27. Working With Institutional Client

Working with the Institutional Client

Chapter Overview

In this chapter, we will explore the complexities of working with institutional clients. The chapter begins with an overview of the institutional marketplace, followed by an in-depth examination of the buy side and sell side of the market. You will gain an understanding of the structure, functions, and operations of both buy-side and sell-side firms. This chapter also covers various elements of institutional trading, such as revenue sources, clearing and settlement processes, and suitability requirements. We unpack the roles and responsibilities of participants in the institutional marketplace, review different investment styles, guidelines, and restrictions, and dive into advanced trading mechanisms such as algorithmic trading, high-frequency trading, and dark pools.

Learning Objectives

1. Distinguish Between the Sell Side and Buy Side in the Institutional Marketplace

• Content Area: The Sell Side and the Buy Side of the Market

2. List Responsibilities of Buy-Side Portfolio Managers and Traders

• Content Area: The Responsibilities of a Buy-Side Portfolio Manager and Trader

3. Describe Roles and Activities of Sell-Side Firm Offices

• Content Area: The Organizational Structure of a Sell-Side Trading Firm

4. Identify Revenue Sources on Equity and Fixed-Income Trading Desks

• Content Area: The Revenue Sources for Sell-Side Trading Firms

5. Explain Institutional Settlement Processes

• Content Area: Institutional Clearing and Settlement

6. Describe Roles and Responsibilities Within an Institutional Investment Dealer

• Content Area: Roles and Responsibilities in the Institutional Market

7. Contrast Different Buy-Side Investment Management Styles

• Content Area: Investment Styles, Guidelines, and Restrictions

8. Define Algorithmic Trading, High-Frequency Trading, and Dark Pools

• Content Area: Algorithmic Trading, High-Frequency Trading, Dark Pools

Key Terms

Key terms are marked in bold throughout the chapter and are defined in the glossary:

• Agency traders
• Algorithmic trading
• Buy side
• Clearing
• Dark pools
• High-frequency trading (HFT)
• Institutional clients
• Market makers
• Order flow
• Prime brokerage
• Proprietary traders
• Settlement
• Sell side
• Soft-dollar arrangement
• Straight-through processing (STP)

Frequently Asked Questions (FAQ)

What is the difference between the buy side and the sell side?

• Buy side firms manage funds to buy securities for their own accounts like mutual funds or pension funds. Sell side firms facilitate the buying and selling of securities for clients and maintain an inventory for trading.

What roles do buy-side portfolio managers and traders perform?

• Buy-side portfolio managers are responsible for making investment decisions in order to meet fund objectives, while buy-side traders execute trades based on those strategies.

What are major revenue sources for sell-side firms?

• Revenue can come from trading margins, brokerage fees, and investment banking activities, including underwriting fees.

How does institutional settlement work?

• Settlement includes the confirmation of trade details, the transfer of securities, and the payment of funds.

What are dark pools?

• Dark pools are private trading platforms that allow institutional investors to trade stocks without exposing their orders to the public, thus preventing significant market impact.

Key Takeaways

• Understanding the different roles and firms within the buy-side and sell-side markets is crucial for functioning effectively in institutional trading.
• Institutional traders and portfolio managers play critical roles within their organizations that impact investment strategies and trading decisions.
• Knowledge of advanced trading technologies and platforms like algorithmic trading, high-frequency trading, and dark pools is essential for modern institutional trading.
• Familiarity with the institutional clearing and settlement process ensures smoother, more effective trading operations.

Glossary of Terms

• Agency Traders: Traders who execute orders on behalf of clients without taking positions for themselves.
• Algorithmic Trading: The use of algorithms to automate trading strategies and execute trades at optimal times and prices.
• Buy Side: Part of the financial market that deals with asset management firms which buy securities for their portfolio management.
• Clearing: The process of reconciling transactions and ensuring the transfer of ownership and funds between parties.
• Dark Pools: Trading platforms that allow institutional investors to trade large volumes of securities without market visibility.
• High-Frequency Trading (HFT): The use of high-speed technology to execute large numbers of orders at extremely high speeds changing the market structure.
• Institutional Clients: Large organizations such as mutual funds, pension funds, endowments, and insurance companies that invest large amounts in securities.
• Market Makers: Firms or individuals providing liquidity by buying and selling securities and profiting from the difference between bid offer spreads.
• Sell Side: Part of the financial market that deals with advisory services, including brokerage, investment banking, and market making.
• Settlement: Completion of the transaction process where securities are delivered in exchange for payment.
• Soft-Dollar Arrangement: Agreements where fund managers receive research or other services from brokerages in exchange for trading commissions.
• Straight-Through Processing (STP): Automation of trade processes, allowing faster and more efficient settlement.

    flowchart TB
	    A[Institutional Clients] -- Receive Advises --> B[Sell-Side Firms]
	    B -- Helps to buy Securities --> A
	    A -- Buys/Sells Through --> C[Buy-Side Firms]
	    B -- Brokers Transactions --> D[Market]
	    C -- Invests in Securities --> D

Assess and Solidify Your Understanding

Welcome to the Knowledge Checkpoint! At the end of each chapter, you’ll find 10 carefully curated quizzes designed to reinforce the key concepts covered. These questions will help you gauge your grasp of the material, identify areas that need further review, and ensure you’re on the right track towards mastering the content for the Canadian Securities certification exams. Take your time, think critically, and use these quizzes as a tool to enhance your learning journey.

Good luck!

In this section

• 27.1 Introduction
  Explore the roles and responsibilities of retail and institutional investment dealers in the Canadian Securities market. Understand the different styles and guidelines they follow to serve their clients' needs, and stay updated with current trends.
• 27.2 Sell Side And Buy Side Of Market
  Explore the distinctions between the sell side and buy side within the institutional marketplace. Learn about the roles, services, and interplay between investment dealers and various types of investors.
  • 27.2.1 Sell Side
    Comprehensive guide covering the Sell Side of Canadian investment dealers, including types such as full-service dealers, investment banking boutiques, and self-directed dealers.
  • 27.2.2 Buy Side
    Explore the institutional clients—corporate treasuries, insurance companies, pension funds, mutual funds, hedge funds, endowments, trusts, and investment management firms—that represent the buy side in the financial markets.
  • 27.2.3 Direct Electronic Access
    This section covers Direct Electronic Access (DEA), including its historical context, risks, regulatory measures, and the roles and responsibilities of institutional portfolio managers and traders.