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Key players in a marketplace


Buy Side and Sell Side

The buy side consists of those who buy exchange services. Liquidity is the most important of these services. Liquidity provides the ability to trade when you want to trade.

buy sideBuy side includes:

- individuals (retail investors)
- funds
- firms
- governments

 

Who use the market to:

  • solve inter-temporal cash flow problems: they have income today that they would like to have available in the future. They use the market to buy stocks and bonds to move their income from the present to the future. Many buy side institutions are pension funds, mutual funds, trusts, endowments and foundations that invest money. In the event they need liquidity, they may decide to sell some of the securities they have in their portfolios
  • take advantage of the order flow available on the market

 

sell side

In particular the sell side sells the liquidity of the order book to the buy side.

 

Different participants can be considered as the Sell side:

Brokers and dealers 

Brokers trade on behalf of their clients and profit by charging clients a commission. Brokers arrange trades their clients want to make by finding other traders who will trade with their clients. On an electronic order driven market this research is easy thanks to the availability of the order flow. Brokers have to find the best trading venue able to satisfy their clients’ needs in terms of liquidity and quantity.

A broker can act as an agent, in its own name, on the client’s account. As a consequence, the broker is responsible for delivering either cash or securities if a customer fails to do so: these intermediaries must stand behind their customers ----> Brokers bear the risks involved in order routing (e.g. IT glitch that could result in an order to be lost or misdirected) and post trade clearance and settlement.

Dealers trade on proper/principal account and profit when they buy low and sell high.

Broker Dealers firms act in dual capacity, both as a broker (agency or customer account) and as a dealer (proper, principal or own account). Under the same firm, these two roles must be strictly separated because the customer risk and the firm’s own risk must be duly separated to prevent a broker-dealer firm from shifting risk, either by intent or inadvertently, to its customers.

Broker-dealers fulfill several important functions in the financial industry; these include providing investment advice to customers, supplying liquidity through market-making activities, facilitating trading activities, publishing investment research and raising capital for companies. Broker-dealers may range in size from small independent boutiques to large subsidiaries of giant commercial and investment banks.

Market makers / specialists

Market makers supply marketability services to public investors by trading in their own names on their own accounts but, unlike dealers, they are contractually committed to provide liquidity to a marketplace by putting up quotes on both sides of the market (one to buy and one to sell). The market maker is also required to maintain a fair and orderly market.

Other types of traders in charge of supporting the natural liquidity of a market or its security or its price discovery process are usually denominated specialists.

 


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