Financial markets

The main businesses carried on by AMAFI members are divided into six categories:

Receiving and transmitting orders 

Order execution

Dealing for own account

Portfolio management

Underwriting

Placing

Receiving and transmitting orders

This category comprises all investment firms that accept trade orders, centralise them and forward them to another provider for execution. These intermediaries do not modify orders in any way. They operate under a mandate when acting on behalf of a client and under a commission arrangement when acting for themselves.

Order execution

Authorised professionals acting as brokers or agents execute orders to trade in financial instruments for clients.

Although order execution differs from clearing, an intermediary that executes an order for a third party generally handles clearing and settlement, either as a clearing house member itself or in partnership with one.

Dealing for own account

Dealers buy and sell financial instruments for their own or their firm's account through different types of transaction. As counterparties, they deal in financial instruments for their own account, acting as principals by filling their clients' buy and sell orders. As arbitrageurs, dealers make a profit from differences in prices when a security is traded on several markets.

Dealers also provide liquidity for financial instruments traded under special agreements with the issuer and the market operator, buying or selling the issuer's securities within predefined limits.

Portfolio management

An investment service provider administers and manages a portfolio of investments on behalf of its client. It adheres to the client's pre-set goals and procedures but can act at its own discretion within certain limits.

This type of investment can be managed in three different ways:

• the investor owns the portfolio and gives an investment firm a mandate to manage it
• the investor transfers ownership of the portfolio to the investment manager through a trust deed or a special purpose fund, then recovers possession when the contract expires
• the investor and the manager have parallel rights over the portfolio.

There is also a difference between individual and collective investment. In the first case, the investor is free to choose the instruments to be bought and sold as well as the duties that will be carried out by the investment manager. With collective investment, the investor's money is pooled and placed in a scheme such as an investment fund or a unit trust. The scheme is overseen by an investment manager who has full discretion over the choice of investment policy.

Underwriting

An investment firm that provides an underwriting service purchases or subscribes for an issue of financial instruments directly from the issuer or seller at a pre-arranged price and then places them with its clients through a broker. The firm's profit, or underwriting spread, is the difference between the consideration it pays to the seller and the price it receives from the client. The underwriter assumes counterparty risk if the issue is not completed.

Placing

Placing consists in finding investors or buyers for an issuer or seller of financial instruments through advertising, solicitation or direct marketing, or by collating buy orders.

Placing is generally carried out through a consortium of underwriters headed by a lead manager, with each underwriter being responsible for its own portion of the issue. A holding company may also be set up for this purpose.

In all cases, the client pays a placing fee. The liability of the investment firm depends on how it is legally bound to the client, i.e. by a mandate or a commission arrangement.