The Environment of AI Flashcards
What are the 5 financial markets that AI trade in?
- Primary Markets: IPO (exit strategy for AI);
- Secondary Market: Consist of both Physical exchanges and OTC markets
- Third market, non members trade exchange listed securities;
- Fourth Market: Direct exchange of large volume of securities facilitated by ECN (Electronic Communication Network)
- Private Markets do not use exchange trading or OTC trading
Who are the buy side institutions in AI?
- Plan sponsor
- Foundation (charitable purpose)
- Endowment (Universities)
- Family office,
- Sovereign/ non-federal wealth funds
- Alternative Investment Funds, include hedge funds, funds of funds, private equity funds, and commodity trading advisers
- Separately Managed Account (SMA),
- Single investor (HNI)
Who are the sell side (selling Investment Research and provide transaction execution services) institutions in AI?
Large Dealer Banks, for example Goldman Sachs, Barclays, JP Morgan
Retail brokers: They act as the middleman between buyers and securities sellers.
What does the buy-side do? What does the sell - side do?
Buy side focuses on buying the appropriate securities for their investment portfolio.
Sell side focuses on selling investment research and provide transaction execution services.
Who are the outside service providers in AI?
- Prime Brokers (similar services as large dealer banks (GS, PW, MSDW)
- Auditors/ accountants
- Attorneys
- Fund Administrators
- Consultants
- Depositories/ Custodians
- Commercial Banks
What is a Plan Sponsor?
An organization, such as a corporation, government entity, or nonprofit organzation, that manages the plan assets for a healthcare or retirement plan for qualified members.
Manages plan assets
What is a foundation?
A nonprofit fund established for charitable purposes to support specific types of activities.
What is special about foundations and endowments?
They have
- long investment horizons,
- high-risk tolerance, and,
- aside from their planned spending needs, little need for liquidity.
Time, risk and liquidity
What is a family office, private welath institution?
They manage the wealth of high net worth families.
They are probibited from being investment advisers to the public.
What are Soverign wealth funds?
Pool of funds owned by government and typically managed by the country’s central bank.
Opposite of Soverign debt
What are alternative investment funds?
They inlcude hedge funds, funds of funds, private equity funds, and commodity trading advisers
What is a separately managed account (SMA)?
Portfolio that is owned by a single investor and managed acording to that investor’s preference by an investment adviser.
What is the difference between commercial banking and investment baning?
- Investment banks expedite the purchase and sales of bonds, stocks and other investments and aid companies in making initial public offerings (IPOs).
- Commercial banks act as managers for deposit accounts for businesses and individuals, although they are primarily focused on business accounts, and they make public loans through deposit money that they hold.
What is retail banking?
Retail banking or Consumer Banking is the provision of services by a bank to individual consumers, rather than to companies, corporations or other banks. Services offered include savings and transactional accounts, mortgages, personal loans, debit cards, and credit cards.
What is proprietary trading
Trade for their own account, know as house account
What is special about Cayman Islands, Bermuda and British Virgin Islands?
- Lack of hedge fund regulation;
- There is no income tax at the Coporate level.
What are primary markets?
They relae to the sale of first time issues (e.g IPO) and additional issues of existing securites
What are secondary markets?
Why are they important?
Where seurities trade after their initial issuance.
They provide liquidity and price/ value information.
What is OTC market?
Different from physical market, OTC uses telpehone and computer to make trades.
What is market maker?
Refers to dealers who determine the bid-ask spread activley participating in the secondary market and posting buy and sell prices.
What are third markets?
Non member investment firms make markets in and trade exchange listed securities without going through the exchange.
What is the fourth market?
Electronic exchange of securities without the services of a broker or an intermediary. They are facilitated by an Electronic Communication network (ECN)
What are private markets?
Different from the other 4. They do not involve exchange trading or OTC trading.
Alternative assets are traded here.
What is systemic risk?
Refers to the potential financial collapse of a large financial institution, a major market participant, or the entire financial market.
POTENTIAL FOR FINANCIAL COLLAPSE
What is a Prime Broker?
They execute trades on behalf of the AI manager, lend securities to sell short, and provide financing
Churning
Illegal excessive trading performed by iM in order to earn excess FEES
Soft dollar arrangement
Refers to investment research, products and services, and cash credits given to the investment manager by broker in return for client business.
Investment managers have a duty to use client brokerage to benefit client.
The concern is that the IM may use a more expensive broker to the benefit of the firm at thee expense of the investor.
Regulation T Margin Rule
Federal Reserve rule concerning leverage.
You may borrow up to 50% of the purchase price of securities that can be purchased on margin. This is known as the initial margin.
3 categories, tax is based on
- Income (indivdual wage income, rental income, corporate earnings, dividends, interest and capital gains)
- Wealth (Real estate taxes, Wealth tax (Columbia and India), Estate taxes (transfer to heirs)
- Transaction
What are OTC Exchanges?
An over-the-counter (OTC) market and an exchange market are the two basic ways of organizing financial markets.
OTC markets utilize and telpehone and computers to make trades. They typically involve much larger trade than traditional exchanges.
They are less transparent.
What are the 2 ways a secondary market is structured?
Explain each
Call Markets
A call market is a market where a stock can only trade at a specific time.
Continuous Markets
A continuous market can occur at any time as long as the market is open. Buyers and sellers are matched up on a continuous basis and the price is determined through an auction or through bid-ask quotes.
Read more: Exchange Market Structure - CFA Level 1 | Investopedia http://www.investopedia.com/exam-guide/cfa-level-1/securities-markets/exchange-market-structure.asp#ixzz3qYyo8eS7
Follow us: Investopedia on Facebook
What is the difference between foundations and endowments?
The primary difference between foundations and endowments is that the foundations are established with a pot of money and no further funds are added to it, whereas endowments can fundraise on an ongoing basis.
Foundations are usually established for charitable purposes by an individual or a family, whereas endowments are public charities (i.e. many donors) for example for purpose of education.
