Asset Management with Price Impact and Fair Treatment of Clients

Michal Jezek and Stephen Satchell

Cambridge Working Papers in Economics from Faculty of Economics, University of Cambridge

Abstract: 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. 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 efforts 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.

Keywords: Multi-account portfolio optimization; market impact; treating customers fairly (search for similar items in EconPapers)
JEL-codes: D18 G11 G20 (search for similar items in EconPapers)
Date: 2010-05-29
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Persistent link: https://EconPapers.repec.org/RePEc:cam:camdae:1027

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