4. Secondary Market Making Dealer Broker Activity

Md. Humayan Kabir ACA 1

Investment and Merchant Banking

Secondary Market Making: Dealer / Broker Activity


Essential TermsSecondary Market: is the market in which

previously issued securities trade among investors and between investors and dealers.

Primary Market: in which issuers distribute securities through underwriters to investors.


Dealing versus BrokingDealer:

Transactions for his own accountWorking as principalNo brokerage commissionEarning income from ask and bid difference,

spreadBid means buying price Ask means selling or offer price


Cont...Broker

Transaction on behalf of customers or clientsEarning brokerage fees or commissionWorking as agent of clientsHe is not principal of transactions


Dealer Activity in Financial MarketsDealer Markets: Specific securities are

tradedSwapsMortgage Backed SecuritiesOTC Options such as caps and floorsGuaranteed investment contracts etc.

The dealer stands both bid and ask pricesDealers profit is spread of buy and sell


Managing Dealer RisksIdentify the risksQuantify the risks and Manage the risks


Financing Dealer InventoryFinancing mainly come from sale repurchase

and resale markets called repo markets


Other Dealer MarketsRepos MarketsReverse Repos MarketsBond MarketsSwaps MarketThe Mortgage-backed MarketsThe Junk Bond MarketsThe Tax-exempt Markets


Brokerage Activity in Financial MarketsBrokers are persons to act as agents for

othersMarket OrderLimit OrderFloor Broker: who is executing tradeSpecialist book


Other Broker ServicesMonitor margin accountsInvestment management servicesAssist in structuring portfoliosProvide research and recommendationsDiscretionary accounts


Rules of Brokerage: Know Your CustomersTo provide ideal services to the clients, it is

needed to know the customers. This process is called Know Your Customers.Source of incomeClients wealthType and duration of experiance


Possible AbusesBucket Shops

Take order but not executed wait till price moves away

Boiler RoomsBoiler room operations are firms that uses high

pressure sales tactics to sell securities, often to naive investors

ChurningRefers to excessive trading to earn commission


Cont...Suitability

Recommendation of investment decision of customers

Front RunningTrading ahead of customers

Poor fillsFill the order with mispriced or inappropriate

price

Thanks to all

4. Secondary Market Making Dealer Broker Activity

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