Chapter 5: Secondary Markets Flashcards
How are markets sometimes characterised as?
price discovery mechanisms
How do brokerages operate?
Advise clients
Facilitate the transactions between two parties, does not take on any principal
Earn comission
What is acting as a broker sometimes known as?
Dealing as agent
How do dealers operate?
A dealer can buy or sell securities directly from clients
Investment banks tend to act as dealers on stock exchanges
What are dealers sometimes known as?
Dealing as principal
What does ATSs stand for?
Alternative trading systems
How would an investment bank utilise an ATS, Alternative Trading System.
Internalising customers trades by executing them against other customers’ trades or firms own inventory
What are regulated markets (MiFID)
Stock exchanges
What are multilateral trading facilities (MTFs)
Systems other than stock exchanges which bring together multiple parties to trade
What are systematic internalisers? (SIs)
Investment firms that on a regular and organised basis deal on their own account when executing client orders outside of markets.
What is the trading venue for trading non-equities called per MiFID?
OTF - Organised Trading Facility
What does OTC refer to?
Over the counter - dealers trading with one another off exchange
What does Dark pool refer to?
Trading outside exchanges and only announcing traded price once deal is complete
Good for large transactions
What are dark pools known as in US and UK?
US - ATSs
UK - MTFs
When can securities being offered not need to be registered with the SEC?
If they conform to registrations set forth in Regulation D
What are the various rounds of equity funding called?
A,B,C,D etc.
What is an example of an offering that does not need to be registered with the SEC under Reg D?
Tech companies looking for funding in exchange for equity
What are frontier markets sometimes known as?
Pre-emerging
What is the SZSE?
Shenzen Stock Exchange
For small-mid companies in China
What are Chinese A and H shares?
A-Shares - mainland shares, hard for foreign investment
H-Shares - listed in HK, popular with global investors
What is a quote-driven system? And one example
Market makers agree to buy and sell a set minimum number of shares at quoted prices
E.g. NASDAQ
What is an order-driven system? And one example
Investors indicate how many securities they want to buy or sell and at what price. System brings these orders together. Common in equities.
e.g. NYSE, TSE, LSE
Which trading system provides more liquidity?
Quote-driven
What is an example of a hybrid system?
LSE’s Stock Exchange Electronic Trading Service – quotes
and crosses (SETSqx)
How are German and French bonds sold?
Auctions
What are GEMMs obligations?
Two-way prices
Bid on gilts
Provide info to DMO on trade info
What are GEMMs privileges
Bid on GILTs
Trade as DMO CP
Access gilts inter-dealer brokers (IDBs)
Who does a GEMM not need to provide two way quotes to?
Other GEMMs / IDBs
What is a Gilt Inter-Dealer Broker?
Arrange deals between GEMMs anonymously
Cannot take on principal, acts as agent
Settles the transactions as if it were the principal
Can only act as a broker between GEMMs
What are execute and eliminate orders?
Execute as much of the trade as possible and cancel the rest
What is a fill-or-kill order
Fill the entire order immediately or cancel it
What is a all-or-none order
Same as fill-or-kill but will only be cancelled at the end of the day
Benefits of CCP?
Reduced CP risk
Anonymity
Reduced admin (only one CP)
Netting
Improved prices (more participants)
What is an IDB, Inter-Dealer Broker?
Exchange member firm that has registered to act as an agent between dealers (e.g. market makers)
Provides anonymity
Can an exchange block a trade?
Yes, they can halt trading
Who maintains the FTSE 100 index?
FTSE Russell
What is the STOXX index?
Global developed markets
What is the FTSE All-Share
Full listing on the LSE in £/EUR
600 companies
What is a total return index?
One that factors in dividend reinvestments
How are stocks weighted in a free-float factor index?
Free float calculated to nearest 5%
What is a decentralised dealer market structure?
Where investors can buy/sell without a centralised location
No exchange
What is an example of a centralised corporate bond exchange?
LSE’s ORB Order Book for Retail Bonds
How can dealer-to-dealer bond trading occur?
Phone
IDB voice broking the deal
Electronically via a trading platform etc MTS Cash or BrokerTec
How can dealer-to-customer trading occur?
Voice trading
Electronic platform, TradeWeb, MTS Bondvision, Bloomberg FIT, Liquidnet and MarketAxess
How do dealer-to-customer systems operate?
On a RFQ, request for quote basis
Investors will request quotes from many dealers platforms
What are the two factors that affect bond pricing?
Issuer and market factor
What are the issuer factors that will affect price? (3)
Credit rating
Structure/seniority of issue
Yields on other benchmark bonds
What are the market factors that will affect bond pricing? (3)
Liquidity
Method of trading
Ability to borrow
