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Market Organization & Structure - Coggle Diagram
Market Organization & Structure
1. Functions of a financial system
Helping people achieve porpose in using financial system
Saving
Borrowing
Raising capital equity
Managing risks
Spot market trading
Information moticated trading
Determining rates of return
Law of supply & demand : money now vs money in the future.
Capital allocation efficiency
Financial systems allocate funds to the most productive
2. Assets & Contracts
Classification of markets
Spot market vs futures markets & options markets
Primary markets vs Secodary markets
Money Markets vs Capital markets
Traditional investment markets vs alternative investment markets.
Securities
Fixed income
Equities
Pooled investements
Currencies
Contracts
Forward contracts :
An agreement to trade an Underlying in the future at a price agreed upon today.
Futures contracts :
Standardized future contracts {Clearinghouse, initial margin, maintenance margin}
Swaps :
An agreement to exchange payments of periodic cashflows that depend on future asset prices or interest rates
Commodity swap :
Payments depend of future prices of a commodity
Currency swap :
Payments are denominated in deifferent currencies
Equity swap :
Payments depend on the return of a stock/index
Options :
Allows the holder to
Buy : Call option
or
Sell : Put option
an underlying at a
Strike price
, at
{European-style}
or before
{American-style}
a date in the future.
Other contracts :
Are mainly insurance contracts,
Ex :
Credit Default Swaps
Commodities :
Trade in the spot market and forward/futures markets
Real Assets :
Tangible properties,
Ex :
real estate, airplanes, machinery...etc.
3. Financial Intermediaries :
Facilitate transactions among buyers & sellers
Brokers, Exchanges & Alternative Trading Systems
Brokers :
Agents who fill orders for their clients
Block Brokers :
Provide brokererage services for large clients
Investment Banks :
They help corporate clients arrange transactions {Securities offerings, Mergers & Acquisitions}
Exchanges :
Provide a market where traders can meet to arrange their trades
Alternative Trading Systems (ATS) :
Trading venues that function like Exchanges but without a regulatory authority. Many of them are classifies as
Dark Pools
because they do not display information about trades
Dealers :
Fill their clients orders by trading with them
Securitizers :
Securitization is the process of buying assets, placing them in a pool, and then selling securities that represent ownership of the pool, through a Special Purpose Vehicle (SPV)
Depository Institutions & Other Financial Corporations :
Institutions that raise money from depositiors and lend it to borrowers
Insurance Companies :
Help people & companies
Offset
risks that concern them
Arbitrageurs
Settlement & Custodial Services
4. Positions :
The quantity of an asset that an entity
Owns
or
Owes
Short Positions :
Selling an asset you do not Own, or
Writting
and
Selling
a Contract
Long Positions :
Owning an asset {Stocks, Bonds, Contracts...etc. }. Benefit from an
Appreciation
in the prices
Leveraged Positions
: Buying securities by borrowing some of the purchase price.
Margin requirement :
The minimum fraction of the purchase price that must be the trader's equity.
Margin Call :
Request for additional equity when the securities price fall.
Call money rate :
Interest rate on margin loan
Margin loan :
Borrowed money to purchase securities
5. Orders :
Provide
instructions
on
What
instrument to trade,
How much
to trade and whether to buy or sell.
Execution instrustions
: How to fill the order
Limit Order
: Instruction to obtain the best price but not accept a price lower or higher (depending on the position buyer or seller) than a specified limit
Market Order
: Instruction to obtain the best price immediately available
All-or-nothing orders
: Can only trade if their entire sizes are traded
Exposure instructions
: Indicate whether, how and perhaps to whom instructions should be exposed
Hidden orders
: exposed only to the broker or exchange that receive them
Iceberg order
:
Display size
is less than real size of order, and the additional size is hidden from public and can be filled only if a suitable larger order arrives.
Validity Instructions
: When the order may be filled
Good Till Canceled Order
Fill or Kill Order
Day Order
Good on Close Order
Stop Order :
An order in which a
stop price
condition is specified
Stop-loss Order :
A combination of a
stop
and
limit
order
Clearing Instructions
: How to arrange the final settlement of the trade
6. Primary Security Markets
Public Offerings
An Underwritten Offering :
In which the investment bank buys whatever left of shares it couldn't sell.
Book Building :
Process of lining up the subscribers who will buy the security.
N.B :
In large public offerings, a syndicate of investment banks and dealers help the
Lead Underwriter
build the book.
Best Effort Offering :
In which the investment bank act
only
as a broker
Competitive-bid :
Mechanism for choosing the syndicate that takes the IPO process.
(Used especially for State-Owned Companies)
Private Placements & Other Primary Market Transactions
Shelf Registration :
[Also called SEC Rule 415]
Corporations sell their securities directly to the secondary market and
not
in a single transaction, but in multiple transactions overtime.
Rights Offerings :
The corporation distributes rights to the existing shareholders to buy the stock at a fixed price, usually lower than the market price.
Private Placements
: Corporations sell securities directly to a smaal group of qualified investors, usually with the assistance of an investment bank - Only in OTC Markets
7. Secondary Markets & Contrat Market Structures
Execution mechanisms
Quote-driven markets :
Customers trade with dealers
Order driven markets :
An order matching system is run by an exchange, a broker, or an ATS
Order Matching Rules :
Price Priority :
Highest priced buy orders & lowest priced sell orders go first.
Time precedence rule :
Use time to rank orders at the same price
Trade pricing rules :
Uniform pricing rule :
Discriminatory pricing rule :
The limit price of the standing order determines the trading price
Derivative pricing rule :
Trades occur at the midpoint of the best bid and ask quotes published by the exchange at which the security primarily trades.
Brokered markets :
Brokers arrange trades between their customers
Trading Sessions :
Markets are organized as :
Call Markets :
Trades can be arranged only when the market is called at a particular place & time
Continuous markets :
Trades can be arranged anytime the market is open
8. Well functioning financial systems
: They allow traders to solve
financing & risk management
problems.
Characteristics
Operationally Efficient Markets :
Low costs of arraging trades
Informationally Efficient markets
Prices reflect the fundamental value of securities
Allows participants to estimate fundamental values of securities
Complete Markets :
Assets or contracts needed to solve these problems are available to trade
9. Market Regulation
:
Objectives :
Promote fairness
Set mutually beneficial standards
Control agency problems
Preventing excessively risky investments
Control Fraude
Ensure that long terme liabilities are funded