Podcast
Questions and Answers
What primary characteristic differentiates full-service dealers from investment banking boutiques?
What primary characteristic differentiates full-service dealers from investment banking boutiques?
Which of the following services are investment banking boutiques least likely to provide?
Which of the following services are investment banking boutiques least likely to provide?
Which description accurately depicts self-directed dealers?
Which description accurately depicts self-directed dealers?
What is a shared service between full-service dealers and investment banking boutiques?
What is a shared service between full-service dealers and investment banking boutiques?
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What type of investor do investment banking boutiques typically serve?
What type of investor do investment banking boutiques typically serve?
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Which role primarily acts on behalf of institutional clients in equity trading services?
Which role primarily acts on behalf of institutional clients in equity trading services?
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What is the main purpose of program trading within the context of institutional investors?
What is the main purpose of program trading within the context of institutional investors?
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How does structured finance differentiate itself from traditional equity trading?
How does structured finance differentiate itself from traditional equity trading?
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Which of the following is NOT a primary activity of the equity sales and trading department?
Which of the following is NOT a primary activity of the equity sales and trading department?
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What has become a common practice among institutional equity investors regarding equity market exposure?
What has become a common practice among institutional equity investors regarding equity market exposure?
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What is the main responsibility of an institutional investment dealer regarding client suitability?
What is the main responsibility of an institutional investment dealer regarding client suitability?
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Which designation is NOT typically required for a research associate in the institutional market?
Which designation is NOT typically required for a research associate in the institutional market?
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What types of products do institutional clients generally buy and sell?
What types of products do institutional clients generally buy and sell?
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What is a key prerequisite for the position of research associate in institutional investment dealers?
What is a key prerequisite for the position of research associate in institutional investment dealers?
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Which statement about institutional clients is false?
Which statement about institutional clients is false?
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What is a critical skill needed by an institutional salesperson?
What is a critical skill needed by an institutional salesperson?
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Which task is NOT part of maintaining strong client relationships for an institutional salesperson?
Which task is NOT part of maintaining strong client relationships for an institutional salesperson?
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What benefit does a good research group provide to an institutional salesperson?
What benefit does a good research group provide to an institutional salesperson?
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Which area must an institutional salesperson gain expertise in?
Which area must an institutional salesperson gain expertise in?
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What is the primary role of an institutional salesperson compared to a retail salesperson?
What is the primary role of an institutional salesperson compared to a retail salesperson?
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Study Notes
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.
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Description
This quiz covers the fundamentals of institutional clients, including their role in financial markets and the various strategies they employ. It explores the differences between the buy side and sell side, revenue sources for sell-side firms, and the impact of algorithmic trading. Test your knowledge of investment strategies and the complex processes involved in institutional trading.
