Institutional Client Overview

Institutional Client Overview

• Institutional clients, like mutual funds and pension funds, are sophisticated investors with substantial accounts.
• They play a significant role in financial markets.
• They have various investment objectives and strategies.
• Revenue sources for sell-side firms include: trading on spreads, commissions, fees, interest.
• Institutional trading employs complex and specialized processes for clearing and settlement.
• The buy side encompasses investors like mutual funds or pension funds, involved in buying securities and services.
• The sell side comprises firms facilitating these transactions.
• Institutional investors use various investment styles, including passive strategies (e.g., buy-and-hold, indexing, immunization) or active strategies (e.g., sector rotation, market timing, value, growth).
• Specific guidelines and restrictions affect each institutional investment mandate.
• Algorithmic trading uses algorithms for automated trades.
• High-frequency trading (HFT) involves incredibly rapid trades aimed at exploiting small price discrepancies.

Sell Side and Buy Side

• The sell side in the investment industry primarily involves dealers selling securities, trading, investing ideas and research .
• Buy-side firms comprise institutional and retail investors buying these or managing their own portfolios.
• Sell-side firms use several structures (e.g., back-office, middle-office, front-office) to facilitate transactions efficiently.
• Buy-side professionals manage portfolios based on their investment guidelines and restrictions.
• Buy-side portfolio managers typically create mandates for investors and execute trades .

Roles and Responsibilities

• Institutional Client Roles:
  • Portfolio managers: determine investment strategies.
  • Traders: execute trades and ensure efficient execution.
  • Sales personnel: relationship managers between the dealer and clients.
• Institutional Investment Dealer Roles:
  • Research associates: conduct financial research for clients.
  • Analysts: provide in-depth and detailed analysis of companies and sectors to guide investment decisions.
  • Institutional sales personnel: manage firm relations with clients and provide advice.
  • Liability traders: manage the dealer's trading capital.
  • Market makers: create a constant, two-sided market for securities.

Algorithmic Trading

• Algorithmic trading employs algorithms to execute trades automatically when specific market parameters are met.
• Often used for high volumes of trades and to execute large trades with reduced market impact.
• Trades are often 'chopped up' and routed through various platforms, including dark pools.

High-Frequency Trading (HFT)

• High-frequency trading (HFT) is a type of automated algorithmic trading that seeks to exploit very small price disparities in a very short time frame (e.g., fractions of a second).
• Very high trade frequency is characteristic.
• Frequently used for high-volume trading, benefiting from the speed of execution and potentially exploiting arbitrage opportunities.

Dark Pools

• Dark pools are alternative trading systems (ATS) that do not display trade information publicly.
• Designed to facilitate large trades while minimizing market impact and price changes (e.g., protecting the buyer or seller from substantial price sensitivity).
• Often used for block trades, or large-volume transactions.
• Lack of transparency potentially impacts market efficiency.