Lesson 4 of 8 · All lessons in this module
- What the financial system does, and what makes it work well
- Classifying assets and markets: securities, pooled vehicles, currencies, commodities and real assets
- Contracts: forwards, futures, swaps, options and insurance
- Financial intermediaries and the services they provide
- Long, short and leveraged positions: leverage ratio, margin return and margin callsVideo lesson
- Orders: execution, validity and clearing instructionsVideo lesson
- Integrated cases: a leveraged loss, a hedge with a floor and a stop-limit buy
- Primary markets, secondary markets and how trades are arranged
Lesson 4 of 8 · 15 min
Financial intermediaries and the services they provide
Intermediaries stand between buyers and sellers: some match them directly (brokers, exchanges), some trade with them across time or place (dealers, arbitrageurs), some repackage cash flows and risks (securitisers, banks, insurers, funds), and some make sure trades settle (clearinghouses, custodians).
In short
- Brokers are agents who find counterparties for clients; exchanges match orders and also regulate members and listed issuers; ATSs match orders without regulating beyond trading conduct (many are dark pools).
- Dealers trade with clients from their own inventory and supply liquidity; they connect traders who arrive at different times. Arbitrageurs connect traders in different markets at the same time.
- Securitisers pool loans and sell claims on the pool, often through an SPV and in tranches; banks turn deposits into loans; insurers pool risks and manage fraud, moral hazard and adverse selection.
- Clearinghouses settle trades within a hierarchy of guarantees; depositories/custodians hold securities safely.
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