Financial Intermediaries Overview

Brokers vs Dealers

• Brokers: Match buyers and sellers, earn commissions, do not trade for themselves.
• Dealers: Trade directly with clients, profit from spreads, and act as liquidity providers.
• Broker-dealers: Combine both roles; potential conflicts of interest exist.

Other Dealer Types

• Primary dealers: Authorized to trade with central banks.
• Block brokers: Facilitate large-scale trades to return big volumes to the market.

Exchanges vs Alternative Trading Systems

• Exchanges: Public traditional markets where brokers and dealers meet.
• Alternative Trading Systems (ATS): Associated with dark pools; orders are hidden and regulatory oversight is limited.

Arbitragers

Trade across different markets to capitalize on price discrepancies. Provide liquidity and often involve high-frequency trading.

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Long, Short, and Leveraged Positions

Long Positions

Holding or buying assets such as stocks, bonds, currencies, commodities, or real assets.

Short Positions

Selling assets not owned, with the intent to repurchase at a lower price. Often used for hedging.

Short Selling Mechanics

1. Borrow securities.
2. Sell the borrowed securities.
3. Repurchase them later.
4. Return them to the original lender.

Covering a short means buying to close the short position.

Risk Profile

• Long positions: Unlimited potential gains; losses limited to asset falling to zero.
• Short positions: Unlimited potential losses; gains capped at asset falling to zero.

Collateral Requirements

Short sellers must keep proceeds from the short sale on deposit with lenders.

Short Rebate Rate

Benefit to short sellers that reduces borrowing costs. Often available only to institutions. Hard-to-borrow securities may have low or negative rebate rates ("on special").