Secondary Markets

Question 1

what is the role of trading venues?

Answer 1

facilitate the purchase and sale of listed instruments

Question 2

what does stock exchange membership allow?

Answer 2

enables banks and stockbrokers to be involved in secondary markets, provide liquidity to existing

Question 3

what is the role of brokers?

Answer 3

arrange deals for their clients as well as potentially giving advice to their clients as to securities investments

Question 4

what is the role of dealers?

Answer 4

actually buy/sell securities, dealer could buy/sell from the client which is described as dealing in principle as the dealer takes a principle position

Question 5

what are ATSs?

Answer 5

alternative trading systems, internalise their customers trades by executing them against other customers trades or the firms own inventory

Question 5

what is dark pool trading?

Answer 5

trading system where stocks are traded without the order price being displayed until after the trade is complete- commonly described as dark liquidity

Question 5

what do markets-makers provide?

Answer 5

provide liquidity that might be lacking on an order-driven system.

Question 6

what is over-the-counter trading?

Answer 6

buying and selling securities outside of an official stock exchange

Question 6

what are order-driven systems?

Answer 6

investors indicate how many securities they want to buy/sell and at what price, the system then brings together the buyers and sellers

Question 7

what are private transactions?

Answer 7

funding round of securities which are sold without an IPO usually to small number of chosen private investors. exemption from SEC via regulation D. commonly used by growing businesses in their early stages via various stages of equity funding

Question 8

what are quote-driven systems?

Answer 8

market makers agree to buy and sell at least a set minimum number of shares at quoted prices- this sets the offer/bid price

Question 9

what do hybrid systems do and what is an example?

Answer 9

combine both order and quote driven systems e.g., SETSqx

Question 10

how do market makers make a profit?

Answer 10

hope to on average buy at the big and sell at the offer

Question 11

what is the role of an agent?

Answer 11

arrange and make deals on behalf of other parties- charge commission on these deals

Question 12

what is an inter-dealer broker?

Answer 12

exchange member firms that have registered with the exchange to act as an agent between dealers

Question 13

what does the term ‘systematic internaliser’ mean

Answer 13

when an investment firm on an organised, frequent, systematic and substantial bases deals on its own account when executing client orders instead of placing the orders elsewhere

Question 14

what is algorithmic trading?

Answer 14

relies on computer systems to buy shares when predefined market conditions are met.

Question 15

what are the benefits of algorithmic trading?

Answer 15

• removes the emotion of trading
• preservation of discipline
• speed, accuracy and reduced costs

Question 16

what is the key to algorithmic trading?

Answer 16

reducing the level of latency (time taken to interact with the market)- could give the trader the ability to act on market information more quickly than others

Question 17

what is prime brokerage?

Answer 17

term given to a collection of services provided by investment banks to their hedge fund clients

Question 18

what services are included in prime brokerage?

Answer 18

• securities lending and borrowing
• leveraged trade execution
• cash management
• core settlement
• custody
• rehypothecation (assets become the property of the prime broker and they’re used for the benefit of the client)
• access to OTC markets

Question 19

how are orders given priority in the order book?

Answer 19

orders are given priority first by price then by time

Question 20

how is the opening price established

Answer 20

using an auction process- uncrossing algorithm where orders that overlap are executed at a single price that maximises the number of shares traded. once this is complete, automatic execution commences

Question 21

what are interruptions in the automatic execution of trades resultant from?

Answer 21

when the price of a trade is more than the price tolerance level away from the previous trade price, allows investors to react to large price changes

Question 22

how can one interact with the order book?

Answer 22

only those with membership to the exchange can interact with the order book

Question 23

what rights can the exchange reserve?

Answer 23

right to prohibit any transaction from being dealt on the exchange- members will have to seek permission to then affect a transaction if a security is suspended

Question 24

what are limit orders?

Answer 24

orders that have a price limit and a time limit- can be partially filled- the only orders that are displayed in the order book

Question 25

what are iceberg orders?

Answer 25

enables a market participant with a large order to partially hide the size of their order from the market and reduce the market impact the large order might have

Question 26

what are market orders?

Answer 26

do not specify price and are immediately executed at the best available price- submitted to the order book to deal in a specified number of shares

Question 27

what are execute and eliminate orders?

Answer 27

will execute as much of the trade as possible and cancel the rest- has a specified price and won’t execute a price worse than that

Question 28

what are fill-or-kill orders?

Answer 28

normally have a specified price, either entire order will be immediately filled at a price at least as good as that specified or the entire order will be killed

Question 29

what are all-or-none orders?

Answer 29

same as fill-or-kill except that if the order cannot be executed immediately, the order will be cancelled until the end of the trading day when the market closes

Question 30

what are the uses of a CCP?

Answer 30

• reduced counterparty risk
• providing total anonymity
• reduced administration
• netting of transactions
• improved prices

Question 31

what are additional costs that may be levied on investors?

Answer 31

• brokers commission
• account fees
• exchange fees, regulatory fees, clearing fees, tax/duties

Question 32

what are stock market indices?

Answer 32

method of measuring the performance of a section of the stock market which is segmented to represent a particular group- used as benchmarks to measure performance of portfolios and to provide the general public with an easy overview of the state of equities

Question 33

how is the S&P 500 weighted?

Answer 33

by free-float market capitalisation

Question 34

how is the FTSE 100 weighted?

Answer 34

measured by market cap.

Question 35

what does the national index represent?

Answer 35

the performance of the stock market of a given nation and reflects investor sentiment on the state of the economy

Question 36

what does the price return measure?

Answer 36

measures the price performance

Question 37

what does the total return measure?

Answer 37

measures the performance of both price return and dividend reinvestment

Question 38

what does net total return measure?

Answer 38

accounts for dividend reinvestment after the deduction of a withholding tax

Question 39

what does free-float measure?

Answer 39

estimates the proportion of shares that are not held by the owners and not burdened with sales restrictions

Question 40

what does a free-float factor represent?

Answer 40

proportion of shares that is free-floated as a percentage of issued shares and is then typically rounded to the nearest multiple of 5%

Question 41

who are the major participants that facilitate the government bond markets?

Answer 41

• government issuing agency
• primary dealers
• broker-dealers
• inter-dealer brokers

Question 42

what is a GEMM and what do they do?

Answer 42

gilt-edged market makers, vetted by the DMO, become a primary dealer and provide two-way quotes to customers and other member firms of the LSE

Question 43

what are the privileges of GEMM status?

Answer 43

• exclusive rights to competitively bid directly with the CMO
• exclusive facility to trade as a counterparty of the DMO
• exclusive access to the services of Gilt inter-dealer brokers

Question 44

what is the role of broker-dealers in the GILT market?

Answer 44

non-GEMM LSE member firms that are able to buy or sell gilts as principal or as an agent

Question 45

what is the role of GILT inter-dealer brokers?

Answer 45

arrange deals between market makers anonymously, not allowed to take principal positions, has to be a separate company and not a division of a broker-dealer

Question 46

how does the price of a corporate bond come about?

Answer 46

based on the equivalent government bond, less a discount to represent the risk that the corporation might default

Question 47

what is the primary function and role of market makers in corporate bonds?

Answer 47

provide liquidity to the market place and act as a facilitator or agent in trades between principalsha

Question 48

what is a decentralised market structure?

Answer 48

enables investors to buy/sell without a centralised location- traders/investors deal directly with each other not through a central exchange

Question 49

what are the 3 ways dealer-to-dealer trading can occur?

Answer 49

• direct telephone contact
• indirectly through IDB, voice broking the deal
• via an electronic market

Question 50

how has trading changed with technology?

Answer 50

electronic trading has become much more important, particularly for more liquid government bondsh

Question 51

what characteristics that can affect a bond issue?

Answer 51

• issuers current credit rating
• structure and seniority of the particular issue
• priority in the event of default by the issuer

Question 52

what market factors can influence an issue?

Answer 52

• liquidity
• method of trading
• ability to borrow