81,838
edits
Prime broker: Difference between revisions
Jump to navigation
Jump to search
→Why prime brokers do it
Amwelladmin (talk | contribs) No edit summary |
Amwelladmin (talk | contribs) |
||
| Line 16: | Line 16: | ||
===Why [[prime broker]]s do it=== | ===Why [[prime broker]]s do it=== | ||
'''[[Prime brokerage]] is a ''financing'' business'''. This is the key to it: ''to [[lend]] clients [[money]] so they can make investments. All going well the client keeps all the profits and losses from their investments, but pays the PB interest and repays [[principal]] | '''[[Prime brokerage]] is a ''financing'' business'''. This is the key to it: ''to [[lend]] clients [[money]]'' so they can make investments. All going well the client keeps all the profits and losses from their investments, but pays the PB interest and repays [[principal]]. Client lets the PB look after the assets so it can monetise them, thereby lowering its costs of providing the funding in the first place. | ||
The PB lends ''explicitly'', through [[cash]] [[margin loan]]s (for [[long]] positions) and stock loans (for [[short]] positions), or ''implicitly'' through [[equity derivative]]s (which can be long or short). All this so your fund can generate — ahh — “[[alpha]]”<ref>Editor’s note: actually ''“[[vega]]”''.</ref> | |||
The four basic prime brokerage trades: | |||
*The [[Prime brokerage physical long|margin loan]]: a physical long position; | |||
*The [[Prime brokerage physical long|stock loan]]: a physical short position; | |||
*The [[Prime brokerage physical long|long swap:]] a synthetic long position; | |||
*The [[Prime brokerage physical long|short swap]]: a synthetic short position. | |||
Each of these four trades involves the prime broker funding an asset, and then getting hold of the asset in one form or another. Since the cost of funding to the prime brokerage is critical to its viability, it is worth seeing what the prime broker does in each of these cases. | |||
You make your money charging a financing rate to your clients on the money you lend them. the challenge is that your business will have to ''pay'' a financing rate, to your treasury department, for all the cash you are using in your business to lend to your customers. The trick is to organise your operation be as efficient as possible, to reduce that cost the treasury department charges you. The lower your cost of funding, the better your margins. | You make your money charging a financing rate to your clients on the money you lend them. the challenge is that your business will have to ''pay'' a financing rate, to your treasury department, for all the cash you are using in your business to lend to your customers. The trick is to organise your operation be as efficient as possible, to reduce that cost the treasury department charges you. The lower your cost of funding, the better your margins. | ||