Wednesday, 28 May 2008

Financial Markets - The Intermediaries

The last important part of our discussion is the role of market intermediaries. These are interesting people, often the most important ones. They are:
  • Market Makers
    • They are a firm(sometimes an individual in certain unorganized markets like real estate) who offers(or makes) a price to a financial instrument or commodity.
    • They quote 2 prices - a bid and an offer.
    • Their intention is to make profit on the bid/offer price spread. e.g. the bid/offer price for USD/INR may be 42.2 and 42.1. Price spread = 0.1
  • Distributors/Sales Staff/Brokers
    • Often a trader/dealer doesn't have any direct contact with the customer. They need sales staff.
    • These are the people who interact with clients and market makers.
    • They receive requirements from clients and fetch price from a market maker.
    • Quite often, they "broker" between two different clients by introducing each other if an offsetting requirement is met without involving the market maker.
    • They may be in touch with different market makers to fetch the best price for their client.
  • Structurers/Research
    • This is a critical part. With various risks involved in the market, all institutions need research personnel to device ways to cut risk.
    • They take market data as input and provide highly customized solution to a given problem/risk.
    • Researching for derivatives to device a way out is a common practice.
  • Middle/Back Office
    • After the transaction is complete, it needs to verified, cleared/settled in bank account of counter-parties. There are other related office/paper work involved in a transaction that is taken care of by the Middle/Back office staff.

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