Chapter 4: The Role of Technology in Trade Capture

Question 1

Why might a pension fund need to sell assets?

Answer 1

If they need to pay out pensions, considered a liability

Question 2

What are the 5 topics covered by Social in ESG?

Answer 2

Diversity
Human rights
Consumer protection
Animal welfare
Local communities

Question 3

What is the challenge with ESG ratings?

Answer 3

Subjective

Question 4

What does a buy-side firm need to do before placing an order on behalf of a customer?

Answer 4

Needs to ensure that the order is compatible with the customers investment objectives.
Documented in an investment mandate
Known as pre-trade compliance

Question 5

What does the term at best or at market mean?

Answer 5

buy or sell at the best price the member firm can obtain

Question 6

What information has to be provided in a trade under MiFID II?

Answer 6

Client Identifier (LEI)
Firm (LEI)
Counterparty (LEI)

Question 7

How can orders be placed?

Answer 7

telephone
firms web page
SWIFT
DTCC/Omego
Refinitiv, Autex
Bloomberg, POMS and TOMS

Question 8

What is the difference between an order being filled by a firm as agent or principal

Answer 8

agent - they send to market and charge a fee
principle - they take on the book, buy or sell

Question 9

What does a sell side firm act as principal or agent for the below?
Bonds
Futures and options
Foreign exchange
OTC
Equities

Answer 9

Bonds - Principal, reach out to market makers
F&O - Always agent
FOREX - Principal
OTC - Principal
Equities - both

Question 10

Which regulation requires best execution?

Answer 10

MiFID II

Question 11

What are the two principles in TCF (Treating Customers Fairly)?

Answer 11

• Principle 6 (customers’ interests) requires a firm to pay due regard to the interests of its customers and to treat them fairly.
• Principle 8 (conflicts of interest) requires a firm to manage conflicts of interest fairly.

Question 12

What is the order flow of a trade? between fund manager and sell side

Answer 12

Fund manager sends order to sell side
Sell side decides how to execute, agent or principal
Sell side sent confirmation of details to the fund manager
- td/vd / price / net cost / agent/principal
Fund manager affirms confirmation or rejects
Fund manager provides allocation details
Sell side allocates the shares to each client/fund
Fund manager reaffirms the above
Settlement instructions sent to custodians

Question 13

What is the Omego Central Trade manager?

Answer 13

Developed by Refintiv, acquired by DTCC in 2013. Electronic trade confirmation platform.

Question 14

What is an example of a principal trade?

Answer 14

Fund places order with broker
Broker sources best price for order
Broker purchases order
Broker then sells to fund at a higher price

Question 15

What are some requirements of dealing platforms for buy & sell side?

Answer 15

Automation compliance
Regulatory compliance (MiFID II)
Support for multi currencies and securities
Connectivity to participants
Commission / Tax calculations
Algorithmic trading support

Question 16

What is a basis point commision?

Answer 16

1 bp is equal to 1/100th of 1%
in this context of bonds, they can say 5bp per million
$500 per 1m

Question 17

What method of fees in commonly used in F&O contracts?

Answer 17

Per unit - “£ per lot”
Exchange specifies how many units of underlying are referenced to one lot

Question 18

When is SDRT applicable?

Answer 18

(0.5%) When purchasing:
Shares in a company that is incorporated in the UK
Shares in a foreign company that maintains a share register in the UK
Options for the above

Question 19

What is Stamp Duty?

Answer 19

Tax that is paid by the final investor
Can avoid by using listed futures and options or CFDs

Question 20

What is the PTM Levy?

Answer 20

Any transaction over £10,000 is charged £1 on LSE
Panel of Takeovers & Mergers
Enforces rules on takeovers

Question 21

What is algorithmic trading?

Answer 21

The use of computer programs to enter orders on exchanges

Question 22

What proportion of trade volume is algorithmic?

Answer 22

30-60%

Question 23

What was introduced in response to the 2010 flash crash?

Answer 23

Volatility circuit breakers
10% change in 5 minutes, 5 min halt

Question 24

How do Sell-Side firms offer algorithmic trading to their clients?

Answer 24

DMA - Direct Market Access
Routing a security order directly to an execution venue

Question 25

What is Investor Self-Serving?

Answer 25

Ability to resolve issues and perform actions without speaking to someone

Question 26

How is credit risk mitigated for exchange traded derivatives?

Answer 26

CCPs take on both obligations

Question 27

What is mark-to-market?

Answer 27

MTM, is an accounting procedure by which assets are marked (recorded) at their current market value.
can be different to book value, e.g. interest taken into account

Question 28

What is the definition of VaR?

Answer 28

The maximum amount at risk over a certain period, to a confidence level.
99% chance of losing less than £100k over 5 day period

Question 29

What is the limitation of VaR
Exposed by Lehman crash / Greek crash

Answer 29

No data on what the maximum losses could be outside the confidence level

Question 30

How are academics working on improving VaR?

Answer 30

CoVaR (Contagion Value-at-Risk_
performs the VaR calculation and then asks how it changes if one particular entity such as Lehman’s – or Greece – finds itself in distress.