Sunday, July 7, 2013

5 business models in investment banking

Hi Yi Hai,

Upon your suggestion, I watched many Tim's videos including this one (http://www.youtube.com/watch?v=xlYDonZLoHg&feature=endscreen) about the 5 business models in investment banking. Very good framework. I have a few inputs to add on his 5 items --

1) prop trading
2) market making
3) M&A
4) Underwriting
5) structured products

1) is the only BuySide business model among Tim's 5 items. In many investment banks, there's actually another buy-side business unit in the form of asset management. They often run big mutual funds and hedge funds.

2) is not the only way a investment bank makes money on the Security markets. Most of them also provide trade facilitation and market access to their big clients. A 3rd major business in this domain is block trading. A big client hoping to sell 500,000 shares of IBM would send the RFQ to 3 investment banks. Once UBS provides a quote and gets selected, it must execute at the agreed price (even if at a loss, if market moves quickly against it.)

5) SP is not a separate business unit in many investment banks I worked with. I guess each trading desk often has a structured product team. Tim made me realize this is probably a 4th business model under the umbrella of Securities business. In Singapore, a lot of commercial banks sell structured products to consumers and businesses, but there could be an investment bank behind the scenes doing the structuring.

3) Besides M&A, there are privatization deals, spin-off deals, Management-Buy-Out deals etc. Very often the advisory bank must lend money to the client.

4) Tim actually used the term "new issue", including bond IPO and stock IPO.

In addition, Prime Brokerage is another big business for many investment banks. The PB department often brings business to the Securities department (since the hedge fund clients often sends in orders) but PB revenue is more than that, based on what I heard.

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