International Financial Markets Essay, Research Paper
Contents
Introduction
Purpose of the Reuters Guide to the International Financial Markets
Who’s Who in the International Financial Markets
The Roles in the International Financial Markets
Traders
Brokers
Sales
Investment Institutions
Decision Support
General Management
Trader Support
Back Office
Retail Sector
Introduction to Financial Markets
Overview of Financial Markets
Types of Instruments
Equity
Debt
Commodity
Over The Counter or Exchange Traded
Cash or Derivative
Domestic or Global
Types of Markets
The Foreign Exchange (FX) Market
Fixed Income Market
Equities Market
Commodities Market
Relationships between Instruments and Markets
Types of Institutions
Banks
Building Societies
Broking Firms
Corporations
Local Authorities
Fund Management
Attributes of Institutions
Roles within Markets
Traders
Fund Managers
Corporate Treasurers
Brokers
Sales
Decision Management
General Management
Trader Support
Back Office Support
International Considerations
Foreign Exchange Traders
What Does a Foreign Exchange Trader Do?
The Foreign Exchange Trader’s Role
Specialisms Within the Foreign Exchange Market
Currencies Traded
Typical Employers
Characteristics of Foreign Exchange Traders
Demographics
Career Path
Computer Skills
Working Relationships
External Relationships
Relationships with Colleagues
The Workplace
Environment
Computer Systems
Other Equipment
Common Tasks
Form an Opinion
Receive Analysts’ Predictions
Trade on the Markets
Complete Details of a Deal
Complete Administration for the Day
Fixed Income Traders
What Does a Fixed Income Trader Do?
The Trader’s Role
Specialisation Within Fixed Income
Where are the Bond Markets?
Typical Employers
Characteristics of Fixed Income Traders
Career Path
Working Relationships
External Relationships
Relationships with Colleagues
Common Tasks
Form an Opinion
Attend the morning meeting
Trade on the Markets
Daily Administration
Information Requirements
Sales People in the Financial Markets
What Does a Salesperson Do?
The Salesperson’s Role
Specialisation Within Sales
Typical Employers
Characteristics of Salespeople
Career Path
User Characteristics
Working Relationships
Working Relationships
Common Tasks
Understand Customers’ Requirements
Answer a Customer Enquiry
Call a Customer with an Opportunity
Get a Price from a Trader
Scenario: A day in the life of a salesperson
Analysts
What Does an Analyst Do?
The Analyst’s Role
Forms of Analysis
Typical Employers
Characteristics of Analysts
Career Path
Working Relationships
External Relationships
Relationships with Colleagues
Common Tasks
Form a View of the Markets
Write the Morning Report (Sell Side)
Brief the Sales Force (Sell Side)
Monday Morning Meeting (Buy Side)
Company Visits
Broker Research
Phone Calls from Investors (Sell Side)
Information Requirements
Online Information
Other Information
Fund Managers
What Does a Fund Manager Do?
The Fund Manager’s Role
Specialisms Within Fund Management
Typical Employers
Characteristics of Fund Managers
Career Path
Working Relationships
External Relationships
Relationships with Colleagues
The Workplace
Environment
Computer Systems
Common Tasks
Monday Morning Meeting
Receiving Calls from Brokers
Analysing a Possible Investment
Assessing the Current Portfolio
Studying Broker Research
Buying and Selling
Thursday Afternoon Meeting
Information Requirements
Online Information
Other Information
Glossary
Bibliography
Chapter 1
Introduction
Purpose of the Reuters Guide to the International Financial Markets
Why The Reuters Guide to the International Financial Markets? Whenever I talk to students, especially those not studying economics, about the world of the financial markets they express huge interest but tell me they want to know more. In general this desire for information is related to being able to understand what goes on so that job hunting can be carried out from a position of knowledge rather than ignorance! This Guide, seeks to fill this gap and help, you the student, understand something of the mechanics of the International Financial Markets, the players and the sheer opportunity for satisfying and rewarding jobs within them. The Guide supplements a series of seminars which will be given in October 1997 at a number of UK universities, see the Graduate web-site, address below, for dates and locations. Of course, the markets comprise the obvious companies, such as the investments banks, but they are only part of the story. The International Financial Markets function because they receive a continuous supply of information – prices, facts, figures, news of politics, economics, natural disasters to name but a few. And it is these companies, such as Reuters, whose job it is to search out this information and to deliver it quickly, accurately and without bias. Understanding the information within the financial markets is a crucial part of understanding the market themselves – not least because the information providers are also major employers! This Guide is provided for private educational purposes only and within this usage you are free to copy it. Beyond this usage it is protected by copyright and written permission from Reuters is required prior to reproduction. To ensure the fastest possible download time from the Internet, the document is text only and it is only a guide, giving a flavour without being exhaustive. I hope you find it useful. Should you have any comments about how we might improve I would welcome them and in the meantime good reading. University Relations Department Reuters Ltd 85 Fleet St London EC4P 4AJ UK Email: ukgraduate.recruitment@reuters.com Corporate site: www.reuters.com Graduate site: www.ims.reuters.com/ukgrad
What does Reuters Guide to the International Financial Markets provide? Reuters Guide to the International Financial Markets provides a general overview of the International Financial Markets markets, for which Reuters is the major supplier of information, and roles within those markets. The document then profiles five customer groups, and provides an analysis of their roles. These groups are: + Foreign Exchange traders + Fixed Income traders + Salespeople + Analysts + Fund Managers
What is contained in the detailed analysis? Each of the profiled roles in this document contains the following information:
+ characteristics such as demographics, career path, computer literacy + working relationships both within and external to the institution where they work + common tasks.
Sources of information Information for Reuters Guide to the International Financial Markets was gathered from:
See Bibliography on + introductory finance books + internal Reuters documents + interviews with financial markets practitioners + interviews with Reuters customer trainers and marketing staff.
Chapter 2
Who’s Who in the International Financial Markets
The Roles in the International Financial Markets
The participants in the International Financial Markets work in a wide variety of roles. Figure 0.1 illustrates these roles.
Figure 1 Roles in the International Financial Markets
Traders
Traders buy and sell in the financial markets. Trading may take place at physical exchanges, for example, for commodities or futures, or over the counter, for example, in foreign exchange. A trader specialises in a particular type of financial instrument. Different types of trader have different roles and requirements. Common types of trader are described below.
Money
Money traders buy and sell currencies and short term debt to fund the business of their employer, such as lending or trade, or for profit. The instruments that they trade are usually of maturity between one month and one year. The instruments may be cash, for example, deposits, treasury bills, Certificates of Deposits or derivatives, such as Interest Rate Futures, FRAs, swaps.
Money traders work in banks and corporate treasury departments. Trading in the cash market does not take place at an exchange but is performed over the counter using telephones and dealing terminals Money traders require foreign exchange rates, bank deposit rates and news information.
Foreign Exchange
See Foreign Exchange Traders on page 33 Foreign exchange traders generally trade currencies on a shorter term basis than money traders: up to one month maturity. The trading environment is over the counter using telephones and dealing terminals. Foreign exchange traders require foreign exchange rates, bank deposit rates and news.
Bonds
See Fixed Income Traders on page 55 Bond traders buy and sell government, quasi-government and corporate bonds for customers and for their own account. They work in investment banks and securities houses. Most bond trading is over the counter. Traders’ requirements include bond data such as issuers, prices and yields; interest rates, foreign exchange rates, graphical analysis and news.
Equities
Equities traders buy and sell equities (stocks and shares) for customers and for their own account. They work for investment and securities houses and are members of an exchange, such as the London Stock Exchange for UK equities. Some traders specialise as market makers; they are obliged to quote buy and sell prices for a selection of chosen instruments at all times during market hours Most equity trading is exchange based, although large over-the-counter equity markets exist, for example NASDAQ in the US. Equities traders require equity prices, information about related instruments such as convertibles and warrants, interest rates, graphical analysis and news.
Commodities
Commodities traders buy and sell commodities such as metals, softs, grains for customers and for their own account. They are normally members of a commodity exchange, such as the Chicago Board of Trade, where trading takes place. Commodities traders work in independent companies and as part of larger financial institutions. They require market future and spot prices, graphical analysis and news.
Energy
Energy traders buy and sell energy contracts oil and gas for customers and for their own account. They are members of an exchange where the trading takes place, such as the International Petroleum Exchange in London. Energy traders work in independent companies and a small number of financial institutions. They require market future and spot prices, foreign exchange rates, graphical analysis and news.
Derivatives
Derivatives trading is a relatively new activity. Traders buy and sell derivatives instruments such as swaps, futures and options for customers and for their own account, and operate across money, bond, equity and commodity markets. Derivatives traders require a wide variety of information, including data which relates to the underlying instruments of the derivatives they trade. They need access to exchange and OTC prices, both real time and historical, plus of course, relevant news. news.
Brokers
Brokers intermediate between traders and customers. They earn commission on the deals that they arrange. Brokers do not normally manage a position, that is, own equities, currency or other instruments, in the market in which they trade. Brokers exist in the foreign exchange, bond and equity markets. They work for independent brokerage companies. Brokers require the same type of information as traders: a money broker would require foreign exchange rates, bank deposit rates, bond data, graphical analysis and news. However, brokers need to obtain this data from a large number of players in the market, so that their prices reflect the market as closely as possible.
Brokers also need to create interest in instruments to persuade their customers to do business. They need to publicise their prices and be able to respond quickly to calls asking their opinion on particular markets and instruments.
Sales
See Salespeople in the Financial Markets on page 65 Sales staff transact buy and sell orders for customers, often institutional investors, and also act as an intermediary between customers and traders. They work for investment banks, integrated securities houses and stock, commodity and energy brokerage houses, and include those working on the corporate desk. The sales function exists in all markets. In equity, commodity and energy markets, sales staff may also be known as brokers. However, sales staff differ from traditional brokerage in that they may hold positions in the market.
Sales staff may use the same information as brokers, depending on the instruments they specialise in. This includes foreign exchange rates, bond and equity data, other market prices, graphical analysis and news. They use any information they can to build relationships with customers, including leisure topics such as sport.
Investment Institutions
See Fund Managers on page 89 The primary interest of some institutions is to invest in, that is, buy and hold, instruments. These institutions are said to work on the buy side. Fund managers, portfolio managers and staff in corporate treasury invest the funds they manage in all financial markets to generate a return for the investors in those funds. Fund and portfolio managers work for pension fund and insurance companies and fund management divisions of major investment institutions. Most large companies have a corporate treasury department to manage their capital requirements, whether surplus or deficit.
Those working on the buy side use interest rate, foreign exchange, bond and equity data, typically across a broader range of markets than a trader. Corporate treasurers also require forward and deposit rates. Fund and portfolio managers require portfolio management facilities, with data-feed inputs, to value their portfolios on an intra-day or inter-day basis.
Decision Support
What does decision support mean? The term decision support describes the function that provides the research information, analysis and interpretation of that information. They include: + economists + analysts + researchers. These groups of people forecast economic performance and market movements to provide guidance to traders and sales staff. They may also publish their forecasts, for a fee, to a wider market audience. Analysts play a key role in the services provided by the sell side to the buy side. Decision management exists in all markets and in all financial institutions. Those in decision management require price information, access to large quantities of historical data, spreadsheet and graphical analysis and notification of impending financial events and announcements.
General Management
The term general management describes the following groups of people: + those from dealing room manager upwards who may be active in the day-to-day trading operation + those in corporate finance and mergers and acquisitions in financial institutions + managers in a variety of roles in non-financial companies who are users of limited financial information and news. Managers may require historic and current information about companies in their sector or areas of interest. They also require basic foreign exchange information for the countries in which they operate.
Trader Support
Trader support can be split into two distinct roles: + position keeping, assisting traders in the dealing room + order entry, a book-keeping role in the Back Office of a financial institution. Those who work in trader support roles require a general view of the financial marketplace, for example foreign exchange rates, interest rates and inter-bank offered rates for currencies of interest.
Back Office
The Back Office exists in all financial institutions. It is here that the administrative tasks connected with dealing are performed. Those working in the Back Office carry out transaction administration (clearing and settlement), credit control (limit setting) and statutory and management accounting. The information they require is mostly internal, with company financial data needed for credit control.
Retail Sector
This term covers those working in retail banking. Retail banks provide exchange transactions and derivatives trading
Chapter 3
Introduction to Financial Markets
Overview of Financial Markets
What is a Financial Market? A financial market is an environment where various types of financial entities are bought and sold, such as equities, currencies, money, bonds, commodities and energy according to a set of rules. Various derivatives of these base entities are also traded, for example, futures, options and swaps. A market for a particular entity exists when there are enough buyers and sellers to influence its liquidity. The more buyers and sellers, the more liquid the market is likely to be. Historically, markets have been physical places, a trading floor for example. Increasingly they are becoming electronic ‘places’ where traders use computer terminals with which to commuicate their buy/sell requirements to each others and to conclude the trades.