chapter 7- how stock markets work

Question 1

what do stock exchanges provide?

Answer 1

trading
clearing
settlement

Question 2

how can trading be driven?

Answer 2

auction driven
or
order driven

Question 3

what is short selling?

Answer 3

selling shares you don’t own in order to buy them back more cheaply at a later date- stock lending enables short selling

Question 4

what does a broker do?

Answer 4

acts as an intermediary between the buyers and sellers and a source of advice for investors

Question 5

what is single capacity when discussing the stock market?

Answer 5

as a member of the stock exchange, you could either be the jobber or the broker but not both

Question 6

when was the Big Bang and what happened?

Answer 6

1986
dismantling the structure of the stock exchange all in one go
it was an international factor in the dismantling of the glass-steagall

Question 7

once a trade is executed, what has to be done?

Answer 7

clearing- checking all the details of the trade match, happens at the end of each trading day, if volume is high it happens multiple times a day
settlement- when the trade is paid for and the shares change hands

Question 8

what does it mean if a share is illiquid?

Answer 8

there aren’t many buyers or sellers so you may not be able to trade in the volume you want

Question 9

what are ECN’s?

Answer 9

electronic crossing networks
electric platforms which enable banks brokers and institutional investors to by-pass markets altogether and effectively create their own
they work by sifting through market data in order to match buy and sell offers

Question 10

what are dark pools?

Answer 10

unofficial markets used to trade large blocks of shares anonymously and off-exchange
by keeping trading private they don’t move markets against those engaged in them

Question 11

what are 2 ways in which a broker can encourage business?

Answer 11

• inducements- soft commissions- technically don’t come from the fund managers, but come indirectly from investors
• provision of research into companies

Question 12

what is front running?

Answer 12

where a broker trades for its own account before filing a client’s order knowing that the client’s order will move the market in its favour

Question 13

what is a Ponzi scheme and how does it come about?

Answer 13

where money is taken from new investors and used to pay above- market returns to existing investors

Question 14

what is a pyramid scheme and how does it come about/

Answer 14

where current investors are incentivised to dins new ones whose money effectively pays them out
1994- Romanian savers lost about $1 billion between 1991-1994 in the Caritas scheme