Chapter 4: The Role of Technology in Trade Capture

Question 1

what are the stages of the portfolio management process?

Answer 1

• understanding client objectives
• formulating investment policy and strategies to meet client objectives
• asset allocation and selection
• performance measurement
• suitability

Question 2

what do buy/sell side firms do?

Answer 2

generate buy/sell orders

Question 3

what influences the timing of investment decisions?

Answer 3

• rebalance a portfolio

Question 4

what is the role of a technology department in applications and services with trade capture?

Answer 4

• cash flow forecasts
• economic and financial forecasts
• market data
• performance and measurement software applications

Question 5

what is the purpose of ESG?

Answer 5

measure the sustainability and societal impact of an organisation, and consists of three (non-financial) measures (environmental, social and governance)

Question 6

what are the challenges of measuring ESG ratings?

Answer 6

• subjective
• different data providers
• multiple sources of data

Question 7

what do buy-side firms do?

Answer 7

make investment decisions on their behalf.
* Buy-side firms need to ensure that the order is compatible with the customer’s investment objectives (investment mandate).
* The process of checking the investment mandate to ensure
the order is in compliance with the investor’s objectives is
known as pre-trade compliance.

Question 8

what do sell side firms do?

Answer 8

Banks and stock exchange member firms (sell-side firms) fill orders from buy-side firms and private individuals.

Question 9

what are the contents of an order?

Answer 9

• Buy or sell – quantity of an instrument and other instructions
• Time-related features (expiry, good till cancelled or open order)

Question 10

what identifiers do parties to a trade need to identify under MiFID II?

Answer 10

Identifiers for:
- client, firm and counterparty

Question 11

what is an agency order?

Answer 11

Forward the order to an investment exchange and charge
the investor a commission

Question 12

what is a principal order?

Answer 12

Sell the investor the required quantity of the instrument from its own stock, or buy the stock from the investor and add it to its own position or book

Question 13

what is best execution?

Answer 13

firms must take all reasonable steps to ensure that their clients’ trades are executed at the best possible price

Question 14

what are the practical implications of best executions?

Answer 14

• places obligation on the sell-side firm
• have to split to order (delay execution)

Question 15

what does TCF mean?

Answer 15

treating customers fairly. firms have to manage conflicts of interest and always act in a way that puts the client first

Question 16

what is a dealing system, why are they important?

Answer 16

mission-critical system used by both buy-side and sell-side
firms to manage the process of placing and taking orders, fulfilling them, and dealing with the trade agreement

essential for automation strategies, and it is necessary for brokers to compete on service levels

Question 17

what are the different types of commission?

Answer 17

flat fee, percentage, basis points, per unit, sliding scale, reducing scale, exchange fees

Question 18

what is commission sharing and why may it be charged?

Answer 18

may be charged by more than one broker for due to cross border trading or different people handling the trade

Question 19

what other fees/expenses might be paid by firms?

Answer 19

• Stamp Duty Reserve Tax (SDRT): tax payable by buyers (but not sellers) of most UK equity shares. The current rate is 0.5%.
• Stamp Duty: a tax paid by the final investor, so trades between stock exchange member firms are exempt from stamp duty
• Panel of Takeovers and Mergers (PTM) Levy: A charge automatically imposed on investors, for trades of aggregate
  value in excess of £10,000.

Question 20

what is algorithmic trading?

Answer 20

method of executing orders using automated pre-programmed trading instructions accounting for variables
such as time, price, and volume

Question 21

what is the issue in regards to Algorithmic trading?

Answer 21

high-frequency traders exacerbated price declines as they sold
aggressively to eliminate their long positions and as they withdrew from the markets in the face of uncertainty

Question 22

How do Sell-Side Firms Provide Algorithmic Trading to their Clients?

Answer 22

allowing traders to bypass traditional brokers and access markets directly through electronic trading systems

Question 23

what is investor self-servicing?

Answer 23

increasing trend of investors using self-service systems
such as apps, websites, or other automated processes to handle their investment and asset management activities

Question 24

what is risk management?

Answer 24

the process of identifying, assessing, and controlling risks that a business may face. Effective risk management is crucial for businesses to achieve their objectives while minimizing the potential losses they may incur

Question 25

what are the different risk types?

Answer 25

• credit
• market
• liquidity

Question 26

what are the measurements for market and credit risk?

Answer 26

Market to Market (value an asset based on its current market price), VaR (measure of how the market value of an asset is likely to decrease over a certain time period)