Institutional Client Overview Chapter

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Questions and Answers

What is the primary goal of a buy-side trader when executing trades?

  • To execute trades at the best prices available (correct)
  • To establish a diverse portfolio for the manager
  • To minimize the number of trades for efficiency
  • To gain a long-term investment advantage

Which factor is typically a lower priority in stable and liquid markets compared to volatile markets?

  • Shopping the order around for better prices (correct)
  • Existing relationships with brokers
  • Speed and efficiency of trade execution
  • Access to multiple sell-side firms

Which of the following activities is NOT typically associated with increasing revenue for a sell-side equity trading desk during a bull market?

  • Equity underwriting
  • M & A advisory services
  • Decreasing bid-ask spreads (correct)
  • Secondary trading activity

Liquidity of an equity primarily depends on which of the following factors?

<p>The difference between bid and ask prices (D)</p> Signup and view all the answers

What does transaction cost analysis (TCA) evaluate when assessing a sell-side firm?

<p>Both explicit and implicit costs (A)</p> Signup and view all the answers

Which of the following is NOT mentioned as a criterion for selecting a sell-side broker?

<p>Proximity of the broker to the trading floor (C)</p> Signup and view all the answers

What is the primary motivation for investment dealers to engage in principal trading?

<p>To earn revenue from bid-ask spreads (C)</p> Signup and view all the answers

Which of the following does NOT constitute a revenue stream for sell-side equity firms?

<p>Interest from personal investments (B)</p> Signup and view all the answers

How do buy-side professionals typically choose their sell-side traders and representatives?

<p>By turning to known and trusted contacts (D)</p> Signup and view all the answers

What typically happens to institutional client activity as fresh investor capital flows into equity portfolios?

<p>It increases, leading to higher secondary market trading activity (D)</p> Signup and view all the answers

What is a primary responsibility of investment dealers before granting DEA access to clients?

<p>Accepting responsibility for compliance with regulatory requirements (A)</p> Signup and view all the answers

What major event in 2010 highlighted risks associated with high-speed trading and DEA?

<p>The Dow Jones flash crash (A)</p> Signup and view all the answers

Which of the following is NOT a requirement for clients seeking DEA access?

<p>Ability to predict market trends accurately (D)</p> Signup and view all the answers

What potential impact does a weak link in a DEA trading system have on the overall market?

<p>Diminished investor confidence and increased systemic risk (C)</p> Signup and view all the answers

Why are investment dealers required to have clients sign a written agreement regarding DEA trading?

<p>To specify compliance with marketplace requirements and risk limits (D)</p> Signup and view all the answers

What is one of the primary responsibilities of a buy-side portfolio manager?

<p>Create investment goals and guidelines for each portfolio (A)</p> Signup and view all the answers

Which task is NOT associated with the responsibilities of the buy-side manager?

<p>Executing trades in the market (A)</p> Signup and view all the answers

How does a buy-side trader support a portfolio manager?

<p>By providing most effective execution of desired trades (D)</p> Signup and view all the answers

Which of the following is a duty of the buy-side portfolio manager in relation to client servicing?

<p>Provide insights about market outlook and portfolio positioning (A)</p> Signup and view all the answers

What aspect of performance is a portfolio manager NOT responsible for?

<p>Execution of trades to maximize short-term gains (B)</p> Signup and view all the answers

Flashcards

Direct Electronic Access (DEA)

A dealer sponsoring a buy-side firm's access to a marketplace by using the dealer's participating organization number to send orders directly without involving the dealer's traders.

Dealer Responsibility in DEA

A dealer must accept responsibility for a client's compliance when granting direct electronic access (DEA).

DEA Client Requirements

Requirements for clients seeking DEA: sufficient financial resources to meet trading obligations, knowledge of order entry systems, adherence to marketplace and regulatory requirements, monitoring systems and procedures.

DEA and Flash Crash

Algorithmic trading strategies used in DEA can lead to events like the Flash Crash, raising concerns about market volatility and investor confidence.

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DEA Client Agreement

A written agreement between a dealer and a DEA client specifying compliance with marketplace requirements, risk and credit limits to ensure proper oversight.

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What does a Portfolio Manager do?

The portfolio manager is responsible for setting investment goals, developing investment strategies, and overseeing the performance of investment portfolios.

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Reporting Performance

The portfolio manager is responsible for reporting the performance of the portfolio to the fund sponsor and clients.

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Buy-side Trader's Role

The buy-side trader executes trades based on the investment strategy of the portfolio manager and monitors market conditions.

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Trader's Knowledge

The trader needs to stay informed about the portfolio manager's strategy and market conditions to execute trades effectively.

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Building Relationships

The trader is responsible for maintaining relationships with sell-side traders and sales representatives to identify potential trade opportunities.

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Axe Sheet

A list of products that a trader wants to sell or buy quickly.

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Buy-Side Trader

A trader who works for an investment firm, buying and selling securities on behalf of the firm's clients.

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Best Execution

The process of getting the best possible price for a trade, considering factors like liquidity and market conditions.

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Sell-Side Broker

A broker who provides investment services to institutional investors like buy-side firms.

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Transaction Cost Analysis (TCA)

The analysis of costs involved in a financial transaction, including explicit fees and implicit costs like bid-ask spreads.

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Bid-Ask Spread

The difference between the bid price (what a buyer is willing to pay) and the ask price (what a seller is willing to accept) for an equity.

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Principal Trading

Equity trading where a dealer uses its own capital (principal) to buy or sell shares, exposing itself to market risk.

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Trading Revenue from Spreads

Revenue generated by dealers from the difference between the bid and ask prices in principal trades.

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Equity Market Bull Run Impact on Dealers

Increases in revenue for dealers due to heightened activity in equity markets, driven by positive market conditions.

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Equity Market Bear Market Impact on Dealers

The effect of a declining equity market on dealer revenue, leading to reduced activity and profitability.

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Study Notes

Institutional Client Overview

  • This chapter details working with institutional clients, beginning with an overview of the institutional market and an examination of the buy-side and sell-side.
  • Institutional clients are discussed, including their structure, functions, operations and various aspects of trading, including revenue sources, clearing and settlement, and suitability requirements.
  • Roles and responsibilities of market participants, investment styles, guidelines and restrictions are explored including algorithmic trading, high-frequency trading (HFT), and dark pools.

Learning Objectives

  • Distinguish between the sell-side and buy-side within the institutional marketplace context.
  • Identify the responsibilities of buy-side portfolio managers and traders.
  • Describe the functions of different offices (back, middle, front) at a sell-side firm that relate to equity sales and trading.
  • Describe the revenue sources on the equity and fixed-income desks of a sell-side trading firm.
  • Explain the institutional settlement process.
  • Summarize the roles and responsibilities of investment dealers.
  • Distinguish between buy-side investment management styles.
  • Define algorithmic trading, high-frequency trading, and dark pools.

Content Areas

  • Examination of sell-side and buy-side of the market.
  • Responsibilities of buy-side portfolio managers and traders.
  • Organizational structure of a sell-side trading firm.
  • Revenue sources for sell-side trading firms.
  • Institutional clearing and settlement processes.
  • Roles and responsibilities in the institutional market.
  • Investment styles, guidelines, restrictions and regulations.
  • Description of algorithmic trading, high-frequency trading, and dark pools.

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Related Documents

CSC Volume 2 Chapter 15: Working with the Institutional Client PDF

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