Financial Markets:

Investment Banking Perspective

Dr. ESHAN AHLUWALIA

Disclaimer
“The information provided in presentation are personal views of the presenter and do not reflect professional views or advice of the employer of the
presenter. Employer will not be responsible or liable for any contents of the presentation of views of the presenter expressed herein”
Backdrop
Area of Financial markets dominated by few Investment Banks and large
financial institutions. Its imperative to understand business activities:
• Where Investment Banks trade?
• How do market participants organize themselves in Financial markets?
• Which products are commonly traded?
• What are different types of Trading strategies?

Flow of Presentation

▪A few facets of Financial Markets

▪Implications on Market Efficiency
▪Products (Asset Classes), Trading Desks.
▪Trading Strategies, selected example & discussion
▪Way forward
A few facets of Financial Markets

Market Design Financial Markets Market Efficiency

Exchange Traded Vs Spreads,

OTC, Operational
Market Participants Efficiencies

Products

Equity, Fixed
Income, FX,
Credit etc.

Investment Banking
Investment Bank

Investment Bank

Client Financing
Whole Sale Retail Asset Mgmt Research
Solutions

Equity Advisory Active Advisory

Fixed Income,
Currency Execution Passive Structured
Commodity

Structured Wealth Mgmt

M&A
Market Design
Gamut of products likes Equities, Fixed Income (Bonds, Repos), Derivatives (Exchange
traded i.e. Futures, Options , OTC product- Swaps, Forwards etc. ), FX etc.

Lit Markets – Exchanges (LSE, TSE) , MTF- Chix, BATS

Exchange
Dark markets- Dark Pools Citi Lava

Bilateral Trades -Amongst broker dealers

Over the Counter (OTC)
Registered Swap dealers (US), SI , MTF (UK)

Prime Services
Financing and Asset
Lending
Security Lending
Trading : Business Lines

Capacity
Principal Agency
▪Proprietary Trading ▪Service Clients
▪Offset Risks ▪Brokers – executing agent
▪Treasury ▪Active Funds

Booking Model

On Shore
Counterparty Venue
Bank

Counterparty Offshore Bank Onshore Bank Venue

OTC vs. Exchange Traded Markets

• Pricing – Trade Search, Price Negotiations

• Market Interconnectedness
• Transparency
• Market Products
• Risk Management – Counterparty Risk
Exchange Traded Markets
Agency Business

Crossing Network,
Capacity : Principal

Exchange

Market Makers
Capacity : Principal

Big Banks, Broker / Dealers Corporate, Funds

Market Design: OTC Markets
Agency Business

Crossing Network

Market Makers

Big Banks, Broker / Dealers Corporates, Funds

Market Design: OTC Markets: Going Forward Electronification
Agency Business : Stock
broking, Bond Trading

Crossing Network

TP/
IDB

Market Makers
TP/
IDB

TP/
Inter dealer banks
Big Banks, Broker / Dealers Corporates, Funds IDB Trading Platforms
Market Design: Core Periphery model
Market Efficiency: Round Trip OTC Orders

X+$1 X+$1
Seller Dealer Buyer

Bid Price Ask Price

Round trip trades in OTC market with one dealer

+$1
Seller Dealer Buyer

Bid Price
+$1 +$1 Ask Price

+$1
Dealer Dealer

Round trip trades in OTC market with more than one dealer
Case of a Municipal Bond
 Trading Product Classification
Asset/ Interest FX Equities Credit FI - Bond Commodit
Markets Rate y

Spot Rates Currency Cash Credit Bond Physical

product

Forward IR-Forward NDF Forwards NA Repo/ Fwds Forward

Future IR-Future Listed Listed NA Listed Listed

Swaps IRSwaps FX swap Vol Swaps CDS Swaps Swap

Options IR-swaption Digital Vanila CDSoption Bondoption Options

Structured Inflation Barrier Barriers, CDX Bond, Equity Loan/

options ELN Lease/
Exotic
Trading Desks
Asset Class Example Clients/ Participants
Equity Delta One Corporate, FI
Liquid Alternative (MF, ETFs) Pension fund, family office

Derivatives FI, Corporate

Quantitative Investment Service Hedge Funds
Rates Match book desk (Bonds, Repos) Hedge Funds, Sovereign govt

Derivatives Hedge funds

Credit Investment grade Credit Corporate, Institutions,
Pension Funds

Derivatives Institutions
Macro Trading Emerging Market Credit, Rates, FX, Bank

FX Trading FI, Bank,

Structured Financing Solutions FI
Derivatives
Trading Channels

Call a Broker

Non-Electronic
Channels
Call Sales Person Trader Tools
High Touch

Direct to Sales person

Electronic Direct Market Access

Channels No Touch

Direct to Algo Strategy SOR/ DMA

ATS
Co-location
Trading Strategies/ Example
Market Efficiency : “Impossible to beat market”

Background Method Example

Imperfect Substitutes Arbitrage Equity Arbitrage, FICC
DSDC Arbitrage

Event Driven Event based trading Index Re-balancing

Price Pressure Merger & Acquisition

Market Neutral Portfolio Replication Stat Arb HFT, Long Short-

Dollar Neutral or Beta
Neutral
Macro Driven Macro Investment Approach Carry Trades
Euro Convergences
Noise, Feedback Driven Technical, Systematic Trading Fractals, Neural Network
Asset Pricing Pricing Anomalies Contrarian, Momentum
Strategy of Index Re-Balancing : Market Structure
Rational Investors

Active Funds(FI) Passive Funds (FI) Noise Trader

Index Stocks Non –Index Stocks

Information-Free Event Information Event

✓Compulsory invest in Index Stocks ✓Benchmark against Index to beat it

✓Buy and Hold Index stocks ✓If 2% return in index and 2% non-index
stock prefers index stock

✓Direct Investors / Hedge funds ✓Manages risk –returns ratio

✓High risk appetite ✓Prefers Index stocks 18
Nifty Indices & Classification of Rebalancing Events
Index rebalancing : Returns

Effective Day=0
Example: Long-Short Strategy
Stock A– under valued
Stock B ---overvalued
value
Desk

Buy A = $900 A
$1000 Cash= $900

Market
Prime
Services Cash= $800
B
Sell B = $800
1% = $8 $800

Stock Cash Total

Lender Long - $900 $100
Short - $800 $800 $2600
Position = $1700 Total = $900
Returns are $1700 * (6%+3%) + $900 *6% = $207 - $8=20%
Way forward

• Electronification of Trading Channels (FinTech/ InvestTech)

• Blockchain – Crypto products

• Regulations- Trade transparency, Product Standardization

• Environment , Social and Governance

• New Products - Private Assets

THANK YOU