom the firm does
business
What is the primary goal of buy-side trader?
to execute the portfolio manager’s trades at the best prices available in the market at the time of the trade
In this way, the trader contributes favourably to the portfolio’s performance. To accomplish best execution, the trader is constantly in contact with investment dealer counterparties. By this means, the trader gets to know the overall market conditions and the liquidity of the sectors and securities that the portfolio manager is most involved in. As such, the trader often serves as the portfolio manager’s “ear to the market”
What are the criteria for selecting a sell-side broker?
- A strong existing relationship with a trader or sales representative
- Speed and efficiency of trade execution
- Block trading capability
- Availability of the desired product
- High quality research
- Access to industry experts, such as economists
- Frequently updated daily market commentary
What is the primary roles of the sell-side dealer?
is to provide secondary markets for securities held by institutional investors
What are the services that Most full-service dealers offer clients?
- Traditional corporate and government finance underwriting
- Merger and acquisition advice
- Secondary trading
- Merchant banking
- Research
- Financial engineering
- Securities services, such as prime brokerage
what is the organizational structure of an investment dealer?
back, middle, and front office.
What are the functions of back-office?
- Operations
- IT
What are the functions of middle office?
Risk management
• Legal and compliance
• Corporate treasury
The heart of the middle office is compliance and risk management. It essentially performs a control function to ensure that there is no collusion between the front and back office. This role is consistent with the separation of duties principle.
