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Lec4 THE EQUITY MARKET (CONTINUE)

SECONDARY MARKET TRADING MACHANICS (The Stock Exchange)

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Overview of The stock exchange

Members of the Exchanges

Listing on the Exchanges Trading mechanics

Requirements related to trading on Exchange

Participants in a secondary market share transaction

Sellers of existing shares

Brokers

Stock Exchange/ OTC

Brokers

Buyers of existing shares

-Individuals -Institutions -Rest of world

-Individuals -Institutions -Rest of world

What is Stock Exchange?

Stock exchanges are formal organizations, approved and regulated by the Securities and Exchange Commission (SEC). These exchanges are physical locations and are made up of members that are use the exchanges facilities and systems to exchange or trade listed stock.
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Ownerships
Limited liability company
Ownership: securities company EX: Korean Stock Exchange, Tokyo stock exchange

Joint stock company:

Members: securities company, commercial banks, financial company, insurance company EX: Malaysia Stock Exchange, London Stock Exchange

State-owned company
HCM Stock Exchange

What is the best form?

Organization

Income
A

Information fees
B

Seats fees: 47% Listed fees: 22% Information fees: 15%

Fees of seats
C

Listed fees
D

Other fees
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NYSE Financial Heaven

1.366 seats 1 seat= 3 million USD Daily: 1,46 billion shares traded with total market value of $46,1 billion 2,800 shares are listed with total market value of $20,000 billion The third largest exchange on the world NYSE is where the "American dream" was completed and buried most 8 pressing

SECONDARY MARKET TRADING MACHANICS (The Stock Exchange)

1 2 3 4 5

Overview of The stock exchange

Members of the Exchanges

Listing on the Exchanges Trading mechanics

Requirements related to trading on Exchange

Members
Title
Brokers: conducts a transaction of securities purchase or sale for clients for commission.

Title

Dealers: involves in security trading by its own capital in order to get profit

Title

Specialists: are dealers or market makers assigned by the exchange to conduct the auction process and maintain an orderly market in one or more designated stocks.
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Brokers The investors places an order with a broker. The brokerage firm owning a seat on the exchange contacts its commission brokers, who is on the floor of the exchange, to execute the order. Floor brokers are independent members of the exchange who own their own seats and handle work for commission brokers when those brokers have too many orders to handle.
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Specialists
Specialists maintain a market in one or more listed securities. All trading in a given stock takes place at one location on the floor of the exchange called the specialists post. At the specialists post is a computer monitor, called the Display Book, that presents all the current offers from interested traders to buy or sell shares at various prices as well as the number of shares these quotes are good for. The specialist manages the trading in the stock. The market-making responsibility for each stock is assigned by the NYSE to one specialist firm There is only one specialist per stock, but most firms will have responsibility for trading in several stocks.
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Specialists
As dealers, they trade for their own accounts in any temporary absence of public buyers or sellers, and only after executing all public orders in their possession at a specific price As agents, they execute market orders entrusted to them by brokers, as well as orders awaiting a specific market price. As catalysts, they help to bring buyers and sellers together As auctioneers, they quote current bid-ask prices that reflect total supply and demand for each of the stocks assigned to them
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Dealers

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Members requirements

Capital Financial & liquidity situation Performances Management Corporate Administration Member of Securities Dealers Association
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SECONDARY MARKET TRADING MACHANICS (The Stock Exchange)

1 2 3 4 5

Overview of The stock exchange

Members of the Exchanges

Listing on the Exchanges Trading mechanics

Requirements related to trading on Exchange

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Listing a business on a stock exchange

A company must apply to a stock exchange to have its shares quoted if it wishes to become a publicly listed corporation and raise equity capital through an offer of shares to the public The stock exchange will ensure that the company complies with the stock exchange listing requirements. Delisted: if a listed corporation does not comply with the listing rules of the stock exchange, the offending company is liable to be suspended from quotation, or it may be delisted
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Listing rules

Quantities

Quality

others

-Capital -Time of operation -Profitability -Debt ratio

- The level of national interest - The position of the Company - Prospect Company

-Audits opinions -Disclosure -Securities

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Listing procedures
A company apply to an exchange Review Apply for listing on the official exchange Check the listing Approve the listing Listed
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3/1/2010

Types of listing

Stock exchange

Initial listing

Additional listing

Change listing

Cross listing

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Advantages & Disadvantages Advantages

3/1/2010

Disadvantages

Information Raising funds disclosure Cost of raising funds etc. Public relationship Liquidity

SECONDARY MARKET TRADING MACHANICS (The Stock Exchange)

1 2 3 4 5

Overview of The stock exchange

Members of the Exchanges

Listing on the Exchanges Trading mechanics

Requirements related to trading on Exchange

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Trading Operation Procedures

1) Investors open account and deposit money or securities at Security Company 2) Investors order to Purchase or Sale of Security 3) After verifying orders validity, the order will be delivered to Security Companys person in the Exchange 4) The order will be keyed in the Exchange computer system by Security Companys person at the Exchange. The security price will be determined by auction. 5) When the order is successfully matched, the result will be notified to Security Company and then to investors. Money and Security will be settled in T+3 including brokerage fees.
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Trading Operation Procedures

Investor

(1)

Opening Account

- Deposit Money - Security Custodian

(2)
Order

(3) Brokers (6)

(4)
Security Company at Exchange

Verify Order

(5)
Computer System of Exchange

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Transaction Information Order

What is an order?

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Types of orders Market orders

Limit orders Stop orders

Exchange

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(1) Market order (MP)

Market order is an order executed at the best price available in the market Advantages: buy or sell a stock at the best available price. will be executed, priority & immediately Disadvantages: the price at which a market order will be executed is not guaranteed.

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(2) Limit order (LO)

A limit order is an order to buy or sell a stock at a specific price or better
A buy limit order A sell limit order

Advantages Disadvantages
No guarantee it will be executed Executed after MP

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(3) Stop orders

A stop order, also referred to as a stoploss order, is an order to buy or sell a stock once the price of the stock reaches a specified price, known as the stop price. A stop order to buy A stop order to sell A stop limit order
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Buy stop order

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Buy stop order

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Sell stop order

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Sell stop order

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Comparison of Limit orders & Stop orders

Limit order Stop order

Higher price Current market price Lower price

Price designated for a sell limit order Price designated for a buy limit order

Price designated for a buy stop order Price designated for a sell stop order

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Other orders

ATO order ATC order Market if touched orders Time specific orders Size related orders

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ATO order
ATO (orders at matching prices determine the opening price) was placed orders to buy or sell securities at the opening price. ATO priority over limit orders in the matching process. ATO entered into the trading system during 8.308.45am No specific price ATO records. ATO will automatically be canceled after the time of the opening price for the order is executed or the order remains unfulfilled.
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ATC order
ATC (orders at prices matching determining closing price) was placed orders to buy or sell securities at the closing price. ATC priority over limit orders in the matching process. ATC is entered into the trading system during the periodic order matching to determine closing prices (10h15-10h30). ATC will automatically be canceled after the time of closing price determined for the command is executed or the order remains unfulfilled.
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Auction Procedure on Exchange

Pricing auction continuous auction periodic auction

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Periodic auction Applied for:

opening shift closing shift on the stock market,

an arrangement of all orders from clients within a certain period and then determine a price at which the largest number of stocks are traded. That is called the listed price.
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Periodic auction
The orders are executed as orderly priority-price as following principles: All buying orders having price higher than the listed price and all selling orders having price lower than the listed price are executed All buying orders having price lower than the listed price and all selling orders having price higher than the listed price are not executed Buying and selling orders having price equal to the listed price can be partly or fully executed depend on each case

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Example A Stock exchange hold a periodic auction to fix an opening price. After opening 30 minutes on 1/1/N, it received limited orders of stock A as the following table (the prior closing price of stock A was 29.500VND/stock)

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Example
Buying order Price Selling order

Buying
accumulated

Quantity

Number
sign

Number Quantity
sign ATO B2 4.500

Selling
accumulated 4.500

5.000

A1

29.500
26.000 18.800

3.500
7.200 4.100

A3
A2 A4

29.000
29.100 29.200

B4
B6 B1

3.200
3.100 3.900

7.700
10.800 14.700

14.700
12.200 9.000

2.500
3.200 4.000

A5
A8 A7

29.300
29.400 29.500
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B3
B5 B8

5.400
2.700 4.600

20.100
22.800 27.400

Example

At both price of 29.200 and 29.3000, the quantity of traded stocks are the biggest. However, price of 29.300 is determined as a listed price since at that price the quantity of traded stocks is the highest and closer to the prior closing price of 29.500
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Continuous auction Continuous auction is a method of trading based on comparing selling orders and buying orders as soon as these orders are input in the trading system and executed as soon as possible Matching principles: The purchase price must be greater than or equal the sell price - Matching the price of the previous orders.
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Example
Time Investor 10h1 10h2 10h3 10h4 10h5 A B C D E Buying Price Selling Price quantitative quantitative 1000 50.5 700 500 2000 52 3200 MP 50 51

Result
Time 10h1 10h2 10h3 10h4 10h5 D-500 D-1500 A- 300
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Buying quantitative

Price No transaction

Selling quantitative

A-700

50.5 No transaction 51 52 50.5

B-700 C-500 E-1500 E-300

SECONDARY MARKET TRADING MACHANICS (The Stock Exchange)

1 2 3 4 5

Overview of The stock exchange

Members of the Exchanges

Listing on the Exchanges Trading mechanics

Requirements related to trading on Exchange

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Unit transaction
is an appropriate amount of stock was chosen as the standard unit of trading in securities traded on the Exchange NYSE:
for shares and fund certificates, transaction units is 10 (1 lot odd), odd lots (1-9) will deal directly with the securities company
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Unit prices
As a minimum monetary value may change in the ordering and stock exchanges Example NYSE: cent (1USD=100cent) HOSE: Price =<49.900 VND =<99.500 VND > 100.000 VND
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Unit 100 VND 500 VND 1.000 VND

Price spread
Means price fluctuation during the day compared to the reference price Reference Price: Usually the closing price of the previous session Example: The reference price is 20.000d/CP The order is only valid if the price of about 19.000 to 21.000 VND per share If the reference price is valid 50.000d/CP
Price spread: 47500-52500
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Price spread
Country
Poland
Malayxia Shanghai New York

Price spread
+/- 10%
+30% +10% Dows Jones decreased by 250 points, NYSE stop for 30 minutes Dows Jones decreased by 400 points, NYSE stop for 60 minutes +/- 5% reference price for company shares

HOSE
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Price spread
From the reference price and price spread, we calculated the price ceiling and price floor: The price ceiling is the highest price of a stock may change during the session compared to the reference price = Reference price ceiling price + (price reference price fluctuation x) Price floor: the lowest price of a stock is done in session = Reference price floor price - (price reference price fluctuation x)
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