Institutional Client Working Quiz
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Questions and Answers

What is a primary purpose of pre-trade dealer risk and compliance controls?

  • To ensure orders comply with regulatory requirements (correct)
  • To track the historical performance of securities
  • To allow traders to bypass marketplace rules
  • To facilitate immediate order execution without delay

Which statement accurately describes the difference between buy-side and sell-side firms?

  • Buy-side firms generally facilitate trading for other clients.
  • Sell-side firms manage portfolios for large institutional clients.
  • Buy-side firms focus on asset management while sell-side firms sell securities. (correct)
  • Sell-side firms typically purchase assets for long-term investment.

Which of the following is NOT a responsibility of a buy-side portfolio manager?

  • Executing trades in the marketplace
  • Analyzing market trends and economic data
  • Setting investment objectives and strategies
  • Providing compliance oversight to trading operations (correct)

Why might smaller buy-side firms not divide roles between portfolio managers and traders?

<p>They often operate with limited resources and personnel. (A)</p> Signup and view all the answers

What type of orders are compliant with pre-trade dealer risk controls?

<p>Orders that adhere to established marketplace regulations (D)</p> Signup and view all the answers

What event highlighted potential challenges associated with high-speed trading in May 2010?

<p>The largest intraday point decline in market history (B)</p> Signup and view all the answers

Which of the following is NOT a requirement for clients before access to Direct Electronic Access (DEA) is granted?

<p>Understanding of all algorithmic trading strategies (D)</p> Signup and view all the answers

What potential outcome is a concern for industry experts regarding incidents like the flash crash?

<p>Diminished investor confidence in the markets (C)</p> Signup and view all the answers

What key role do investment dealers play in ensuring compliance for DEA clients?

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

What aspect of the DEA framework is emphasized to protect Canadian marketplaces?

<p>Balancing electronic trading benefits with market integrity (C)</p> Signup and view all the answers

What is required from the custodian during the matching process of an institutional trade?

<p>The custodian must verify the trade details and settlement instructions against available securities or funds. (B)</p> Signup and view all the answers

How many trade-matching elements are required to clear an institutional equity trade?

<p>26 different elements must be confirmed. (C)</p> Signup and view all the answers

Which of the following is NOT one of the three steps taken after matching is complete?

<p>The custodian reinitiates the trade process for clarity. (A)</p> Signup and view all the answers

Which factor contributes to the complexity of institutional trades compared to retail trades?

<p>Institutional trades involve more parties and steps in processing. (A)</p> Signup and view all the answers

What is the primary purpose of the customer trade confirmation issued by the dealer?

<p>To confirm the required trade information to the custodian. (B)</p> Signup and view all the answers

What is a primary duty of a liability trader?

<p>To complete orders that agency traders cannot fully fulfill (D)</p> Signup and view all the answers

Which example illustrates proactive trading by a liability trader?

<p>Entering a trade without a triggered event or request (B)</p> Signup and view all the answers

Why might liability trades cost the firm trading capital?

<p>They ensure a functional secondary market at the cost of capital (A)</p> Signup and view all the answers

What factor significantly influences issuers' choice of an investment bank?

<p>The capacity to make secondary markets for their securities (A)</p> Signup and view all the answers

Which is NOT a sector mentioned for liability traders?

<p>Foreign exchange desk trading currencies (D)</p> Signup and view all the answers

Flashcards

DEA Arrangement

A system where an investment firm allows another firm to directly access a marketplace through a dealer, without involving the dealer's trader.

Flash Crash (2010)

A significant, sudden drop in the Dow Jones Industrial Average, followed by a rapid recovery, highlighting the potential risks of high-speed trading.

Algorithmic Trading

A sophisticated trading strategy using computer programs to execute trades automatically based on pre-set rules.

Dealer Responsibility (DEA)

Investment dealers must ensure clients comply with regulatory requirements and marketplace rules before allowing DEA access.

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DEA Client Requirements

Clients must demonstrate sufficient finances, order system knowledge, regulatory compliance knowledge, and monitoring procedures to use DEA.

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Pre-Trade Controls

Checks performed before an order is submitted to a marketplace to ensure compliance with regulations and internal limits.

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Post-Trade Monitoring

Regularly reviewing completed trades to make sure they follow all rules and regulations.

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Buy-Side

Entities that purchase assets and invest in securities, like pension funds, mutual funds, and hedge funds.

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Sell-Side

Companies that specialize in creating and selling securities to investors, like investment banks and brokerage firms.

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Portfolio Manager (Buy-Side)

Responsible for creating and managing a portfolio of investments to meet specific investment goals.

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Trade-Matching Elements

Details required for settling an institutional equity trade, including security identification and order information. These must be confirmed by all parties involved.

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Custodian Role in Trade Matching

The custodian, holding the investor's assets, confirms the trade details, ensuring the availability of funds or securities for settlement.

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Matching Process

The step where all parties involved verify and agree upon the trade details, ensuring consistency and completeness.

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Institutional Trade Complexity

Institutional trades are more complex than retail trades due to larger financial amounts, more involved parties, and multiple processing steps.

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Trade Allocation

The manager instructs the custodian on how securities traded should be distributed among the underlying client accounts.

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Liability Trader

A trader who manages a specific sector of the market, buying and selling securities to maintain a balanced inventory and make a market for clients. They prioritize market share and profitability, sometimes taking on trades even when it costs the firm some trading capital.

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Reactive Trading

Liability traders make trades based on a reaction to clients' requests or market events. They buy or sell securities to meet specific demands.

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Proactive Trading

Liability traders can initiate trades based on their own analysis and foresight, even without immediate client requests. They anticipate market trends and aim to profit from them.

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Market Making

Liability traders make a market by being willing to buy and sell securities at all times, even at a small loss, to ensure smooth trading for clients. They are the 'go-to' firm for a particular sector.

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Balancing Market Share and Profitability

Liability traders navigate the delicate balance between attracting clients and maintaining a profitable trading strategy. They must determine when to make a market, even at a loss, to secure future business.

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Study Notes

Institutional Client Working

  • Institutional clients include various entities like mutual funds, pension funds, and corporate treasuries
  • Differences between buy-side and sell-side are discussed extensively
  • Sell side deals in products and services like trading, investing, research, investment advice, trade execution, and corporate finance
  • Buy side is the investor, both institutional and retail
  • Investment dealers are full-service, investment banking boutiques, and self-directed dealers
  • Full-service dealers are involved in various aspects of securities markets
  • Investment banking boutiques focus on specific sectors and companies
  • Self-directed dealers focus on providing equity trading services to retail investors with small-to-medium accounts

Learning Objectives

  • Differentiate sell-side and buy-side in institutional marketplace
  • List the responsibilities of buy-side portfolio manager and trader
  • Describe sell-side back, middle, and front office roles in equity sales and trading
  • Describe equity and fixed-income sell-side revenue sources
  • Explain the institutional settlement process
  • Describe roles and responsibilities within an institutional investment dealer
  • Contrast different buy-side investment management styles
  • Define algorithmic trading, high-frequency trading, and dark pools

Content Areas

  • The Sell Side and the Buy Side of the Market
  • The Responsibilities of a Buy-Side Portfolio Manager and Trader
  • The Organizational Structure of a Sell-Side Trading Firm
  • The Revenue Sources for Sell-Side Trading Firms
  • Institutional Clearing and Settlement
  • Roles and Responsibilities in the Institutional Market
  • Investment Styles, Guidelines, and Restrictions
  • Algorithmic Trading

Key Terms

  • Agency traders
  • Algorithmic trading
  • Analyst
  • Axe Sheets
  • Buy-side
  • Clearing
  • Coverage traders
  • Dark pools
  • Direct electronic access
  • High-frequency trading
  • Institutional clients
  • Institutional salesperson
  • Institutional trader
  • Investment bankers
  • Liability traders
  • Market makers
  • Order flow
  • Origination
  • Price spread
  • Prime brokerage
  • Proprietary traders
  • Research associate
  • Responsible designated trader
  • Settlement
  • Soft-dollar arrangement
  • Straight-through processing
  • Trade-matching elements
  • Universal Market Integrity Rules

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Related Documents

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

Description

Test your knowledge on the roles and responsibilities of institutional clients, including the distinctions between buy-side and sell-side. This quiz covers core concepts such as investment dealers, full-service firms, and the functions of portfolio managers and traders in the institutional marketplace.

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