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Introduction

Financial markets can be categorized as those dealing with newly issued financial claims, called
primary market, and those for exchanging financial claims previously issued, called the
secondary market.
The secondary markets are those in which securities are bought and sold after the original sale. A
secondary market transaction involves one owner or creditors selling to another. Therefore the
secondary markets provide the means for transferring ownership of corporate securities.
The secondary market, also known as the aftermarket, is the financial market where previously
issued securities and financial instruments such as stock, bonds, options, and futures are bought
and sold. The term "secondary market" is also used to refer to the market for any used goods or
assets, or an alternative use for an existing product or asset where the customer base is the
second market (for example, corn has been traditionally used primarily for food production and
feedstock, but a "second" or "third" market has developed for use in ethanol production).
Another commonly referred to usage of secondary market term is to refer to loans which are sold
by a mortgage bank to investors such as Fannie Mae and Freddie Mac.
With primary issuances of securities or financial instruments, or the primary market, investors
purchase these securities directly from issuers such as corporations issuing shares in an IPO or
private placement, or directly from the federal government in the case of treasuries. After the
initial issuance, investors can purchase from other investors in the secondary market.

Secondary market in Bangladesh


The secondary market for a variety of assets can vary from loans to stocks, from fragmented to
centralized, and from illiquid to very liquid. The major stock exchanges are the most visible
example of liquid secondary markets - in this case, for stocks of publicly traded companies.
Exchanges such as the Dhaka Stock Exchange and Chittagong Stock Exchange provide a
centralized, liquid secondary market for the investors who own stocks that trade on those
exchanges. Most bonds and structured products trade over the counter, or by phoning the bond
desk of ones broker-dealer. Loans sometimes trade online using a Loan Exchange.

Functions of Secondary Market

Provides regular information about the value of security.

Helps to observe prices of bonds and their interest rates.

Offers to investors liquidity for their assets.

Secondary markets bring together many interested parties.


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It keeps the cost of transactions low.

Nature of Secondary Market


In the secondary markets the securities are traded by investors. The secondary markets need to
have higher levels of liquidity so that transaction could be carried on properly.

Market Structure
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Trading locations
Organized secondary markets can be classified as either exchanges or over-the-counter markets.
In all countries, there are secondary markets that are legally established as national securities
exchanges, which we will simply refer to as exchanges. The products traded on an exchange are
approved by the directors of the exchanges and referred to as listed products. For example, in
the case of common stock, the product is the stock of a company. However the common stock of
all companies in a country is not listed on a stock exchange. The stock exchange will specify
requirements for a company to be traded on that exchange. Such a company is said to be a listed
company. Other products that can be traded on an exchange are certain types of derivative
products such as options and futures.
A decentralized market, without a central physical location, where market participants trade with one
another through various communication modes such as the telephone, email and proprietary electronic
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trading systems. In an over-the-counter market, dealers act as market makers by quoting prices

at which they will buy and sell a security or currency. A trade can be executed between two
participants in an OTC market without others being aware of the price at which the transaction
was effected. In general, OTC markets are therefore less transparent than exchanges and are also
subject to fewer regulations.

PERFECT MARKET
In order to explain the characteristics of secondary market we first describe a perfect market for a
financial asset.
In perfect market, all buyers and sellers are price takers and market price is determined at the
point that supply equals demand.
FEATURES OF PERFECT MARKETS

There are many buyers and sellers so that no one individual can influence market price.

Producers and consumers have perfect knowledge of events in the market.

Firms and customers act individually to maximize their position.

There are no barriers to entry or exit.

Secondary Market Trading


The term secondary market trading signifies the buying and selling of securities, after they have
been brought out through an Initial Public Offering. In order for secondary market trading to take
place a particular security has to be listed in the relevant exchange.
The term secondary market trading could also be denoted to the dealing of the smaller parts of a
larger loan and ownership interest in business enterprises.

Benefits of Secondary Market Trading


There are various benefits of trading in the secondary markets. The biggest advantage is that the
investors can recover their investments to a certain extent, provided their economic status
undergoes a change.
This is different from the conventional lending and partnership agreements. In such cases the
investors may refrain from making long term investments. Even if they invest for a longer period
of time, they would charge higher rates of interest for it.
In the secondary markets the investors are provided the luxury of being able to sell their interests
in the respective investments. This is specifically applicable if the particular investment has been
fragmented in comparatively smaller parts.
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The investors are provided such luxuries in case of the securitized loans, equity interests like
bonds or stocks that could be traded.

SECONDARY MARKET TRADING MECHANICS


TYPES OF ORDERS
Market Orders
The simplest type of order is the market order, an order executed at the best price available in
the market. If more buy orders and sell orders reach market at the same time, the price can
obtain. Buyers give priority offering lower price. Sellers give offering higher price. If there are
more than one order at the same price. The priority rule is based on the time of arrival of the
order. The danger of a market order is that an adverse move may take place between the time the
investor places the order and the time the order is executed.
Limit Orders
It designates a price threshold for the execution of trade. It is a conditional order. A buy limit
order indicates that the security may be purchased only at the designated price or lower. A sell
limit order indicates that the security may be sold at the designated price or higher.
The danger of limit order is that it comes with no guarantee it will be executed at all. The
designated price may not be obtainable.
Stop Order
Stop order specifies that the order is not be executed until the market moves to a designated
price at which time it becomes a market order. A stop order to buy specifies that the order is not
to be executed until the market rises to a designated price. A stop order to sell specifies that the
order is not to be executed until the market price falls below a designated price.
Two dangers of stop order:
1-Security prices sometimes exhibit abrupt price changes.
2-Stop order can be subject to the uncertainty of the execution price.

Market if Touched Orders


This order becomes a market order if a designated price is reached. However, a market-iftouched order to buy becomes a market order if the market falls to a given price. A market-iftouched order to sell becomes a market order if the market rise to a specified price.
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Time Specific Order


Orders may be placed to buy or sell at the open or close of trading for the day that is time
specific orders.
Size Related Orders
For common stock, orders are also classified by their size.

A round lot is typically 100 shares of a stock.

An odd lot is defined as less than a round lot.

A block trade is defined as an order of 10.000 shares of a given stock.

Short Selling
The selling securities that are not owned at the time of sale is referred to as selling short.
A short sale can be made only when either
1-The sale price of the particular stock is higher than the last trade price(It is referred to as an
uptick trade)
2-There is no change in the last trade price of particular stock and the previous trade price must
be higher than the trade price that preceded it.(It is referred to as a zero uptick.)
Margin Transactions
Investors can borrow cash to buy securities themselves as collateral.

A transaction in which an investor borrows to buy additional securities using the


securities themselves as collateral is called buying on margin.

The funds borrowed to buy the additional stock will be provided by a broker, and the
broker gets the money from a bank. The interest rate that banks charge brokers for
these transactions is known as the call money rate (also called the broker loan rate).

Margin requirements
The initial margin requirements is the proportion of the total market value of the securities that
the investor must pay for in cash.
Maintenance margin requirement is the minimum amount of equity needed in the investors
margin account as compared to the total market value.

Role of brokers and dealers in Secondary markets


Brokers

A broker is an entity that acts on behalf of an investor who wishes to execute


orders. In economic and legal terms, a broker is said to be an agent of the
investors.

Brokers aid investors by collecting and transmitting orders to the market, by


bringing willing buyers and sellers together, by negotiating prices, and by
executing order. The fee for these service is the brokers commission.

Dealers as market makers

Unmatched or unbalanced flow causes two problems.

The securitys price may change abruptly even if there has been no shift in either
supply or demand for the security.

Buyers may have to pay higher than market-clearing prices if they want to make their
trade immediately.

The fact of imbalances explains the need for the dealer or market maker, who stands
ready and willing to buy a financial asset for its own account.

Dealers perform 3 functions in markets;


They provide the opportunity for investors to trade immediately rather than waiting
for the arrival of sufficient orders on the other side of the trade(immediacy) and
dealers do this while maintaining short-run price stability (continuity)
Dealers offer price information to market participants
In certain market structures, dealers serve as auctioneers in bringing order and
fairness to a market.

Trading System of Bangladesh


Trading system of Bangladesh is classified by two types
a) Stock Exchange
b) OTC

Bangladesh Stock exchange


The Securities and Exchange Commission exercises powers under the Securities and Exchange
Commission Act 1993. It regulates institutions engaged in capital market activities. Bangladesh
Bank exercises powers under the Financial Institutions Act 1993 and regulates institutions
engaged in financing activities including leasing companies and venture capital companies. The
SEC has issued licenses to 27 institutions to act in the capital market. Of these, 19 institutions are
Merchant Banker & Portfolio Manager while 7 are Issue Managers and 1(one) acts as Issue
Manager and Underwriter. There are two stock exchanges ( the Dhaka Stock Exchange (DSE)
and the Chittagong Stock Exchange (CSE) ) which deal in the secondary capital market.
A stock exchange is an entity that provides "trading" facilities for stock brokers and traders, to
trade stocks, bonds, and other securities. Stock exchanges also provide facilities for issue and
redemption of securities and other financial instruments, and capital events including the
payment of income and dividends. Securities traded on a stock exchange include shares issued
by companies, unit trusts, derivatives, pooled investment products and bonds.
To be able to trade a security on a certain stock exchange, it must be listed there. Usually, there is
a central location at least for record keeping, but trade is increasingly less linked to such a
physical place, as modern markets are electronic networks, which gives them advantages of
increased speed and reduced cost of transactions. Trade on an exchange is by members only.
The initial offering of stocks and bonds to investors is by definition done in the primary market
and subsequent trading is done in the secondary market. A stock exchange is often the most
important component of a stock market. Supply and demand in stock markets is driven by
various factors that, as in all free markets, affect the price of stocks (see stock valuation).
There is usually no compulsion to issue stock via the stock exchange itself, nor must stock be
subsequently traded on the exchange. Such trading is said to be off exchange or over-the-counter.
This is the usual way that derivatives and bonds are traded. Increasingly, stock exchanges are
part of a global market for securities.
Bangladesh capital market is one of the smallest in Asia but the third largest in the south Asia
region.
It has two full-fledged automated stock exchanges namely Dhaka Stock Exchange (DSE) and
Chittagong Stock Exchange (CSE) and an over-the counter exchange operated by CSE. It also
consists of a dedicated regulator, the Securities and Exchange commission (SEC), since, it
implements rules and regulations, monitors their implications to operate and develop the capital
market. It consists of Central Depository Bangladesh Limited (CDBL), the only Central
Depository in Bangladesh that provides facilities for the settlement of transactions of
dematerialized securities in CSE and DSE.

Dhaka stock exchange


Dhaka Stock Exchange (Generally known as DSE) is the main stock exchange of Bangladesh. It
is located in Motijheel at the heart of the Dhaka city. It was incorporated in 1954. Dhaka stock
exchange is the first stock exchange of the country. As of 18 August 2010, the Dhaka Stock
Exchange had over 750 listed companies with a combined market capitalization of $50.28
billion.
History
It first incorporated as East Pakistan Stock Exchange Association Ltd in 28 April 1954 and
started formal trading in 1956. It was renamed as East Pakistan Stock Exchange Ltd in 23 June
1962. Again renamed as Dacca Stock Exchange Ltd in 13 May 1964. After the liberation war in
1971 the trading was discontinued for five years. In 1976 trading restarted in Bangladesh. In 16
September 1986 was started. The formula for calculating DSE all share price index was changed
according to IFC in 1 November 1993. The automated trading was initiated in 10 August 1998.
In 1 January 2001 was started. Central Depository System was initiated in 24 January 2004. As
of November 16, 2009, the benchmark index of the Dhaka Stock Exchange (DSE) crossed 4000
points for the first time, setting another new high at 4148 points.
Formation
Dhaka Stock Exchange (DSE) is a public limited company. It is formed and managed under
Company Act 1994, Security and Exchange Commission Act 1993, Security and Exchange
Commission Regulation 1994, and Security Exchange (Inside Trading) regulation 1994. The
issued capital of this company is Tk. 500,000 which is divided up to 250 shares each pricing Tk.
2000. No individual or firm can buy more than one share. According to stock market rule only
members can participate in the floor and can buy shares for himself or his clients. At present it
has 230 members. Market capitalization of the Dhaka Stock Exchange reached nearly $9 billion
in September 2007 and $27.4 billion in Dec 9, 2009.
Chittagong stock exchange
Chittagong Stock Exchange is a stock exchange located in the port city of Chittagong in
southeastern Bangladesh. It was established in 1995 as the second stock exchange of the country.
The exchange is located in the Agrabad commercial area of the city.
Timeline

1 April 1995 CSE incorporated as a company.


10 October Floor trading started in cri out system.
4 November 1995 formally opened by then former Prime Minister Begum Khaleda Zia.
30 May 2004 Internet based Trading system opened.

OTC Market of Bangladesh


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OTC- Dhaka
Dhaka Stock Exchange Ltd. provides Over-The-Counter (OTC) facilities for transaction of share
of companies as per SECs directive no. SEC/CMRRCD/2001-16 dated 06 September, 2009
transaction procedure of which is followed by Securities and Exchange Commission (Over-theCounter) Rules, 2001.
Initially with 51 companies, Dhaka Stock Exchange Ltd. Over-the-Counter (DSE-OTC) has
started its journey on October 01, 2009 as per SEC Directive # SEC/CMRRCD/2001-16/168
dated 01 October, 2009. Among 51 issues, trading of the shares of United Commercial Bank Ltd.
has been resumed in the main market of DSE from 13 June 2010 under "Z" Category as per SEC
Directive No. SEC/SRMIC/94-205/369 dated June 08, 2010. As per directive #
SEC/CMRRCD/2001-16/65 and SEC/SRMIC/94-198/623 dated 28 September 2010 & 05
October 2010 there are 29 (twenty nine) more companies have been added with the existing OTC
instruments with effect from 01 October and 20 October 2010 respectively.
Out of 25 issues (which have been delisted from the main market for failure to demote their
securities within 30 September 2010) only 10 issues are declared eligible for demote securities
by Bangladesh Securities and Exchange Commission (BSEC) and subsequently these are
transferred to the main market, as the securities of those companies have been dematerialized.
GMG Industrial Corporation Ltd. delisted from DSE OTC market effective from June 20, 2011
as per their application in this regard. Thus, total number of securities stood at 68 (sixty-eight)
under OTC facility as on 31 December 2011.
The Board of Directors of DSE in its 769th meeting held on April 30, 2014 has decided to de-list
the shares of Padma Cement Limited from the Exchange with effect from May 7, 2014 in
accordance with the Court Order dated March 13, 2014 in the Company Matter No. 53 of 2012
following its liquidation. Thus, total number of securities stood at 67 (sixty seven) under OTC
facility as on 7th May 2014.
The Board of Directors of Dhaka Stock Exchange Ltd. has approved the application of the water
chemicals Ltd. to place its share from Over the Counter(OTC) Market to main market with effect
from 14 May, 2014.
Thus, total number of securities stood at 66 (Sixty six) under OTC facility as on 14th May, 2014
OTC -Chittagong
The nation at large, to assist in efficient capital formation by developing vibrant, dynamic and
self Over The Counter (OTC) is a new facility of Chittagong Stock Exchange for the issuers,
investors, capital market and regulated capital market.

Bangladesh needs a separate OTC exchange


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Stock market of Bangladesh had remained steady ever since the army-backed caretaker
government came to power in January, 2007. Here is the apparent contradiction. The caretaker
government launched crusade against corruption and they arrested a lot of politicians and
businessman. As a result, the business community as whole became shaky. Presently, some
people consider the period of caretaker government as the dark one for the business.
We know that the share market is very sensitive. Any adverse situation, particularly in the state
level, may create havoc in the market. Sometimes even a guess or misconception may pull down
the market. We may cite the example of happening in the Mumbai Stock Exchange in 2004.
Congress won the election with the communist parties as coalition partners. Apprehending the
state intervention Mumbai stock exchange crashed.
But this psyche did not work in Bangladesh. Both the stock exchanges of the country witnessed
higher trade. After the elected government came to power, the share market had became bullish
in nature. The daily trading average of Dhaka Stock Exchange (DSE) recently exceeded Tk. 15
billion (1500 core). Of course, the media has always been ascribing the higher trade as record.
The share market of Bangladesh is burgeoning. More and more companies including the bigger
ones from telecommunication and energy sector are likely to be added to the litany of listed
companies. So long the share trading has been confined to Dhaka city and, to some extent,
Chittagong. It may be mentioned that there is a stock exchange in Chittagong but the quantity of
its trading amounts to 10 per cent of that of DSE. However, brokers are opening branches across
the country. So it is expected that there will be phenomenal growth of investors. If all these
factors move positively there is no reason why the daily trading will not rise to Tk 30.00-Tk
50.00 billion (three to five thousand core taka) within a span of two to three years. Thereafter, we
may think of commenting on record.
However, even in this stable situation of the market sometimes the share market gets jittery and
investors become restive. It is natural that such a rise-and-fall will always occur in the market.
There is no denying the fact that there are some corporate shenanigans who will do mischief. But
there is no dearth of their compatriots in the other sectors of the securities markets. Neither the
Securities and Exchange Commission (SEC) nor the DSE bears in mind the need for ensuring
profit to the investors.
The investors themselves are likely to be aware of their responsibilities. They should know the
fundamentals of a company before investment. That is why a section of market experts believe
that most of the investors in the share market should be considered as caveat emptor and they are
not supposed to have any sympathy.
Probably believing in the generalization theory, the authority has incriminated Z-group
companies for such a situation. But this is a wrong proposition. The total paid-up capital of Z
Group companies amounts to 3.0-4.0 per cent of the total capital of the DSE.
So it is unlikely that these companies can influence the trade in such a big way. However the
possibility of playing ingenious trick by some brokers can not be ruled out. The companies that
do not pay any dividend or do not hold annual general meeting (AGM) regularly or violate any
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other major rule of a stock exchange are dumped in Z-group. They are not likely to be allowed to
stay in such a situation for long. The SEC has framed necessary rules for disposal of these kinds
of companies. After their inclusion in this group the board of directors are to be re-constituted
and this board is likely to take various steps such as improvement of trading, merger and
acquisition or winding up as the situation may demand.
Unfortunately, such rules are not followed. The SEC has permitted Dhaka Stock Exchange
(DSE) to run over-the-counter (OTC) market for trading of shares of the Z-group. But the charter
of OTC market speaks different. These are is as follows: a) The issuer of an unlisted or delisted
security shall apply to the exchange, as designated by the commission, through a stockdealer/stock-broker in the form prescribed by the exchange for availing the OTC facilities for
buying or selling of such security on payment of prescribed fee, etc.,, to the exchange: (2) The
companies which have not offered securities for public subscription but have issued securities
with the consent of, or deemed to have obtained consent from, the commission, shall be eligible
for availing OTC facilities subject to the following conditions; (a) the paid-up capital of the
companies shall be at least Taka 10 million (1.0 core); (b) they are regular in holding annual
general meetings; and (c) there are no accumulated losses; (3) The exchange shall also provide
OTC facilities to any issuer of an unlisted or delisted security as directed by the Commission. To
run an OTC market in such a stop-gap arrangement is neither considered healthy nor desirable.
In most countries, OTC market is operated by a separate management. In neighboring India,
OTC market, known as OTCE of India, is a separate company and all the sponsored directors are
either banks or financial institutions. If the responsibility of running an OTC market is entrusted
to a stock exchange, the question of conflict of interest is sure to crop up; moreover, the main
function of OTC market is not to trade with delisted companies. Since some companies may not
qualify to be listed with stock exchange because of stiff rules and regulations, they are supposed
to approach OTC market for listing.
If any delisted company of a stock exchange wants to be in the OTC market, it is to comply with
the rules and regulations of OTC exchange and no special consideration as delisted companies.
The SEC of Bangladesh should think anew. They should rescind the present rules for OTC
market and take steps for establishing a separate company to be known as OTC exchange of
Bangladesh.
We believe that there will be very positive response from financially institutions for establishing
an OTC exchange. In this connection, it may be mentioned that OTC exchange will have the
transparency of activities like any stock exchange.

Example of OTC in Bangladesh: Online Market Order (OMO)


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Order submission for share trade through online is a revolutionary concept in our country. This
online order submission system will bring a radical change to the whole share market concept in
Bangladesh. As our country is going through a digital era, StockBangladesh.Com is the first IT
firm in Bangladesh to provide real time share trade facilities to the investors.
StockBangladesh.Com is a well-known research based web portal for share market information,
Technical research and analysis. StockBangladesh.Com has started disseminating the light of
technical Analysis in mass people having the intention to make capital market free form rumor.
StockBangladesh.Com mission is to make the general trader a better investor so that they can
invest conveniently with minimum risk. Stock Bangladesh tool lets general trader create the
webs best looking financial charts for technical analysis. Its Search Engine shows user the best
investing opportunities of Bangladesh share market. With these sophisticated IT infrastructure
and skilled professionals, StockBangladesh.Com is the top most institute in regard to share
market information. StockBangladesh.Com now developed an Online Market Order system
where we provide online trade facility to the broker house. Account holders of that broker house
can enjoy the online order facility though StockBangladesh.Com site.
Benefits of OMO

Traders can enjoy trading facility without any hassle of going to a broker house or hear a
busy tone in the brokers telephone.

Traders can have real time market data in the OMO system

Traders can view every steps of processing of their submitted order in real time though
OMO system

Traders get notification in every steps of processing of their submitted order and also
have e-mail of this notifications and statements.

All the shares traded through OMO will be stored in the users account and they can
check whenever they want.

Traders will have portfolio facility in OMO system and they can print any statements just
like they gets from the broker house.

Conclusion
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The stock market debacle of December 2010 reflected the vulnerable state of
Bangladeshs secondary markets. It had sprung from a convergence of factors that included
inadequacies in the existing system as well as policies and practices that were not sustainable.
The most critical problem was that of strong government tutelage over the secondary markets,
and, in particular, the regulator. This had held back sector development and constrained the
responsible institutions from strengthening accountability and carrying out their mandates
effectively. This combined with strong vested interests resulted in an entrenched status quo.
The program effectively challenged the status quo by adopting a two-step strategy of scaling
down state influence in the capital markets through redefining the regulatory partnerships as
well as strengthening the regulators capacity while working more closely with regulators such
as Bangladesh Bank and the demutualized stock exchanges. This has led to greater
transparency, improved compliance, and increasingly stronger enforcement powers, and, in
turn, to investors greater trust and confidence in Bangladeshs secondary markets.
The amendment of the SEC Act in November 2012 removed the BSECs subordination
to the Ministry of Finance. That allowed the BSEC to enable clearer lines of responsibilities and
thereby more effective supervision and enforcement. The timely and effective completion of the
demutualization process at the stock exchanges represented another key milestone of the
program in countering strong vested interest and challenging the status quo as well as setting
the groundwork for expanding secondary markets in Bangladesh. The brokers and dealers have
historically resisted any reforms that could reduce their control over the stock exchanges. The
introduction of a real-time state-of-the-art market surveillance system at the BSEC directly
addressed one of the key impediments to Bangladeshs capital market development by
detecting the kind of trading irregularities and market abuses that had led to the stock market
crisis of 2010. The program also significantly reduced tax distortions in the secondary markets
through implementing broad and substantive tax policy actions that ranged from ensuring a level
playing field for mutual funds to promoting bond market activity and encouraging the use of
equity financing.

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