Appendix 2.1 Financial Intermediaries …………………………………………..……….

251

FINANCIAL INTERMEDIATION

Savings Investment

Brokers

Household Businesses
(Investors with (corporations)
different risk Banks
preferences and
needs)

Financial
markets

Preferences Costs Financial Projects

intermediaries
and markets

Savings are transformed into investment in an economy via financial intermediaries (such as
brokers and banks) and stock exchanges. The main role of financial inter-mediation is the
reduction of the cost and facilitation of the matching process of borrowers and lenders needs,
in term of amounts and time, and risk preferences.
Financial intermediaries conduct a special type of analysis to run their business and satisfy
their customer needs. This analysis encompasses market prediction, portfolio management,
risk management, and financial product development.
Appendix 2.1 Financial Intermediaries …………………………………………..………. 252

ORGANIZATIONAL STRUCTURE OF A BANK

Bank

Retail Financial Corporate Banking Investment Banking Global Investment

Services

Credit card trade finance

Retail banking Foreign exchange sales
Private banking hedging trading indexed asset mgt
(asset mgt, stock discounting research active asset mgt
broking, life asset backed hedging instruments
insurance, fund financing
management)

ORGANIZATIONAL STRUCTURE OF A STOCK EXCHANGE

A stock exchange fulfils three basic functions:
1) capital raising: allowing small and large companies to raise capital and to have their
shares more publicly traded,
2) offering trading services: operating different types of trading systems – such as order
driven, quote driven, or trading seats - and disseminating market information,
3) and regulating both capital raising and trading markets: through investment rules,
companies listing requirements, exchange rules, and by monitoring members and
companies compliance with rules, and resolving conflict of interest and rules violations.
Appendix 2.1 Financial Intermediaries …………………………………………..………. 253

STOCK EXCHANGE

CAPITAL RAISING TRADING SERVICES REGULATION

EQUITIES QUOTE DRIVEN INVESTMENT RULES

INT’L EQUITIES DISSEMINATING INFO LISTING REQT

DEPOSITORY RECEIPTS ORDER DRIVEN MONITORING

BONDS TRADING SEATS CONFLICT RESOLUTION

WARRANTS

GILTS

The basic functions of a stock exchange [LSE]

A CLEARING SYSTEM
A clearing system helps financial intermediaries in the clearing and settlement of trades. The
following figure depicts a typical flow of a transaction issued by a client and executed by a
financial intermediary (broker) after clearing and settlement.

Client
Private investor Client instructs broker to
or fund manager Shares purchase/sell shares
credited
to client
Shares credited to broker
Clearing house Broker

Best price Broker approaches

per share Market Maker market makers for
best price

A clearing system [EASDAQ]