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Markets and the ecosystem

A market is a place where buyers and suppliers meet and agree on terms for a transaction. Financial markets are markets for capital where entities that need financing (buyers) meet investors (suppliers) and then provide a payment (investment return) for the use of that capital.

Over time, financial markets have grown in size and complexity, but at their core they still serve the purpose of bringing together investors and investment opportunities. We now have a diverse ecosystem composed of multiple layers, participants and products.

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The equity market

The equity market is where shares of publicly traded companies are bought and sold in exchanges. When an investor owns a company stock, they become a partial owner of that company. They have the potential to benefit from its success and to have a return on their investment either in the form of share price growth or dividends.

Most investors do not have the necessary resources to analyze the universe of shares available globally. For example, the MSCI ACWI Investable Markets Index (IMI) has over 9,000 securities, but the equity universe that MSCI monitors has over 34,000 securities. There are also regulatory requirements for accessing and trading in exchanges.

This is where asset managers come in. Asset managers have the resources and knowledge to create financial products which simplify the act of investing. Investors can choose a product from their offering that best fits their requirements. Larger, institutional investors, such as pension funds, may also request specific solutions and provide a set of instructions — including what index should be used as a performance benchmark.

Individual investors may also require assistance that goes beyond the choice of a financial product. Wealth managers can look at their clients’ overall financial position and advise how to shape it — for example incorporating tax and retirement planning.

When an asset manager decides to trade, they need to use the services of a broker. A broker is authorised to execute trades in exchanges and other venues. Exchanges serve primarily as marketplaces, but they also define the terms of futures contracts — a type of financial product that may be used to hedge against market fluctuations.

The fixed income market

The fixed income market covers a wider range of security types, like corporate or government bonds, which mostly trade outside the exchanges. Asset managers will work with their brokers on over-the-counter (OTC) markets, where buy and sell orders are matched through a communications network. The interactions between ecosystem participants remain very similar: asset managers provide the expertise and financial products that investors need to invest in the fixed income market — and wealth managers provide support to individual investors.

The alternative markets

Investors may also use other types of money managers like hedge funds and private capital managers.

Hedge funds apply multiple investment strategies and usually only work with institutional investors looking to further diversify their portfolios. They interact with brokers and exchanges in a similar manner to asset managers — even if they use a wider range of financial instruments and undertake more complex transactions.

Hedge funds may also leverage the assets they manage to borrow additional money to invest. This could amplify potential gains but also increase potential losses. They may also ‘short’ securities if they expect it to fall in price, by borrowing securities from a broker.

Private capital firms operate in private markets where participants and terms of the transactions tend to be less visible to outside participants. Transactions in a private market tend to involve more complex financial instruments and deal structures, and have historically been restricted to larger, institutional investors.

In most instances, investors’ assets will be pooled into funds for a specific period, during which their capital cannot be accessed. For this reason, investments in private capital tend to be seen as illiquid but come with an expectation to deliver higher returns than stocks or bonds over the long term.

Key participants - The financial market ecosystem

Key participants in the ecosystem


Classified as institutional or retail investors, they have money to invest which they look to preserve and grow. Institutional investors refer to pools of capital from multiple owners (pension funds, insurance companies) or entities where the ownership of the capital lies with an aggregate or collective entity (sovereign wealth funds, foundations). Retail investors tend to refer to individuals and their personal wealth. Investors differ in many ways, for example in size, professional decision-making and degree of sophistication.

Asset managers

Asset managers manage investors’ capital. They assess opportunities in financial markets that merit an investment and that may deliver the results required by investors. These opportunities range from stocks to fixed income, as well as more complex products such as derivatives that may help manage risk within portfolios. Asset managers may specialize in a particular asset class (e.g. equities), approach (e.g. active equities) and style (e g. quantitative active equities).

Wealth managers

Wealth managers provide investment advisory services to help individuals and their families preserve and grow their wealth. They help clients choose from the broad range of investment options provided by asset managers and potentially also help them structure their portfolios to align with their investment goals and individual circumstances.

Index providers

Index providers, such as MSCI, create indexes that measure the performance of a market and that may be used in the construction of financial products. Index providers may also provide additional data, research and tools to enable institutional investors to better understand markets and improve their decision-making.


Brokers are members of stock exchanges or other financial markets that execute the transactions required by investors and asset managers. For example, an individual cannot trade stock on an exchange — any trade must be done through an authorised participant like a broker. Some brokers may also buy or sell securities using their own capital, and these are called broker-dealers.


Exchanges are highly regulated marketplaces where equities and other securities are, bought, and sold. Brokers are usually the only authorized participants that may place trades in exchanges.

Hedge funds

Hedge funds are money managers that use a wider range of strategies, financial products and asset classes to deliver returns that are not correlated with markets or that exploit market inefficiencies. Their goal is usually to maximize the increase in the value of investments per year rather than outperforming the market. As they do not restrict themselves to traditional asset classes such as equities and fixed income, they are sometimes referred to as alternative asset managers.

Private capital firms

Private capital firms are money managers that do not operate in public markets. They will tend to raise funds through partnerships with investors to make investments in unlisted companies or assets. Types of private capital firms include private equity, private debt, private real estate and infrastructure.

Indexes in - The financial market ecosystem

Indexes in the financial ecosystem

Indexes play a key role in the financial ecosystem. They help investors and asset managers speak a common language, allowing for better alignment of goals and outcomes.
Let’s go through a few examples:

  • Pension funds

    To deliver a steady flow of income to its members, a pension fund needs to invest and grow its capital over time. To do that, it needs to select asset managers that offer the products that match its requirements in terms of universe of securities and level of potential returns. Those requirements can be communicated through an index. For example, if a pension fund believes they should incorporate considerations around the transition to a low carbon economy, they could require their asset managers to use an index such as the MSCI World Climate Action Index as their index of reference.

  • Asset managers

    In an asset management company, there may be teams with different skill sets and investment philosophies. To better communicate their differences, they may select different indexes for their funds. For example, if one of the teams is focusing purely on the UK market, they may choose the MSCI UK Index as their benchmark. Another team may be focusing only on technology stocks and could use the MSCI World Information Technology Index to signal to investors what type of companies they look for (information technology) and the breadth of their investable universe (world).

  • Wealth managers

    The number of individual investors using wealth managers is growing. These individuals have more complex needs and require a more tailored approach. For example, they may have requirements in terms of return expectations, risk tolerance or specific tax circumstances. Wealth managers can work with index managers to create custom indexes tailored to those requirements. For example, the wealth manager may require an index that excludes Company A, because their client works for that company and want their investment portfolio to act as a diversifier to their income.

Did you know - The financial market ecosystem

Did you know?

A brief history of financial products innovation

  • 1602

    The Dutch East India company issues shares and thereby establishes the first securities 1602 market of modern time

  • 1774

    The world’s first mutual fund is established by Dutch merchant and broker Abraham van Ketwich covering bonds from Austria, Denmark, Germany, Spain, Sweden, Russia, and a variety of colonial plantations in Central and South America

  • 1867

    The UK’s first mutual fund, the Foreign & Colonial Investment Trust, is established

  • 1946

    The first venture capital firm, American Research and Development Corporation and J.H. Whitney & Company, is founded in the US

  • 1949

    Alfred Winslow Jones — the first hedge fund — is established in the US

  • 1973

    The Chicago Board Options Exchange (CBOE) introduces standardized options contracts for trading

  • 1982

    The first equity exchange-traded fund (ETF), the Toronto Index Participation Shares (TIPS 35), is launched in Canada

  • 1983

    The first index options start to trade (CBOE 100 index)

Source: CFA Institute Research Foundation, “Financial Market History”, Dec/2016; Prequin

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