Business Intelligence

Asset Management With Price Impact And Fair Treatment Of Clients

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Executive Summary

In light of recent regulatory initiatives focusing on fair treatment of customers in financial markets, this paper examines the agency problem created by an asset manager with market impact, segregated accounts and preference-based contracts. It illustrates how aggregate client welfare and assets under management are affected by the order in which clients' accounts are sequentially traded and demonstrates that the manager is unlikely to have incentives for equal treatment of clients. Increased transparency and/or effective regulation in this area seem socially desirable since the manager's incentives and client welfare generally appear to be misaligned.

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