INSTITUTIONAL SECURITIES OVERVIEW

Institutional securities refers to a financial division in many companies which provides its clients with services such as research, brokerage, and distribution of securities. This financial sector tends to target local as well as foreign and hedge fund investors and often spans across both equities and fixed income divisions of the firm. Institutional equity business currently accounts for more than two-thirds of the volume of all transactions on major U.S. equity exchanges.

Many financial institutions are involved in investment banking to some extent; however, most have both Investment Banking functions as well as Sales & Trading functions. Many employees who work for investment banks are in these Sales & Trading divisions where they serve as Brokers or Traders and cannot be considered ‘investment bankers' even if they are working for an investment bank. Those in sales positions will develop the relationships with potential clients and buyers of new securities in their target area with the goal of promoting their services. The specific functions of investment bankers can be found in greater detail in the analysis section on investment banking.

Sales & Trading is normally the most lucrative area of a bank because the Traders will buy and sell the bank's financial products for a profit and bring in commissions for the sales made. This department will also keep their clients informed about activities in the market and new trading ideas in an attempt to gain more business and tailor their solutions to their clients.

Many employees within an investment bank report into the Sales & Trading division, where they can serve, for example, as Brokers or Traders. These employees should not be considered ‘Investment Bankers' even as they are working for an investment bank, though the two divisions do work together frequently through a well known barrier known as the Chinese Wall. The Chinese Wall is a term which has been used since 1929 to separate the two arms of investment banking when the stock market crashed and the government wanted to limit the company's ability to engage in both businesses and dissipate any conflicts of interest. The is essentially an information barrier set in a company attempting to separate those who make investment decisions from those who have access to highly confidential or non-disclosed information, which could potentially impact these decisions. This is done in an attempt to avoid a large conflict of interest and to safeguard a firm's insider information to ensure that the trading which occurs is proper ^(2,7).  

As mentioned earlier, institutional securities should not be confused with investment banking. In investment banking, Bankers are involved in capital raising and financial advisory services including research, advice on mergers, acquisitions, corporate reorganization, real estate and corporate lending ^(1,2), while Sales & Trading divisions are more focused on developing relationships with potential clients and promoting their services ¹. Some have also confused institutional securities with private banking, although in private banking there is normally a more intimate relationship established with clients because of the detailed financial analysis of personal funds which is required ¹. 

In most financial companies, those professionals in Sales & Trading receive information from the Research Analyst who has spent time preparing information and facts on a particular industry and generating ideas. Once this information is passed to the Sales & Trading division, these salespeople will call their counterparts and contacts in order to elicit investment decisions ⁵. At this point, the client will either choose to buy, sell, or hold on that position which is what will begin the transaction.

MAIN FUNCTIONS 

Trading can be compared to match-making. Buyers need to find a seller to match their interests, and sellers must find buyers whose interests match their product. Simply stated, Institutional Securities or Sales & Trading divisions are the "match-makers". The process of searching the quantities of products, as well as, the selling and buying prices must all match. They act as a facilitator for trading and a point of contact for clients while liaising between research groups and trading desks.

Sales & Trading is often times the most profitable area of an investment bank because it is in charge of managing a large portion of the revenue in most banks ⁵. The main function of a sales and trading division is to connect and build relationships with high net-worth investors and institutions to suggest ideas for trading and take orders given to them as a result of these pitches ⁶. The representative will provide clarity to the financial market and trading practices, offer financial counseling, create a financial portfolio for a client, offer advice on what to invest in, and keep clients informed about the economic conditions which could effect the value of securities in their portfolio ¹². At this point, if the client is interested, these employees will communicate the orders given to them with the appropriate trading desk who will then price and carry out the actual trade ⁶.

These trading desks will also structure new products at times to fit the needs of the clients ⁶. Most Sales Representatives will work to meet the needs of individual investors, although some specialize in institutional investors where the representative will concentrate on one particular financial product such as stocks, bonds, or options, and handle the sale of new issues ⁹. 

Though every financial company has a unique structure and hierarchy using different characteristics and requirements to define each level, there are some similarities to allow a general pattern to be discussed. One consideration to make when looking into an organizational structure is the size of the bank. Investment banks often house most professionals in the Sales & Trading area, and these banks employ a total estimate of 40,000 people, more than three quarters of which are males ¹⁰. Traders and Sales People can be categorized according to the products they trade, by the specific type of clients they work with, or by the sector they specialize in.

Often times, MBA graduates will begin working as an Associate at an investment bank in their institutional securities division ¹⁰. Many times, students will work as Interns or Summer Associates for financial companies while in school to gain experience. Starting as an Intern or an Analyst is the single best way to gain entrance points into a full-time position ² and they receive a high level of supervision and direction from more experienced Sales People and Traders ¹⁰. These employees will often start as Analysts and work on a computer to model outcomes of different paths and scenarios possible for that client before moving into an actual Sales & Trading role. These models are normally created based on the company's historical data and valuations. These models can span over just a few days or they can be designed to show the impacts of a trade for the following 5 years. Analysts may also be responsible for assisting Senior Associates on presentations and travel arrangements.

The next step after an Analyst is usually Associate and is common after about three years of service as an Intern or Analyst for those who have just received an MBA ¹⁰. The responsibilities of Analysts and Associates are often very similar, but Associates are given slightly more challenging tasks, greater responsibility, and more promotional opportunities. These professionals will supervise the analysis done by the more Junior Analysts and Interns, as well as, develop the financial plans to be later implemented by more Senior Associates ¹⁰. Once an Associate is a bit more senior, they will be given an opportunity to do more creative and challenging work alongside more senior employees to develop strategies and partake in more extensive strategic and financial planning. After this, employees have the opportunity to move onto higher titles if their performance warrants it. Normally, an Associate can be promoted to an AVP or VP and from here one can be promoted to the Director level.

STRATEGIES IN INSTITUTIONAL SECURITIES, SALES AND TRADING

Traders often participate in a process known as market making quoting both the buy and the sell price of financial products with the intent to make money on each trade ². A market maker refers to a person or a firm which determines a buying and a selling price for a particular financial product in an attempt to make a profit on the turn or bid of that product.

Because investment banks are always coming up with new ideas and products, the strategies they use to operate have a tremendous impact on their ability to be profitable and remain competitive in the marketplace. Strategists play an important role by utilizing quantitative models to consider companies and industries and try to analyze or predict their needs and performance while taking consideration of the macroeconomic climate⁴. This can be a key factor in the success of a Sales & Trading division because representatives need to know which types of clients to go after during which times and this forecasting can also assist them in determining which types of financial products to offer².

Financial firms compete to be at the forefront in their product offerings, assets, and technology. Once a product is known to create large margins and draw in clients, it is normal for other banks to mimic these products in an attempt to retain a competitive edge¹. All financial institutions, including investment banks, seek to maximize their profitability by managing their level of risk; and for the most part, the larger the risk, the larger the potential reward. Traders are very mindful of risk and they use assessed risks to create strategies for trading. At times, riskier methods are employed in a volatile climate with the hopes of a greater reward. Other times, less risk will be taken in attempt to modestly generate revenue in a more stable fashion.