fusion point research Marketing Research Reports

Marketing to Sales and Trading Leaders in Investment Banking

Understanding Their Role

Investment banks execute millions of trades every year. Some of these trades are executed on behalf of clients of the bank. These clients are either looking to buy or sell a financial instrument. In other instances, the bank uses its own money to execute trades. The purpose of this activity, called “proprietary trading”, is to make profits off of the trade thereby increasing the profitability of the bank.

 

Dedicated teams of salespeople are assigned to work with the investing clients of the bank. The role of the salespeople is to offer advice, provide research created by the firm, and to provide pricing offers for any trades the client might want to make. When a client wants to sell a security that they own, the sales rep will quote what is called the “bid price”. This is the price the firm is willing to pay to buy the security from the client. Conversely, when a client wants to buy any security the price the sales rep quotes is referred to as the “offer price”. This is the price at which the bank will sell the security to the client. This service of buying and selling Investment Bank’s provide is often called “market making”. This is because the bank is always willing to “make a market” to complete the customer’s trades (assuming the bid or offer prices are agreed to).

 

In proprietary trading (usually called “prop trading”), the bank uses its internal expertise to “beat the market” and make positive returns on behalf of this firm. Up until 2008 banks were making riskier and riskier investments with their prop trading, with the hopes of generating greater profits. The downturn of these risky investments is one of the reason many banks failed during the financial crisis of 2008. In 2009 Congress passed the Dodd Frank Act, which re-instituted a regulation called the “Volcker Rule”. This regulation placed new limits on the types of prop trading that banks can be involved in. As a result many banks sold their proprietary trading divisions, or now operate them as a separate legal entity.

 

Whether it is trading with clients or trading for their own proprietary interests, banks utilize three basic approaches:

 

  1. The first is fundamental analysis that bases a security price on corporate and economic details. The fundamental approach for a security involves the analysis of the economy, industry, and company. This applies to equities and fixed income securities. In commodities, fundamentalists study factors that affect market demand and supply. Currencies are affected by economic fundamentals such as production and inflation and by political factors as well. In futures, expectations of interest rate and cash market conditions are important. Volatility and expected direction of price movements are key in valuation.1
  2. The second approach is the market efficiency hypothesis, in which securities’ prices are based on all available information to offer an expected rate of return consistent with their level of risk.2
  3. Finally, technical analysis attempts to use information on past price and volume to predict future price movement. It also attempts to time the markets. For its purposes, technical analysis is based on several key assumptions, including:
  • Demand and supply determine market price.
  • Securities prices tend to move in trends that persist for long periods.
  • Reversals of trends are caused by shifts in demand and supply, which can be detected in charts.
  • Many chart patterns tend to repeat themselves.3

“With teams of experienced professionals and a suite of sophisticated electronic platforms, we give our clients multiple ways to strategize, track and execute securities transactions in exchanges around the world.” – Goldman Sachs Website4

1 Liaw, K. Thomas. The Business of Investment Banking: A Comprehensive Overview. 3rd ed. Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030.

2 Ibid

3 Ibid

4 “Sales & Trading.” Goldman Sachs. Accessed 11/25/2015, available at: www.goldmansachs.com/what-we-do/securities/sales-a...

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Copyright © 2016 Fusion Point Research, Inc.

Large Investment Banks trade securities millions of times per year. They employ salespeople to work with clients to make these trades. New regulations have limited the ability of banks to make more speculative, “proprietary” trades on their own.
fusion point research Marketing Research Reports
Large Investment Banks trade securities millions of times per year. They employ salespeople to work with clients to make these trades. New regulations have limited the ability of banks to make more speculative, “proprietary” trades on their own.
  1. The first is fundamental analysis that bases a security price on corporate and economic details. The fundamental approach for a security involves the analysis of the economy, industry, and company. This applies to equities and fixed income securities. In commodities, fundamentalists study factors that affect market demand and supply. Currencies are affected by economic fundamentals such as production and inflation and by political factors as well. In futures, expectations of interest rate and cash market conditions are important. Volatility and expected direction of price movements are key in valuation.
  2. The second approach is the market efficiency hypothesis, in which securities’ prices are based on all available information to offer an expected rate of return consistent with their level of risk.
  3. Finally, technical analysis attempts to use information on past price and volume to predict future price movement. It also attempts to time the markets. For its purposes, technical analysis is based on several key assumptions, including: