1. Certificate for Introduction to Securities & Investment (Cert.ISI) Unit 1 Lesson 2:  The difference between Retail and Professional  Main retail and professional service providers 2cis

2. Professional and retail business The Financial Services industry is divided into two distinct areas. The first is:  The professional sector (also known as the wholesale, or institutional sector)  Business to business

3. Professional sector In the professional sector, certain assumptions are made:  Participants know what they are doing  They do not need to have trades explained in detail  They do not need to be protected from their own stupidity  Participants will honour their trades  Trades agreed verbally or electronically are binding commitments  “Dictum meum pactum” (my word is my bond)  Participants will deal in certain minimum sizes  Prices quoted are usually for large volumes  Prices are wholesale, i.e. cheaper  Participants know their end-customers  And will vouch for their legality

4. Professional and retail business The second distinct area of the Financial Services industry is:  The retail sector  Business to customer

5. Retail sector In the retail sector, certain assumptions are made:  Retail customers do not always know what they are doing  They need to be given as much information as possible  They may only be sold investments which are suitable for their needs  Retail customers can pull out of financial transactions  Retail investors are given “cooling off” periods during which they can cancel transactions  They can get their money back if financial products have been miss- sold to them – this includes insufficient information  Retail customers will deal in small transactions sizes  Prices quoted are retail, i.e. more expensive  Retail customers have to prove their identity  And must be monitored for suspicious transactions FSA consumer finance web-site

6. Retail prices versus wholesale prices Foreign exchange (forex) dealer’s screenTypical retail money changer’s board Prices of financial products in the High Street are more expensive than they are in the professional, or wholesale, markets Prices in your local corner shop are higher than they are in the cash-and-carry.

7. How to calculate forex transactions Travel money prices GBP / EUR Bank buys: 1.32Bank sells: 1.15 Question: You have GBP100 (£100) and you want to convert them into euros. You are a retail customer. How many euros will you get? Solution: The money changer is selling euro notes to you and you are paying in pounds. You must use the Bank sells quote: The sell rate quoted is: 1.15 So: 100 x 1.15 = €115.00

8. Retail prices versus wholesale prices Forex dealer’s prices (wholesale) GBP / EUR Bank buys 1.2303Bank sells 1.2301 Question 1: You have GBP30,000 (£30,000) and you want to convert them into euros. How many euros will you get if you are: a) a retail customer b) a professional (wholesale) customer ? Question 2: You have EUR75,000 (€75,000) and you want to convert them into pounds sterling. How many pounds will you get if you are a) a retail customer b) a professional (wholesale) customer ? Question 3: In percentage terms, how less favourable are the Buy / Sell quotes of the money changer (retail) versus the professional (wholesale) forex dealer? Money changer’s prices (retail) GBP / EUR Bank buys: 1.32Bank sells: 1.15

9. Solutions: Question 1 Question 1: You have GBP30,000 (£30,000) and you want to convert them into euros. How many euros will you get if you are: a) a retail customer b) a professional (wholesale) customer ? Solution to Question 1: You are buying euros and paying in pounds. The money changer is selling euros to you, You must use the Sell rate quoted: Retail customer: £30,000 x 1.15 = €34,500 Professional (wholesale) customer: £30,000 x 1.2301 = €36,903 Forex dealer’s prices (wholesale) GBP / EUR Bank buys 1.2303Bank sells 1.2301 Money changer’s prices (retail) GBP / EUR Bank buys: 1.32Bank sells: 1.15

10. Solutions: Question 2 Question 2: You have EUR75,000 (€75,000) and you want to convert them into pounds sterling. How many pounds will you get if you are a) a retail customer b) a professional customer ? Solution to Question 2: You selling euros in order to obtain pounds. The money changers are buying euros from you. You must therefore use their Buy quotes: Retail customer: €75,000 ÷ 1.32 = £56,818.18 Professional (wholesale) customer: €75,000 ÷ 1.2303 = £60,960.74 Forex dealer’s prices (wholesale) GBP / EUR Bank buys 1.2303Bank sells 1.2301 Money changer’s prices (retail) GBP / EUR Bank buys: 1.32Bank sells: 1.15

11. Solutions: Question 3 Question 3: In percentage terms, how less favourable are the Buy / Sell quotes of the money changer (retail) versus the professional (wholesale) forex dealer? 1.32 minus 1.2303 = 0.0897 (0.0897 ÷ 1.2303) x 100 = 7.29% Buy quotes 1.2301 minus 1.15 = 0.0801 (0.0801 ÷ 1.2201) x 100 = 6.57% Sell quotes Forex dealer’s prices (wholesale) GBP / EUR Bank buys 1.2303Bank sells 1.2301 Money changer’s prices (retail) GBP / EUR Bank buys: 1.32Bank sells: 1.15

12. How much profit do money changers make? Scenario: Your travel company goes bust and your European holiday is cancelled. You decide to go to Brighton instead. You need to change your holiday money back into pounds. First transaction was changing £100 into euros for your European holiday £100 x 1.15 = 115 euros Second transaction is changing €115 back into pounds 115 euros ÷ 1.32 = £87.12 Money changer’s profit £100 minus £87.12 = £12.88 Money changer’s gross profit margin 12.88% Sainsbury profit margin Money changer’s prices (retail) GBP / EUR Bank buys: 1.32Bank sells: 1.15

13. How much profit do forex dealers make for their firms? First transaction was changing £30,000 into euros £30,000 x 1.2301 = €36,903 Assume that you want to change those €36,903 back into pounds €36,903 ÷ 1.2303 = £29,995 Forex dealer’s profit £30,000 minus £29,995 = £5 Forex dealer’s gross profit margin (£5 ÷ £30,000) x 100 = 0.02% BUT: The minimum lot size for a professional (wholesale) currency transaction is 100,000 units of currency. So: £100,000 X 0.02% = £20 profit Forex dealer’s prices (wholesale) GBP / EUR Bank buys 1.2303Bank sells 1.2301

14. Most professional (wholesale) forex transactions are in lots of 8-10m units of currency £10m x 0.02% = £2,000 Retail markets versus wholesale markets

15. Exercise Write down as many different types of professional (wholesale) financial activities that you can think of Foreign exchange  the trading of currencies International banking  cross-border banking transactions Stocks and shares, and bond trading  buying & selling for customers and their own account Derivatives  the trading of options, swaps and futures Fund management  managing investment portfolios Insurance  various types, including re-insurance Investment banking  such as mergers and acquisitions Custodian banking  safe-keeping of assets

16. Exercise Write down as many different types of retail financial activities that you can think of: Retail banking  deposit accounts, lending and credit cards Pensions  helping people save for their retirement Investment services  from stock-broking to private banking Financial planning and advice  managing investment portfolios Insurance  Life, medical, income and mortgage protection