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by retail clients. On exchanges with floor-based trading, only regular traders will be familiar with the jargon and protocol required for trading. Allowing a novice to step in would cause unnecessary chaos and confusion.

      The other reason why exchanges insist on dealing with market intermediaries is to reduce the possibility of settlement failure. The term settlement refers to the delivery of securities from the seller to the buyer and the delivery of cash from the buyer to the seller. Default on the part of either party to a transaction can substantially dent the public's confidence in the system. To prevent settlement failure, exchanges have elaborate risk management systems in place. Market intermediaries are required to post performance guarantees or collateral called margins with the exchanges to rule out the possibility of a failed trade. Obviously, it makes sense for a party to have such a financial relationship with the exchange only if trading regularly and in large volumes. For public traders who trade relatively infrequently, it will not be practical to develop such an arrangement with the exchange. However, brokers and dealers who either trade regularly on their own account and/or have a large number of trades routed through them will find it worth the cost and effort to have such a financial relationship with the exchange.

      The brokerage industry has now been deregulated in most countries. Prior to deregulation, a minimum brokerage fee was specified by the authorities. What was therefore happening in practice was that institutional clients were subsidizing retail clients. That is, institutional clients were paying more than they ought to have, considering the magnitude of their transactions, while retail investors were paying less than what they ought to have paid. The immediate impact of deregulation was a sharp increase in retail brokerage rates. However, a brand-new industry was born as a consequence, which is termed as discount brokerage. A regular broker, referred to as a full-service broker, will sit one-on-one with the client seeking to ascertain their investment objectives in order to provide suitable recommendations. The broker will also provide extensive research reports to facilitate decision making. A discount broker, on the other hand, will offer no advice. This broker's only task is to execute orders placed by clients. There is also a category of brokers referred to as deep-discount brokers. These brokers also provide no investment-related advice, but they insist on transactions of a substantial magnitude and charge commissions that are even lower than what are levied by discount brokers.

TRADING POSITIONS

Traders are said to have a long position when they own an asset. An investor with a long position will gain if the price subsequently rises and will lose if it were to fall subsequently. A rise in price will constitute a capital gain at the time of sale, whereas a price decline would be termed as a capital loss. The principle behind the assumption of such a position is: buy low and sell high. Investors who take long positions in anticipation of rising prices are said to be bullish in nature and are termed as bulls.

      All traders in the market need not be bullish about the future. Some may be of the opinion that prices are going to decline. Such investors will assume what are termed as short positions. Traders are said to have taken a short position when they have sold an asset they do not own. In practice, this is accomplished by borrowing the asset from another investor. Such a transaction is called a short sale. In such cases, traders will have to eventually purchase the asset and return it to the lender. If their reading of the market is correct, and prices do decline by the time the asset is bought back to close out the position, they stand to make a profit. When someone with a short position acquires the asset, they are said to be covering their position. Short sellers, therefore, seek to sell high and buy low. Short-selling is considered a bearish activity and such investors are termed as bears.

THE BUY-SIDE AND THE SELL-SIDE

      The trading industry can be classified into a buy-side and a sell-side. The buy-side consists of traders who seek to buy the services being offered by the exchange. The traders on the sell-side are those who are offering the services of the exchange. Thus, the terms buy-side and sell-side have no implications for the purchase and sale of securities. Traders on both sides of the market regularly buy and sell securities.

      Of all the services offered by the exchange, the key is liquidity. The sell-side traders sell liquidity to the buy-side traders by giving them the opportunity to trade whenever they desire. The buy-side consists of individuals, investment funds, institutions, and governments that use the markets to achieve objectives like cash flow management and/or risk management. The sell-side consists of brokers and dealers who help buy-side traders to trade at their convenience.

INVESTMENT BANKERS

      An investment banker is an investment professional who facilitates the issuance of securities in the primary market. These institutions help the issue process in two ways. First, they help the borrower to comply with various legal and procedural requirements that are usually mandatory for such issues. For instance, a prospectus or an offer document must accompany any solicitation efforts for the issue. Most issues have to be registered with the capital markets regulator of the country, which is the Securities and Exchange Commission (SEC) in the United States. Finally, most issues are listed on at least one stock exchange. Listing is a process by which an exchange formally admits the issue for trading between investors, after the securities have been allotted. An IT firm or an automobile manufacturer will be clueless about the latest regulations and procedures. Hence, they require professional advice to facilitate a successful issue of securities, and this is where investment banks can help.

Second, investment bankers provide insurance to the issuer by underwriting the issue. This means that they stand ready to buy that portion of the issue which remains unsubscribed, if the issue were to be undersubscribed. Underwriting helps in two ways. First, it reduces the risk for the issuer. Second, it sends a positive signal to the potential investors about the quality of the issue, since the investment banker stands ready to buy whatever they choose not to subscribe to. To give an example, consider an issue that has been underwritten by UBS. This means that if investors do not subscribe to the entire amount on offer, UBS will accept the remainder. This would reassure a potential investor, for obviously a bank like UBS would not give such an undertaking without doing its homework. In certain cases, an investment bank may not desire to take upon itself the entire risk of a new security issue, for the issue may be very large, or else may be perceived to be extra risky. Consequently, a group of investment banks may underwrite the issue together, thereby spreading the risk. This is called syndicated underwriting. The chief underwriter is referred to as the lead manager. The next rung of investment bankers are referred to as co-managers. There is also a selling group associated with most issues. It consists of relatively smaller investment banks, who do not underwrite the issue, but who have been roped in because of their expertise in marketing such issues in their zones of influence.

      At times the investment bank, instead of underwriting the issue, will offer to sell it on a best efforts basis. That is, the bank will merely offer to do its level best to ensure that the issue is fully subscribed. In these cases, the investment bank merely performs a marketing function without providing the insurance that characterizes the process of underwriting. Consequently, the bank's commission in such cases will be lower.

      Most public offerings are usually underwritten because issuers are more comfortable with such arrangements. This is because the investment bank has a greater incentive to sell the securities when there is a risk of devolvement. What is devolvement risk? It is the risk that the bank may have to buy the unsold securities in the event of undersubscription. Such an eventuality will inevitably lead to a loss for the bank, in the sense that the shares so acquired will have to be subsequently offloaded in the market at a price that is lower than the issue price. This is because devolvement is a clear sign of negative market sentiments about the issue, and an issue that fails will experience a fall in price on listing.

DIRECT AND INDIRECT MARKETS

      In a direct market, the surplus budget units in the economy deal directly with the deficit budget units. That is, funds flow directly from the ultimate lenders to the ultimate borrowers. For instance, if 3M were to be making

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