Secondary markets Flashcards
Features of stock exchanges
Purpose - market place to facilitate trading, regulated companies gives greater confidence, transparency price discovery mechanisms.
Developed markets - offer sophisticated formal markets, high degree of regulation.
Underdeveloped markets - lower degree of sophistication.
Typical conditions for listing on a main market:
Public traded companies, protection against dilution of ownership, minimum market value and/or number of shares brought to market, established trading record, production of a prospectus, ability to meet ongoing requirements.
Main requirements for a company’s shares to be admitted to the AIM are twofold:
- That there is no restriction on the transferability of the shares.
- That the AIM company appoints two experts to assist it:
a. The nominated adviser – as seen, the nomad can be thought of as an exchange expert, advising the company on all aspects of AIM Listing Rules and compliance.
b. The broker – AIM companies’ shares are usually less liquid than those of fully listed companies; it is the broker’s job to ensure that there is a market in the company’s shares, to facilitate trading in those shares
and to provide ongoing information about the company to interested parties.
UK Alternative Investment Market (AIM)
As with the Official List, the LSE imposes similar continuing obligations on AIM companies. There are also certain other aspects in relation to AIM companies and their broker and nominated adviser:
• The broker and adviser can be the same firm; they are often firms of stockbrokers or accountants.
• If a company ceases, at any time, to have a broker or adviser, then the firm’s shares are suspended from trading.
• If the company is without a broker or adviser for a period of one month it is removed from AIM.
Liquidity rebate
An incentive offered to market makers by MTF and other platform providers to encourage the use of their platforms.
Order vs quote-driven
Quote-driven - price controlled by price makers (market makers), bid/offer spread, screen- and phone-based.
Order-driven - prices determined by buy orders and sell orders, orders awaiting execution placed on order book, electronic trading.
Market participants
• Brokers - Act as agent for a client • Dealers - Act as principal for their own account • Dual capacity - Are able to act as agent and principal • Market Makers - Must provide prices at which it is willing to buy and sell a minimum number of its chosen shares throughout the course of the trading day • Acting as an inter-dealer broker Although the IDB acts as an agent between two firms it settles the transaction as if it were principal. However, it does not hope to make profits from price rises or falls by taking a position in the market.
Stock lending:
- Temporary transfer of securities with an agreement to return equivalent securities to the lender at pre-agreed time.
- After the market maker has sold the shares ‘short’, it will borrow stock via an SBLI so that it can settle its position with the investor.
Stock lending effect on a lender’s rights:
• Title of security passes to the borrower
• Borrower receives dividends/coupons
• Benefits of corporate actions passed on to the lender
• Voting rights lost (unless stock recalled in good time)
Stock lending agreement
• Sets out how the benefits of the lent securities will be passed back to the lender e.g. manufactured dividend
Global Master Securities Lending Agreement
• Sets out legally binding contracts in a standardised format for participants
• Reviewed regularly
Order book trading
• Fully automatic trading
- Execution, Matching, Reporting
- Straight-through processing to settlement
• Trading halts
- The exchange can prohibit any transaction for any reason
• Typical reason is suspension of listing
- Members must gain permission to trade in a suspended security
- The length of the halt is at the discretion of the exchange
• Transparency of member orders
- Members only can view the order book
- Order priority
• Price, then time
- No minimum/maximum order size
Auctions
Auction activity is visible to all members.
The random start is to prevent manipulation. The price assessed by the uncrossing algorithm becomes the opening price for the security. During the course of the uncrossing, addition, amendment or deletion of orders is not permitted.
Interruption to automatic execution
if the price of a trade is significantly
different from the last automated trade (this can be anything from 5% to 25%), automatic execution can be suspended. Trading would restart with an intraday auction.
Iceberg order allows:
an order to be partially hidden from the market view.
Upon entry of the order, the participant specifies:
• The total order size
• The visible ‘peak’ size (the maximum volume that will be shown to the market at any time)
Matching orders will execute against the visible peak. The system automatically brings in the next tranche onto the order book as a new order.
This will continue until the order has been exhausted or until deleted.
Each time a new tranche of an iceberg order is revealed a new time stamp is given to the order
Benefits of a Central Counterparty (CCP):
- Reduced counterparty risk
- Providing total anonymity
- Reduced administration
- Facilitates netting
- Improved pricing (due to anonymity)
Costs of trading :
• Broker’s commission – commission is typically based on a set percentage of the value of the securities being purchased or sold. If little or no advice is being
offered, the firm is described as a discount broker.
• Account fees – brokers also tend to charge account fees to their ongoing customers.
• Exchange fees, regulatory, clearing fees taxes.
