Exchanges Flashcards
What are the Main exchanges?
- Formal stock exchanges–> mainly for equity shares
- Exchanges for futures and options
- Automated exchanges–> Have no trading floors and operator accepts the securities for entry into the system if they satisfy certain criteria and dealers then enter the price at which they will deal.
- Single Investment firm exchanges–> A single firm in an organised and systematic way hold an inventroy of securities or buys them in and is prepared to trade them at disclosed prices.
- Over-the-counter–> trades are done direct with other traders who hold the securities concerned (do no use brokers).
- Primary and secondary markets
- Wholesale and retail markets
- Brokers and dealers–> brokers are agents and dealers deal for their own account.
What are the main features of exchanges?
- Channeling–> brokers connect buyers and sellers
- Liquidity–> always a counterparty willing to buy or sell.
- Price discover–> right price of the asset is discovered by supply and demand. Requires issuers-transaparency.
What is a bid?
It is the price which a trader is willing to pay to buy.
What is an ask?
The price at which a seller is will to sell.
What is the spread?
The difference between the bid and the ask.
What is the difference between order-driven and quote-driven exchanges?
Order-driven is where offers to buy and sell are displayed and then matched when they coincide in like an auctions.
Quote-driven systems have market-markers (dealer who also offers to buy or sell a specific security). Market markers are obliged by the exchange rules to quote firm tow-way prices during mandatory period during the day at or above a minimum size. There is priority which orders are taken.
What is matching?
It is the process of reconciling the seller’s and buyer’s version of the deal. Dealers forward their deal to the operator responsible for matching which checks conformity and confirms the details to buyer and seller. It must be matched at the same day.
What is settlement?
It is the transfer of the investments against payment.
What is the organisation and regulation of the exchanges?
- Management of the exchange–> fit and proper satisfying a criteria as to compliance and integrity
- Financial resources
- Price transparency
- Listing and prospectus rules–> criteria which qualify securities for listing on the exchange and provision for de-listing.
- Members of the exchange–> detail requirements
- Conduct of business–> best execution
- Orderly trading–> rules for suspension of dealings
- Regulatory compliance–> exchanges are expected to monitor compliance by their members with the regulatory regime.
- Complaints and dispute resolution–> must be proper system for complains and for the settlement of disputes
- Clearing and settlement–> need to be done efficiently
- Fees brokerage and costs–> fixed fees and brokerage are commonly not permitted on competition grounds.
What are the advantages of listing?
- issuers raise permanent capital from an extremely large pool of investors
- existing shareholder can make a large profit by selling their shares to the public
- issuers become known to investors and analysts and so can raise more capital from the market
- enhanced liquidity of share sales tends to mean their price rises
- listing enhances credibility with banks, suppliers and other
- issuer can use its shares to pay for takeovers
What are the disadvantages of listing?
- Higher risk of liability for underwriters and directors on the offering circular for the securities
- More disclosur, higher audit fees, high compliance cost
- Less freedom
- Exposure to short-term demands by analysts and investors
- More exposure to shareholder activism
- Greater risk of director liability and abusive litigation
- Impact of insider trading legislation
- Listing expenses and fees and ongoing costs
- Risk of hostile takeovers.
What are examples of listing criteria?
Companies which wish to list on a stock exchange must generally satisfy a number of listing criteria for example:
- Minimum number of share holders
- A minimum percentage to be held by the public as opposed to controlling shareholders
- Minimum of 12 months or three years of operations showing a minimum pre-tax income and the like
- Meet corporate governance standards
What are the rules of corporate governance wet out in the listing regime?
- Boards must establish committees
- Fees and remuneration of directors should be disclosed
- Non-executive and independent directors should make up, say, at least one-third of the board.
- There should be a separation of the role of chairman and chief executive with a preference for the chairman to be non-executive
- Adequate and timely information should be provided to shareholders at the annual general meeting
- Companies should disclose conflicts of interests.
What are the payment systems in the Exchange?
Payment involves three steps:
- A payment order
- The acceptance of the payment order
- Debiting or crediting of an account
Most payment orders between banks are transmitted via the bank’s computers or more commonly via a private telecommunication system known as SWIFT.
