4. Financial Markets

Question 0

What do primary markets do?

Answer 0

They raise capital and enable surplus funds to be matched with investment opportunities

Question 1

What is a stock exchange?

Answer 1

An organised marketplace for issuing trade securities by members of that exchange.

Question 2

What do secondary markets do?

Answer 2

Allow primary markets to function efficiently by facilitating two-way trade in issued securities.

Also, by injecting liquidity into what would otherwise be deemed illiquid long-term investments, they also reduce the cost of issuing securities in the primary or new issue market.

Question 3

What are the two broad categories of trading of secondary markets?

Answer 3

1. Quote driven

2. Order driven

Question 4

What is an order driven market?

Answer 4

One that employs either an electronic order book (such as the LSE’s SETS), or an auction process, such as that on the NYSE floor, to arch buyers with sellers.

Question 5

What are the key features of order driven markets?

Answer 5

1. Buyers and sellers will each use a broker who will act on their behalf as agent.
2. The broker’s role is to find a matching buyer for his client’s shares or vice versa & to obtain best execution for the client.
3. The broker will charge commission for arranging a deal.
4. This trade takes place on the floor of an exchange or via a computerised trading system.
5. The price for the trade will be governed by demand and supply and so can be affected by large orders which can move the price.

Question 6

What are quote driven trading systems?

Answer 6

These systems employ market makers to provide continuous two way, or bid and offer (buy and sell) prices during the trading day, in particular securities regardless of market conditions.

Question 7

What are the key features of a quote driven system?

Answer 7

1. Liquidity is provided by a market maker
2. The market maker is required to buy and sell securities under all market conditions
3. Market makers quote a price for buying and for selling and make their profits through the difference at which they buy and sell
4. Buyers and sellers will use a broker, as with order driven markets, who will act as their agent. The broker will execute the trade, however, with the market maker that is offering the best price.

Question 8

What is an example of a quote driven equity trading system?

Answer 8

NASDAQ-OMX

Question 9

What is SETS?

Answer 9

SETS (Stock Exchange Trading Service) is an order based system for all the large UK company shares.

It combines electronic order-driven trading with integrated market maker liquidity provision, delivering two way prices for the most liquid and international securities.

Question 10

What is SEAQ?

Answer 10

SEAQ (Stock Exchange Automated Quotation system) is a quote driven system used for fixed income stocks and some Alternative Investment Market (AIM) shares which are smaller companies that are not traded as frequently.

Question 11

What are ‘bid prices’ and ‘offer prices’?

Answer 11

Bid prices are the prices that a firm is willing to buy at

Offer prices are the prices that firms are willing to sell at.

Question 12

What is principal trading?

Answer 12

This is : When the client places an order with it (the broker firm) to sell shares it will execute this order against its own trading book and, in doing so, will ensure that the client receives best execution.

Question 13

What is agent trading?

Answer 13

When a broker firm acts as an agent, arranging deals for others and making money by charging a commission on the deal. Eg H&L.

Question 14

What is on-exchange trading?

Answer 14

Trades that are conducted through stock exchanges such as the LSE or NYSE.

Question 15

What is over the counter trading?

Answer 15

Also know as off exchange, OTC transactions take place outside the confines of a stock exchange, where there may be a greater degree of flexibility on offer. Bonds are typically traded on the OTC market, as the size of the order and the relative lack of liquidity mean that the market can operate more effectively by seeking out a counterparts to deal with.

Question 16

Name some of the major stock exchanges.

Answer 16

US: NYSE, NASDAQ
UK: LSE
EU: NYSE Euronext
GERMANY: Deutsche Börse 
SPAIN: BME
GREECE: ATHEX
MIDDLE EAST: Saudi Arabia Exchange AKA Tadawul
JAPAN: TSE
HONG KONG: HKSE
CHINA: SSE
INDIA: NSE & Stock Exchange Mumbai
SINGAPORE: SGX
AUSTRALIA: ASX

Question 17

What is the system of settlement whereby simultaneous exchange of stock and cash is required?

Answer 17

Delivery vs Payment (DVP)

Question 18

What would T + 3 mean when referring to settlements?

Answer 18

This refers to the date on which a trade settles - T refers to the trade date and T + 3 identifies that the transaction will settle three business days after the trade date.

Question 19

What is book entry transfer?

Answer 19

When the transfer of ownership takes place by means of an electronic transfer within the records of a central securities depository.

Question 20

What is the foreign exchange also known as?

Answer 20

FOREX

Question 21

How long is the settlement on deals struck in the spot market?

Answer 21

Two business days after the date of transaction (T + 2).

Question 22

What are the two types of transaction conducted on the forex?

Answer 22

1. Spot transactions are immediate currency deals that are settled within two working days.
2. Forward transactions involve currency deals that are agreed for a future date at a rate of exchange fixed now.