Course:

COMMODITIES AND
ALTERNATIVE INVESTMENTS
Course Instructor: Umang Somani, CAIA (vf-umang@gim.ac.in)

Session 8: Types of Markets, Participants

and Regulatory Authorities
1
Types of Markets

2
Types of Markets

• New issues, for instance in an Initial Public Offering (IPO), are sold in
primary capital markets and distributed by an underwriter who is
responsible for the organization, risk bearing (during placement), and the
distribution, or sale, of newly issued securities.

• Post their initial offerings, securities are traded in secondary capital

markets such as for instance the New York Stock Exchange (NYSE) which
provide greater liquidity and a continuous flow of price information.

3
Types of Markets

• There is also a marketplace in which brokers and institutional investors

(e.g. fund managers) can trade exchange-listed securities.

• There are other markets, sometimes referred to as Dark Pools, which are
private exchanges that facilitate exclusive private transactions between
institutional investors. A wide range of securities and structured products
can trade on such markets with little transparency to the broad public
market.

4
Types of Market Participants

5
Types of Market Participants

• Buy Side
• Sell Side
• Service Providers
• Regulators

6
Types of Market Participants

• Buy Side
• Sell Side
• Service Providers
• Regulators

7
Buy Side

• Plan Sponsors : It is a designated party (a company or employer) that sets

up a healthcare or retirement plan (such as a 401(k)) for the benefit of the
organization's employees. The responsibilities of the plan sponsor include
determining membership parameters, investment choices, and in some
cases, providing contribution payments in the form of cash and/or stock.

• Endowments: It refers to a large capital base that is maintained on an

inflation adjusted basis in perpetuity.

• Foundations: A non-profit fund established for charitable purposes to

support specific types of activities. As compared to endowments,
foundations often have limited lives and also tend to have annual minimum
spending rates (In US, it is 5%)
8
Buy Side
• Family Office/Private Wealth: It is essentially a managed pool of capital
that is owned by one individual or a small group of individuals. Their goals
could include intergenerational wealth transfer, philanthropy, supporting a
foundation, or ensuring a certain lifestyle for the family members.

• Sovereign Funds: These are large state owned investment funds that exist
to benefit future governmental spending needs and possibly to stabilize
currencies. Money to these funds can come from natural resources,
persistent trade surpluses and/or possibly the receipt of foreign aid.

• Hedge Funds/ Private Equity/ Funds of Funds

9
Buy Side

• Separately Managed Accounts (SMA): These are individual investment

accounts offered by a brokerage firm and managed by independent
investment management firms. The relationship between an investment
adviser and a client to which it provides advice is typically documented by a
written investment management agreement.

• An SMA can be thought of as similar to pooled investment arrangements,

such as mutual funds, in that a customer pays a fee to a money manager for
managing a customer's investment

10
Types of Market Participants

• Buy Side
• Sell Side
• Service Providers
• Regulators

11
Sell Side

• Large Dealer Banks: These are major financial institutions, such as

Goldman Sachs, Deutsche Bank, and the Barclays Group, that deal in
securities and derivatives.

• Large dealer banks are much larger and more complex than retail bank.

• Generally, most large dealer banks act as intermediaries in the markets for
securities, repurchase agreements, securities lending, and over-the-
counter (OTC) derivatives. In addition, large dealer banks are often
engaged in propriety trading and brokering hedge funds.

12
Sell Side

• Brokers: Also on the sell-side are retail brokers that receive commissions
for executing transactions and that have research departments that make
investment recommendations.

• Advantages of using brokers include their expertise in the trading process,

their access to other traders and exchanges, and their ability to prevent
clearance and settlement problems.

• Because brokers play the role of middlemen in the trading process, traders
can also utilize broker services when they want to remain anonymous to
other traders.

13
Types of Market Participants

• Buy Side
• Sell Side
• Service Providers
• Regulators

14
Service Providers
• Prime Brokers: They allow an investment manager to carry out trades in multiple
financial instruments at multiple broker dealers while keeping all cash and securities at a
single firm. A prime broker's essential job is to clear and finance trades for its client,
provide research, arrange financing, and produce portfolio accounting.

• Accountants and Auditors

• Attorneys

• Fund Administrators: They are responsible for bookkeeping, third-party information

gathering, and securities valuation functions for all of their funds, both onshore and
offshore. The fund administrator maintains a general ledger account, marks the fund's
books, maintains its records, carries out monthly accounting, supplies its monthly
profit/loss statements, calculates its returns, and provides an unbiased, third-party
resource for price confirmation on security positions.
15
Service Providers
• Hedge Fund Infrastructure: Hedge funds can require a complicated infrastructure and
extensive technological systems. The infrastructure may have three main components:
(1) platforms, (2) software, and (3) data.

• Consultants

• Depositories and Custodians: They are responsible for holding their clients’ cash and
securities and settling clients’ trades, both of which maintain the integrity of clients’
assets while ensuring that trades are settled quickly.

• Commercial Banks: Hedge funds may enlist the services of a commercial bank to
facilitate the flow of both investment- and noninvestment-related capital and they may
utilize their commercial bank for loans, credit enhancement, and/or lines of credit.

16
Types of Market Participants

• Buy Side
• Sell Side
• Service Providers
• Regulators

17
Financial Regulatory Authorities in US and Europe

18
Financial Regulators

• US:
• SEC – Securities and Exchange Commission
• FINRA – Financial Industry Regulatory Authority
• CFTC – US Commodity Futures Trading Commission
• NFA – National Futures Association

• Europe:
• ESMA – European Securities and Markets Authority
• EBA – European Banking Authority
• EIOPA – European Insurance and Occupational Pensions Authority
• ESRB – European Systemic Risk Board

19
Questions?

20