Stock Exchanges Flashcards

1
Q

Who are the market makers?

A

An entity who makes the market by posting two-way quotes (bid and offer price) at which he is willing to buy or sell a security.

  • They bear the risk of clearing all quantities under all market conditions
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2
Q

What is a Quote-driven market?

A

A market whereby securities are traded via designated market makers.

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3
Q

What is a Limit order book?

A

A centralised location (electronic rather than physical) where investors submit orders and stating the desired prices they wish trade.

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4
Q

What is an Order-driven market?

A

A market whereby securities are traded via the Limit order book only.

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5
Q

What are the 2 priority rules?

A

1) Price priority: Best price executes first

2) Time priority: First come first serve

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6
Q

What are Market Orders?

6

A

1) Immediate execution at best price
2) Trader do not specify price (price-taker)
3) Certainty with respect to execution but not price
4) Consumes liquidity
5) Most market orders are pure and plain market orders
6) Different exchanges offer different other types of market orders, which are not commonly not used

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7
Q

What are Limit Orders?

8

A

1) Trader specify the price to trade (limit price)
- Wait until the price is matched
2) Certainty with respect to price but not execution
3) The limit price for a limit buy (sell) order can be greater than, equal to, or less than the bid (offer) price
4) The higher (lower) the limit price for a limit buy (sell) order, the higher is the probability of execution
5) If the limit price of a limit buy (sell) order is higher (lower) then or equal to the offer (bid) price, it is called a marketable limit order, which functions like a market order.
6) In a pure order-driven market, limit orders are the sole suppliers of liquidity (“make the market”)
7) Most limit orders are pure and plain limit orders
8) Different exchanges offer different other types of limit orders, which are not commonly used.

  • Assumed to be a day order unless stated otherwise
  • Price priority > Time priority
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8
Q

What is NYSE?

A

New York Stock Exchange.

- Originally a quote-driven market

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9
Q

Who are the market makers of NYSE?

A

Specialists.

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10
Q

What do these Specialists do and where do they come from?

7

A

1) Members of NYSE
2) Dealers who specialises in certain stocks
3) Used to be the only ones who can access the limit order book
- They have a lot of information (information monopoly) –> Can strategise
4) Maintain the market: Continuous quotes throughout the day
5) Executing orders: By crossing, matching, or through own inventory
6) Balance the buy and sell pressure and stabilize prices by trading against the market trends
7) Every stock only has 1 specialist (Everyone that buys/sells have to buy/sell from a specialist)
- 1 specialist can handle more than 1 stock

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11
Q

How does technology affect market makers (Specialists)?

3

A

1) Market makers lose their edge of having more information
- With the internet, information is prevalent to even the general public
2) Companies begin selling information
3) Number of specialists has been falling (only left a few who do not do much) as the information monopoly is dwindling

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12
Q

What is Nasdaq?

4

A

National Association of Securities Dealers Automated Quotations.

1) A stock market that started out as a quote-driven OTC market
2) First electronic stock market
3) Claimed to list more companies and trade more shares per day than any other exchanges
> More companies –> More market makers per stock –> More competition to make the market
4) IT sector is the biggest and the most well-known sector in Nasdaq

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13
Q

What are ECN?

8

A

Electronic Communication Networks.

1) Early financial disruptors
2) Alternate trading system (ATS)
3) Electronic limit order book
4) Self-regulatory organisation (SRO): Minimal regulatory burdens vs NYSE where 1/3 of NYSE employees are regulatory units
5) Pseudo-exchange
6) Very fast execution at very low transaction costs
7) Very fast market acceptance
8) No human intervention

Increase competitiveness, exchanges found it hard to survive.
Therefore, these exchanges bought ECN. (Nasdaq bought Instinet)

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14
Q

Examples of ECN?

4

A

1) Archipelago
2) Instinet
3) Island
4) NexTrade

*Many are now exchanges and playing a major role in the security trading industry

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15
Q

What are Online Brokers?

4

A

1) New disruptors
2) Zero commission and trading fee
3) Make profit by:
> Payment for order flow (PFOF) –> With designated market makers, online brokers have to pass the order to the market makers to make the trade and profit from the transaction
> Direct orders to market makers (e.g. Citadel)
> Selling data
4) Made possible due to technological advances and information through social media –> Market environment changed very differently

*Pandemic: Retail portion of trades increased from 10% to 25%

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16
Q

Examples of Online Brokers?

3

A

1) Robinhood
2) Charles Schwab
3) Fidelity

17
Q

Details about SGX?

6

A

Very small market.
The whole of SGX is smaller than a Amazon/Facebook stock.

1) Total listing = 696 stocks
2) SGX Mainboard: 479 Singapore and foreign companies listed
3) SGX Catalist: 217 small and medium sized companies listed
4) Total market capitalisation about: S$862.1 billion
5) Domestic vs Foreign Listing
6) Minimum bid (tick sizes) - refer to notes

18
Q

What are some SGX Linkages?

3

A

Singapore very small and thus, want to collaborate with other exchanges.
But so far, all went bust. Came and gone.

1) With Australian Stock Exchange
- First co-trading established
- Allows settlement of ASX and SGX securities by participants in both markets (ended in May 2005)

2) JADE (With CBOT) - Ended Nov 2007

3) ASEAN Trading Link: 7 exchanges by 2015
- SGX with Bursa Malaysia: Sept 18, 2012
- SET (Thailand): Oct 15, 2012
- Cease operation wef Oct 6, 2017

19
Q

What is the Minimum trading price (MTP)?

6

A

1) Stocks to be set at $0.20 since the majority (80%) of the market is trading at very low prices (<20%)
2) Applies to Mainboard shares
3) Computation: Volume weighted average price (VWAP) of shares for the 6 months preceding the date of review
4) Mainboard companies will be placed on the MTP watch list if:
> 6-month VWAP < $0.20 + last 6-month average daily market cap < $40m [Fail]
> Only can exit the watch list if fulfill both conditions
5) Continual monitoring: 1st business day of June and December
6) A company entering the list will have 36 months to exit the list, after which…delist

*Currently the scheme is scrapped because many companies were struggling with this MTP

20
Q

What are the transaction costs involved in SGX?

(5)

*Do not really need to memorise this

A

1) Brokerage rates are fully negotiable
2) CDP charges a clearing fee of 0.0325% with no cap
3) Trading Fee: 0.0075% of traded value for stocks
4) Goods and Services tax (GST)
5) Once matched, CDP becomes counterparty to each side of the transaction

21
Q

What is Odd lot trading in SGX?

A

Shares that are mainly traded in round (broad) lots.

e.g. 100 shares per lot

22
Q

What is a Unit Share Market?

A

Trading of odd lots in any quantity less than one round lot of the underlying share in the Ready Market.

Example: For a buy order of 1160 ABC shares, 1100 shares will be executed on the Ready Market and the remaining 60 shares will be executed on the Unit Share Market.

> Trades executed in the 2 markets for the same underlying share can be consolidated in a single contract

23
Q

What are the dividend/withholding tax in SGX?

(2)

*Do not really need to memorise this

A

1) Gross dividends payable is taxed at the corporate tax rate of 17%
2) No dividend tax or withholding tax on dividends

24
Q

What are the controls on Foreign Investors in SGX?

(4)

*Do not really need to memorise this

A

1) No foreign exchange controls
2) No restrictions on the acquisition of securities by foreign investors
3) Foreign ownership is restricted only in certain companies
4) No limitations on the repatriation of income, capital and capital gains