LOS p: Discuss the role of ethics in trading.

Q1. Which of the following is FALSE regarding best execution, the CFA Institute’s Trade Management Guidelines, and ethics in trading?

A)   The buy-side trader’s relationship with clients must come before their relationship with sell-side traders.

B)   Best execution should be measured over short, relevant time periods.

C)   Record keeping is a key component of the CFA Institute’s Trade Management Guidelines.

Q2. Frank Rolle is a portfolio manager who works for a firm that offers comprehensive portfolio management and employs buy-side traders. Rolle and his buy-side trader are considering shifting their business to a sell-side trader, Jack Smith. Smith has promised that Rolle and his traders will gain access to investment research put out by his firm. Rolle knows that Smith’s firm tends to charge higher commissions. Rolle does not believe the quality of Smith’s research to be any better than he is currently receiving from other sell-side traders. What should Rolle do?

A)   Not trade with Smith because his research is of no better quality.

B)   Not trade with Smith because the interests of his clients come first.

C)   Trade with Smith because he may have better research.

Q3. Which of the following is TRUE regarding a buy-side trader’s priority?

A)   Their relationships with their broker, the client, and sell-side traders are of equal priority.

B)   Their relationship with the client must come first.

C)   Their relationship with sell-side trader must come first.

Q4. Which of the following is FALSE regarding the role of ethics in trading?

A)   Trust has become more important.

B)   The relationship between buy-side and sell-side traders is becoming less adversarial.

C)   Buy-side traders have a fiduciary duty to maximize the value of the client’s portfolio.

LOS p: Discuss the role of ethics in trading. fficeffice" />

Q1. Which of the following is FALSE regarding best execution, the CFA Institute’s Trade Management Guidelines, and ethics in trading?

A)   The buy-side trader’s relationship with clients must come before their relationship with sell-side traders.

B)   Best execution should be measured over short, relevant time periods.

C)   Record keeping is a key component of the CFA Institute’s Trade Management Guidelines.

Correct answer is B)

Although best execution can be measured ex post over time, it should not be used to evaluate trading effectiveness over a short time span. Buy-side traders and portfolio managers have a fiduciary duty to maximize the value of their client’s portfolio.

Q2. Frank Rolle is a portfolio manager who works for a firm that offers comprehensive portfolio management and employs buy-side traders. Rolle and his buy-side trader are considering shifting their business to a sell-side trader, Jack Smith. Smith has promised that Rolle and his traders will gain access to investment research put out by his firm. Rolle knows that Smith’s firm tends to charge higher commissions. Rolle does not believe the quality of Smith’s research to be any better than he is currently receiving from other sell-side traders. What should Rolle do?

A)   Not trade with Smith because his research is of no better quality.

B)   Not trade with Smith because the interests of his clients come first.

C)   Trade with Smith because he may have better research.

Correct answer is B)

Buy-side traders and portfolio managers have a fiduciary duty to maximize the value of their client’s portfolio. Smith’s higher commissions should prevent Rolle from trading with him. The buy-side trader’s relationships with sell-side traders must never come before the interests of their clients. There is no evidence that Smith has done anything improper, so reporting him to the exchange regulators is unnecessary.

Q3. Which of the following is TRUE regarding a buy-side trader’s priority?

A)   Their relationships with their broker, the client, and sell-side traders are of equal priority.

B)   Their relationship with the client must come first.

C)   Their relationship with sell-side trader must come first.

Correct answer is B)

The buy-side trader should always be acting in the best interests of their clients. Buy-side traders and portfolio managers have a fiduciary duty to maximize the value of their client’s portfolio. The buy-side trader’s relationships with sell-side traders must never come before the interests of their clients.

Q4. Which of the following is FALSE regarding the role of ethics in trading?

A)   Trust has become more important.

B)   The relationship between buy-side and sell-side traders is becoming less adversarial.

C)   Buy-side traders have a fiduciary duty to maximize the value of the client’s portfolio.

Correct answer is B)

Brokerage commissions have fallen dramatically. The temptation is to shift costs to those that are implicit, rather than explicit. Thus, trading between buy-side and sell-side traders is becoming more adversarial. Furthermore, the disclosure of information in a trade can be used against a trader later on, especially with the advent of electronic trading venues where trader identity can be kept confidential. Thus, trust has become more important given the potential negative ramifications of trading with an unscrupulous trader.