Stock Exchange Mechanism

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By:- SANDEEP SINGH(2403)

To:- KIMTI HARISH

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Until recently, most of financial research focused onthe investment decisions.

There was a missing part of investment cycleexecution of investment decisions.

More over, many investment optimization modelsassume zero execution cost. But in reality it is not true.

Ignoring this fact may lead to significant mistake inestimating investment returns.

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Securities

Market

Equity

MarketDebt

Market

Derivatives

Market

GovernmentSecurities

Market

CorporateDebt

Market

Money

Market

Options

Market

Futures

Market


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BROKER

JOBBERS

BULLS OR TEJIWALA BEARS OR MANDIWALA

STAGE

LAME DUCK


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The main stock exchanges in the world include:

America American Stock Exchange NASDAQ

New York Stock Exchange So Paulo Stock Exchange

Europe Euronext Frankfurt Stock Exchange London Stock Exchange Madrid Stock Exchange Milan Stock Exchange Zurich Stock Exchange Stockholm Stock Exchange

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Australia/Asia/Africa Australian Stock Exchange

Bombay Stock Exchange

Hong Kong Stock Exchange

Johannesburg Securities Exchange

Korea Stock Exchange

Shanghai Stock Exchange

Taiwan Stock Exchange

Tokyo Stock Exchange

Toronto Stock Exchange

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Selection of a broker.

Placing an order.

Marking the contract.

Contract note.

Settlement.


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Brokeran individual or firm which operates between a buyer and a seller andusually charge a commission. For most products a licence is required.

Dealeran individual or firm which buys and sells for its own account.

Broker/dealer an individual or firm buying and selling for itself and others. Aregistration is required.

Principala role of broker/dealer when buying or selling securities for its ownaccount.

Market makera brokerage or bank that maintains a firm bid and ask price ina given security by standing ready, willing, and able to buy or sell at publicly quoted

prices (called making a market).These firms display bid and offer prices for specific

numbers of specific securities, and if these prices are met, they will immediately buy foror sell from their own accounts.

Specialista stock exchange member who makes a market for certain exchange-traded securities, maintaining an inventory of those securities and standing ready tobuy and sell shares as necessary to maintain an orderly market for those shares. Can bean individual, partnership, corporation or group of f irms.

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Call (periodic) auctionselling stocks by bid at intervalsthroughout the day. The orders are stored for execution at a single marketclearing price.

Continuous auctionbuyers enter competitive bids and sellersplace competitive offers simultaneously. Continuous, since orders areexecuted upon arrival.

Dealership markettrading occur between principals buyingand selling to their own accounts. Firm price quotations are available priorto order submission.

Auction markets are concentrated and order-driven

Dealership markets are fragmented and quote-driven

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NYSEopens with a periodic auction market and then switches to acontinuous auction. Same forTokyo Stock Exchange.

NASDAQ andInternational Stock Exchange (London)are quote-driven systems (continuous dealership market).

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Euronext Paris

the market is segmented into a number ofdifferent groups of stocks based on size and liquidity. The tradingmechanisms vary depending on the segment.

Euronext 100, Next 150 ,CAC40indices and stocks which have morethan 2,500 order book transactions per year continuous auction.

Other stockscall auction twice a day.

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Market orderimmediate execution at the best price availablewhen the order reaches the marketplace

Limit orderto execute a transaction only at a specified price (thelimit) or better

Stop order Good till cancelled

Fill-or-kill

All or None

Day order

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A register for limit buy orders and a registry for limit sellorders.

Limit orders are queued for execution against incomingmarket orders using price then time priority rules.

Transparency: how much top orders can be viewed

More transparent order book allows to see what ishappening in the market and make more accurate forecasts

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is an order to buy or sell a security once the price of thesecurity reaches a specified price, known as the stop price.

When the specified price is reached, the stop order isentered as a market order. Stop orders are used to try tolimit an investor's exposure in the market. With a stoporder, the customer does not have to actively monitor howa stock is performing. However because the order istriggered automatically when the stop price is reached, thestop price could be activated by a short-term fluctuation in

a security's price. Once the stop price is reached, the stoporder becomes a market order. In a fast-moving market, theprice at which the trade is executed may be much differentfrom the stop price.

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Exchange

ElectronicCommunicationsNetwork

MarketMaker

Firm InternalizesOrder

Internet

order

Phone

order

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ECN is a computer system that facilitates trading of financial productsoutside of stock exchanges. The primary products that are traded onECNs are stocks and currencies.

In order to trade with an ECN, one must be a subscriber. ECNsubscribers can enter limit orders into the ECN, usually via a customcomputer terminal or a direct dial-up. The ECN will post those orderson the system for other subscribers to view. The ECN will then matchcontra-side orders for execution.

Generally, the buyer and seller are anonymous, with the tradeexecution reports listing the ECN as the party.

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A transaction where a broker/dealer provide aninvestor with guaranteed execution of the trade list atthe market prices at a specific point in time.

All timing risk is transferred to broker/dealers.Investors are charged a premium for this.

Blind bid investor provides only trade list statistics.Than broker/dealer defines the price.

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Market impact is a decreasing function with time andvolume.

Timing risk is an increasing function with time andvolume.

So, trading too aggressively will cause investors toincur high market impact cost and low timing risk.Trading too passively means having low market impact

cost but high timing risk.

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Market impact is primarily caused by: Supply-demand imbalance (liquidity needs)

Information leakage

Market impact could be

Temporaryoccurs when the order is released but does not altermarkets long-term outlook caused by liquidity demand and immediacyrequirements.

Permanentlong-term change in price caused by an order.

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Timing risk grows from the uncertainty surroundingtrading cost estimates. It includes price volatility andinstability in volume profiles during a day.

Opportunity risk is of not being able to implementinvestment decision in full. It is caused by insufficientstock liquidity or unfavourable price movement.

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The securities market is the market for equity, debt, and derivatives.

Equity market has two segments, viz., the primary market and thesecondary market.

There are four ways in which a company may raise equity capital in the

primary market: public issue, rights issue, private placement, andpreferential allotment.

The secondary market consists of the organised stock exchanges. The

principal stock exchanges in India are the National Stock Exchange and

Bombay Stock Exchange.

The key features of stock market transaction in India are screen-basedtrading, electronic delivery, and rolling settlement.

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Documents

Stock Exchange Mechanism