Piotr Staszkiewcz is a Polish economist interested in auditing and financial markets. He is a public auditor registered at KIBR (Polish Audit Association). He earned his Ph.D. in macroeconomics from Wroclaw Economic University in 2003. From 2003 to 2005 he served as a member of the Management Board of Low Silesia Chamber of Auditors. In 2009 he was appointed to the Polish Auditor Examination Commission by the Polish Ministry of Finance. He is also a fellow of the Polish Economic Association.
Chapter 2 Market Participants
Financial intermediaries provide customers with financial instruments that cannot efficiently be obtained by making direct transactions on security markets.
intermediates stock exchange business model IPO order execution investment activities short selling 2.1. Financial intermediaries
Financial intermediaries provide customers with financial instruments that cannot efficiently be obtained by making direct transactions on security markets. Consider : An investment fund collects money from small investors and invests a lump sum into a security, thereby achieving a price discount due to the size of the order. This would not be achievable if a single investor were to invest directly in the same instruments. Intermediaries are institutions that require, usually, authorization to operate in regulated financial markets. They include the following: - Central banks - Banks - Investment banks - Broker-dealers - Mutual funds (USIT's) - Insurance companies - Pension and retirement funds - Commodity dealers - Locals - Other institutional investors - Non-institutional intermediaries The previous list indicates typical organized (or legal-based) entities; however, there are number of structures based on contractual agreements such as: consortia, special purpose vehicles (used, e.g., for securitization), financial conglomerates, and joint venture schemes, which build up another layer for non-institutional intermediaries. Analysis of such a structure is beyond the scope of this book. 2.2. Business models
Typical business models for the financial intermediaries are presented in the following table: Name Idea of Activity Gain Earned on Typical Customer Basic Customer Benefit Deposit Bank Collects deposits at lower rates and extends the credits on higher rates. Usually there is a difference in the maturity of the credits and deposits The difference between the rates and mismatch of maturities Retail customer Professional knowledge not required, product is easy but expensive Investment Bank Provides financing in return for financial instruments Fees Corporate Lower cost of financing Insurance Company Accepts risk from individuals in return for a premium Premium Mixed Risk transfer Broker/Agent Usually represents client in front of many institutions. Works on behalf of client.
Brokers do act as intermediaries and do not keep inventory
Commission Mixed Selection costs Dealer/Principal Usually represents an institution in front of many clients. May buy assets on their own account and resell to clients. Dealers do keep an inventory (e.g., IPO securities, new cars)
Commission plus capital gain resulting from mismatch of time between acceptance and execution of order Mixed Product expertize Mutual fund Collects assets from clients and manages a lump sum fund Success fee
Management fee Mixed Acquisition of assets on gross sales (discounts available)/td