Asset Management with Price Impact and Fair Treatment of Clients
AbstractIn 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. Effectively, she may conduct limited invisible transfers of wealth among largely uninformed clients by granting preferential market access to some of them and this may be purely the result of her dollar-alpha maximization e orts rather than size/importance-based client discrimination. 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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Bibliographic InfoPaper provided by Faculty of Economics, University of Cambridge in its series Cambridge Working Papers in Economics with number 1027.
Date of creation: 29 May 2010
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Web page: http://www.econ.cam.ac.uk/index.htm
Multi-account portfolio optimization; market impact; treating customers fairly;
Find related papers by JEL classification:
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
- G20 - Financial Economics - - Financial Institutions and Services - - - General
- D18 - Microeconomics - - Household Behavior - - - Consumer Protection
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-06-04 (All new papers)
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