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Global Financial Market. Gautam Goswami Fordham University. Private Financial Intermediaries (FIs). Private FIs: profit-seeking firms whose assets are predominantly financial.

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Global financial market

Global Financial Market

Gautam Goswami

Fordham University


Private financial intermediaries fis
Private Financial Intermediaries (FIs)

  • Private FIs: profit-seeking firms whose assets are predominantly financial.

  • Financial Intermediaries (FIs) are the professionals that guide us through our risk shifting and cash flow timing transactions in financial markets.


Broker dealer operations
Broker/Dealer Operations

  • Broker:

    FI that brings together buyers and sellers without acting as a principle in the transaction.

  • Dealer:

    FI that makes a market in a financial security, thereby participating as a principal in the financial transaction.

  • Market Maker or Specialists:

    Dealers that make a market in one or more number of securities and who maintain a “fair and orderly” market by dealing personally in the market.


Other operations of private fis
Other Operations of Private FIs

  • Underwriting: the process whereby the FI brings to market a newly issued financial security.

  • Asset Transformation: the FI’s creation of new financial securities by selling financial securities that are different from the financial securities it buys.

  • Securitization: the packaging of non-traded financial securities into a newly created tradable financial security.


The structure of financial markets
The Structure of Financial Markets

  • Two settings: 1. Formal Financial Exchanges

    2. Over-the-counter (OTC) Markets

  • Financial Exchanges are formalized Trading Institutions. Only members have the right to trade in Fin. Exchanges. Each Financial Exchange has detailed and explicit rules governing the conduct of the trade of securities.

    Examples:

    NYSE: New York Stock Exchange

    CBOT: Chicago Board of Trade

    CME: Chicago Mercantile Exchange

    LIFFE: London International Financial Futures Exchange

    LSE: London Stock Exchange


The structure of financial markets cont
The Structure of Financial Markets (cont.)

  • Over The Counter (OTC) covers all other financial market transactions. In an OTC trade buyer or seller are free to negotiate all contractual details. Modern OTC markets rely on telephone and computer screens to link buyers and sellers with market dealers. Dealers quote both bid and ask prices to prospective buyers and sellers.

  • Examples: NASDAQ, FX Market

    NASDAQ: National Association of Securities Trader Automated Quotation

    FX Market: Foreign Exchange Inter-bank Market


The structure of financial markets cont1
The Structure of Financial Markets (cont.)

  • Drivers of Liquidity: Manual vs. Automated trading systems

    Example 1: Trade in German Govt. Bond futures moved from LIFFE derivatives market to Swiss- German derivatives exchange EUREX

    Example 2: Flight from BBB to AA bonds in 1998 after Russian Default

  • Liquidity can also be created through the removal of credit (counterparty) risk. In the money market use of “Sale and Repurchase of Agreement’ or REPO is such an example.

  • Repo is a short-term contract when one party agrees to sell a security to another party (the lender) and then repurchase subsequently at a higher price.


Clearing settlement service
Clearing & Settlement Service

  • Process: Each party (say A&B) keeps cash in a Bank Account, known as Clearing Bank) and keeps his/her own securities in “securities accounts”. To settle a trade, the securities are taking out of party A’s account and deposited into party B’s account, while the cash is taking out of party B’s account and deposited into party A’s account.

  • Oldest method – messengers sent for confirmation (up to 50’s).


Clearing settlement service cont
Clearing & Settlement Service (cont.)

  • Depository Trust Company (DTC) in 60’s.

  • All parties have securities accounts with DTC and DTC keeps records of all transfers.

  • Other than the recording a trade, a trade confirmation is also required. In last 30 years, all clearing houses are consolidated as:

  • For equity trades: National Security Clearing Corporation (NSCC)

  • For all Fixed Income: Fixed Income Clearing Corporation (FICC)

  • Both NSCC and FICC, as well as DTC are subsidiaries of Depository Trust & Clearing Corporation (DTCC).

  • Today most trades are handled in an automated fashion from organization to settlement (called Straight through Processing, STP).


Clearing settlement service cont1
Clearing & Settlement Service (cont.)

  • Regulations:

  • There are two types of regulation in securities market, one by legislation (through US government) and the other is self governing. After Great Depression and 1929 market crash, the Security Act helped to create SEC or Security Exchange Commission and Commodity Futures Trading Commission (CFTC in 1972) which are government agencies.

  • Non-government agencies/ self regulatory organizations:

    National Association of Security Dealers (NASC)

    National Futures Association (NFA)

    Bond Markets Association ( BMA)

  • Regulation and Compliance:

  • Whether self regulated or regulated by government, compliance is an important issue in every firm.


Clearing settlement service cont2
Clearing & Settlement Service (cont.)

Type of PFI

1. Buy-side companies:

Professional Asset Management Companies (invest client’s money): Blackrock, PIMCO, BGI, Deutsche Asset Mgmt

Mutual Fund Co.

2. Flagship Sell-side companies are:

Goldman Sachs

Morgan Stanley

Lehman Bros

Bear Sterns

3. Mutual Fund or Asset management companies.

Fidelity

Vanguard


Clearing settlement service cont3
Clearing & Settlement Service (cont.)

Commercial Bank and Investment Bank

  • 1930’s Glass Steagal Act d separated the Commercial Banking activity and Investment Banking activity. In 1990’s it changed and

  • Citibank bought Salomon Brothers

  • Chase bought JP Morgan

  • UBS

  • HSBC

  • Deutsche Bank

  • Credit Swiss


Clearing settlement service cont4
Clearing & Settlement Service (cont.)

Money is made in Private Financial Intermediaries

  • Investment Banking fees

  • Asset Management fees

  • Brokerage fees

  • Market making revenues

  • Proprietary trading revenues

  • Hedge Funds make money from asset management and proprietary trading

  • Dealers make money from Market making revenues and Proprietary trading revenues

  • Brokers make money from Brokerage fees.


Global financial markets
Global Financial Markets

  • 1700’s: London, Amsterdam, Paris, Antwerp

  • Mid-1800’s: London, Amsterdam, Paris and New York

  • Mid-1900’s: mainly New York

  • 1990: London is back with New York, Tokyo

  • 1990’s: PIMCO, BAI – west coast

    Florida, California

    USA Europe Asia Australia

    New York London Tokyo Sydney

    Chicago Paris Singapore

    Frankfort Hong Kong

    +California Amsterdam Shanghai

    +Florida Bombay


Global financial markets cont
Global Financial Markets (cont.)

  • Investment Banking  Underwriting

     Bringing new securities to market

     Advising on Mergers & Acquisitions

  • Retail Brokerage – buy/sell securities for clients

    Maintain accounts for individual investments

  • Prime Brokerage – buy & sell to other brokers/ dealers

  • Asset Management – buy side activity

  • Equities / Fixed Income / Securities – Trading


Global financial markets cont1
Global Financial Markets (cont.)

  • Trading groups are organized by type of customers.

  • Hedge Funds, Banks, Asset Managers, Corporations

  • Trading group include a Trader, Trading Assistants, Interns + some Quants And Technology people for support.

  • Trade Solicitation vs. Pricing securities vs. Closing Trade

  • Trading Books and manage p&L of the trading Desk

  • Bank Office or operations - reconciliation/clearing

    - netting

    - settling trades

  • Traders are supported by research group

    1. Understand the existing Pricing Model

    2. Develop programs that traders could run on their computers

  • All have Market Data Platforms (Bloomberg or Reuters)

  • Recent trend is Quantitative Risk Management


Global financial markets cont2
Global Financial Markets (cont.)

  • Other Market Players

    1. Portfolio Managers  data mining task

    2. Hedge Funds  Use models and take risks

    (smaller operations) typically hires – quant traders

  • Quant traders need expertise in Excel modeling but knowledge of quantitative modeling and the knowledge of particular products are necessary.

  • Desk Quants  creates and maintains quantitative models that are used in day to day trading activity. Desk Quants are an intermediary between trader and technology units.

  • Sales and Market Research

  • They provide research support to the sales people. Broader analysis of economic / political / and issues driving market.


Global financial markets cont3
Global Financial Markets (cont.)

Positions of hiring:

  • Analysts vs. Associates

  • VP vs. Directors

  • Managing director


Sell side financial intermediaries participants in secondary markets
Sell Side Financial Intermediaries: Participants in Secondary Markets

Dealer

Dealer

Dealer

Inter

Broker

Dealer


Exchanges Secondary Markets

NYSE

Exchanges

NASDAQ

Exchanges

FCN

Broker

Broker

Broker

I

N

V

E

S

T

O

R

S


Organization structure of a sell side financial intermediaries
Organization Structure of a Sell Side Financial Intermediaries:

TOP MANAGEMENT

Legal / Compliance

Revenue / Producing

Technology

Risk Management

Investment Banking

Equity

Asset Management

Fixed Income

Retail / Prime Brokarage

Foreign Exchange

Rates

Credit

Risk Management

Mortgages

Treasuries

Int. Rate Derivatives

Munis

Swaps

Structured Products


Market participants
Market Participants: Financial Intermediaries:

Firms Government Agencies Other FIs

General Motors

US Treasury

FNMA

World Banks

Lehman Bros.

Goldman Sachs

Citi Group

I

N

V

E

S

T

O

R

S


Global financial markets1
Global Financial Markets Financial Intermediaries:

Size of Different Global Financial Markets

(Source: RPM Handbook)







Table 6 principal exchanges for equity derivatives
Table 6. Principal Exchanges for Equity Derivatives Billion)

Notes: EUREX was formed joining DTB and SOFEX Euornext is a combination of Dutch and Paris exchanges

DTB: Deutsche TerminBorse

SOFEX: Swiss Options and Financial Futures Exchanges




Figure 2.1 DerivativesPrivate Financial Intermediaries (FIs)

Brokers

Financial

Securities

Financial

Securities

Dealers

Financial

Securities

Financial

Securities

Transparent FIs

Underwriters

Investment bankers

Financial

Securities

Financial

Securities

Funds Deficit

Units

Funds Surplus

Units

Financial

Securities

Shares

Mutual funds

Pension funds

Opaque FIs

Loans

Deposits

Banks

Financial

Securities

Policies

Insurance comp

Non-intermediated

Transactions

(direct financing)

IOUs

IOUs


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