3. Financial Intermediaries

d. describe types of financial intermediaries and services that they provide;

What is a financial intermediary? Financial intermediaries are institutions that function as the line of communication between buyers and sellers in the financial system. Functioning as a middleman, a financial intermediary seeks to match investors who have specific financial goals with investments opportunities that can aid in the achievement of those goals.

What is a broker, how is that different than a block broker? - A broker executes trade orders on behalf of a customer. - A block broker helps fill larger orders.

What do investment banks do? Investment banks help their corporate clients raise capital by issuing shares or bonds. They also help their corporate clients identify and acquire other companies.

What is an exchange? An exchange is like a market where stocks, bonds, options and futures, and commodities are traded.

What is an Alternative Trading System (ATS)? Alternative trading systems (ATSs) are non-exchange trading venues that bring together buyers and sellers of securities. ATSs do not exercise regulatory authority over their subscribers and do not discipline subscribers other than by exclusion from trading.

What is a dark pool? Dark pools are Alternative Trading Systems (ATSs) that don’t display their orders (which are usually very large).

What is a dealer? A dealer trades for its own accounts. Individual dealers provide liquidity to investors by trading the securities for themselves. They buy or sell with one client and hope to do the offsetting transaction later with another client.

What is a securitizer? Securitization is a structured finance process that distributes risk by aggregating assets in a pool (often by selling assets to a special purpose entity) then issuing new securities backed by the assets and their cash flows. The securities are sold to investors who share the risk and reward from those assets.

What is the purpose of an insurance company? Insurance involves pooling funds from many insured entities (e.g., policyholders) in order to pay for relatively uncommon but severely devastating losses which can occur to these entities.

What is arbitrage? Arbitrage is the practice of taking advantage of a price difference between two or more markets (the law of one price). Simply put, it is the possibility of a risk-free profit at zero cost. Arbitrage is not simply the act of buying a product in one market and selling it in another for a higher price at some later time. The transactions must occur simultaneously to avoid exposure to market risk, or the risk that prices may change on one market before both transactions are complete.

What is a clearinghouse? A clearinghouse is a financial institution that provides clearing and settlement services for financial and commodities derivatives and securities transactions.