capital market workshops - department of … on the sase... · capital market workshops ......

CAPITAL MARKET WORKSHOPS

1st Workshop – April 15th

“Overview of the Financial System”, Almir Mirica, executive director SASE

“The Role of Privatization in the development of the capital market”, Dr. Matej

Živković, Securities Commission FBiH

2nd Workshop – May 13th

“Sarajevo Stock Exchange – An Overview”, Dr. Tarik Kurbegović, CEO SASE

“Trading on the Sarajevo Stock Exchange”, Almir Mirica, executive director SASE

“Introduction to Valuation”, Feđa Krivošević, SASE

3rd Workshop – May 27th “Regulation of the Financial System”, Dr. Matej Živković, Securities Commission

of FBiH

“Corporate Governance, Reporting & Disclosure”, Almir Mirica, executive director

“Municipal Bonds”, Feđa Krivošević, SASE

“Trading on the Sarajevo Stock Exchange”, Almir Mirica International Burch University, May 13th, 2013

Contents

Functions of a Stock Exchange

Classification of trading systems

Electronic order book

Importance of order ranking

The Real Order book

Auction trading and continuous trading

Calculation of auction price

Trading on SASE

Trading Schedule

Basic order types

Overview of the SASE Trading Workstation

Price protection mechanisms

Clearing & Settlement

SASE Market organisation

Listing and reporting requirements

Functions of a Stock Exchange

Short reminder:

In the real world frictions exist in the form of

• Information (acquiring) costs

• Transaction costs

Financial market try to mitigate those costs

Stock Exchanges

Places of organised, rule-based trading in securities

Through aggregation of demand and supply in one place,

price-discovery is facilitated

Issuers have no direct financial benefits from secondary

trading; importance of secondary market is provision of liquidity

(premium) and price-discovery for the primary market

Price-discovery depends on a number of factors:

Disclosure requirements

Pre-trade and post-trade transparency

Choice of trading algorithm

When you think about Stock Exchange...

Classification of trading systems

Quote driven markets (Dealer Markets)

Designated market maker / specialist provides bid and ask prices

All trades are executed against the market maker orders

Often floor based systems

Benefit: guaranteed liquidity at quoted prices

Drawback: less transparency

Order driven markets (Agency Markets)

Buy and sell order of clients “meet” directly and are visible to

participants

Trades occur when two orders are matched

Often electronic trading systems

Benefit: more transparency of prices and offered volumes; lower

execution costs

Drawback: no execution guarantee

Electronic Order Book

Fundament of the order driven trading system

Comparable to an Excel-table

Left side: Buy orders

Right side: Sell order

Orders are ranked by price-time priority

Price-priority

• Buy-side: highest price has first position (Best Bid)

• Sell-side: lowest price has first position (Best Ask)

Time priority

• In case two orders have same price: order with lower

time-stamp has higher priority

• Position of order in order book is lost if crutial features of

order are changes (price, volume, special execution and

visibility terms)

Other possibilities: order size, broker or dealer order, special

terms etc.

Every listed security has its own order book

Importance of order ranking

Buy side Sell side

Order Volume Price Price Volume Order

A 200 30,00 29,00 356 F

B 156 29,00 31,12 1.000 G

C 345 29,00 31,12 231 H

D 1.350 28,45 36,00 500 I

E 2.000 26,35 38,00 4.000 J

Order book ranking defines the sequence of order execution

The Real Order Book

Buy-side Sell-side

Best bid Best ask

Auction Trading System

Auction Trading

Orders are entered in pre-open

phase; no trading take place

All orders are consolidated in

one place and time – at auction

All trades occur at ONE

AUCTION PRICE

Aims to mitigate information

assymetry between investors

(traders are forced to reveal

information through order

placement)

Reduces price impact of large

trades and reduces chance of

adverse selection and front running

Intended for low-liquidity

securities

Official price of security: Auction

Time Market State

What can be done?

09:00-12:0x Pre-Open Order entry & editing

12:0x* Open (Auction)

Matching of orders

12:05 – 13:30

Pre-Open Order entry & editing

14:00 Closed Order overview

* Random interval; x={0..300} seconds

Continuous Trading System

Continous Trading

After the opening auction,

trades are concluded as soon

as two orders match in terms

Opening price is the same

for all trades; afterwards,

every trade can be at a

different price

Aggressive price concept:

the latter order gets the better

Intended for more liquid

shares with less potential for

information assymetry

Official price of security:

weighted average of all

concluded trades

Time Market State

What can be done?

09:00-10:0x Pre-Open Order entry & editing

10:0x* Opening Auction

Matching of orders

10:05 – 13:30

Open Order entry & editing; trading

14:00 Closed Order overview

* Random interval; x={0..300} seconds

Calculation of Auction Price

Order # Volume Bid-price Ask-price Volume Order #

a 10 100 97 10 e

b 40 99 98 30 f

c 20 98 99 40 g

d 20 97 100 10 h

Price Demand Supply Traded volume

96,00 90 (a+b+c+d) 0 0

97,00 90 (a+b+c+d) 10 (e) 10

98,00 70 (a+b+c) 40 (e+f) 40

99,00 50 (a+b) 80 (e+f+g) 50

100,00 10 (a) 90 (e+f+g+h) 10

Trading on SASE

Only (trading) members of SASE can trade at the Exchange

Members must have licence from the Securities Commission and

must also have membership at the Securities Registry

Electronic, order driven trading system Brokers trade from their offices, connected through VPN’s with the

Exchange (no trading floor)

Open order book, market depth Top 50 orders from each side

Member codes not vissible to market participants

Price time-priority of orders in the order book

Market opening with random intervall (duration: 300 seconds)

Volatility interruptions

Two trading algorithms, based on the (trading) liquidity of

securities Continuous trading (Muli-Fixing-Trading Schedule – MFTS)

Auction trading

Special trading modes Privatization of minority state ownership in companies

Special auctions for Closed End Funds and strategic owners

Primary auctions for public offerings

Trading schedule

Basic order types on SASE

Price constraints

market order: buy/sell at the prevailing market price (takes liquidity

from the market; investor demands immediacy)

limit order: buy / sell up to the specified price limit (provides liquidity

to the market; may take time to be executed)

Validity constraints

Open order: good for 180 days or until fulfilled / cancelled

Date order: order valid until specified date (no longer than 180

Daily order: if not fulfilled, automatically removed from order book

Special terms of execution

All-or-None order: either buy/sell the whole package, or don’t trade

at all

Minimum fill first trade: minimum value of first trade must be 1.000

KM; afterwards transformed into regular order

Minimum fill all trades: every time the order is to be executed, the

specified minimum amount must be traded

Hidden Volume (“Iceberg”) order Only a part of the order is visible (min.order value: 10.000 KM)

Protects large investors from adverse price movements on the

market

SASE Trading Workstation

Market Watchlist

All Symbols

Market by Order Overview

Market by Order: single orders are shown

Market by Price and Trades

Market by Price: Aggregate offering / demand at prices is shown

Order entry mask

Price protection mechanism

Static limits If price of individual order is outside the static limits of a security, it is

placed in the inactive order book.

The allowed range is calculated daily by the trading system and based on

the previous official price of security

After the price of the inactive order falls into the allowed range

automatic transfer to the active order book

Static limits are based on the market segment / subsegment

“Hard limits”

Dynamic limits If entering an order would result in a transaction outside of the dynamic

limits, volatility interruption is initiated (trading halt for 15 minutes for all

orders of this security)

The market opens again through an opening auction

Limits are based on reference price (last official price or price of last

volatility auction)

Increasing order exposure time; circuit breaker (cool down phase);

preventing negotiated deals away from market price

“Soft limits” – can be breached as long as other participants have the

chance to take part in a trade

Graphical representation

After the trade - Clearing & Settlement

Standard T+3 settlement of equities and bonds; mandatory settlement

T+0: SASE delivers report on matched transactions to Securities Registry

T+1: Registry submits to each member a report on the amount of net debts/claims

by 10:00

T+2: Members are required to pay the net-debt amount into the clearing and

settlement account of the Registry latest by 13:00

T+3: Registry transfers securities from seller’s account into buyer’s account, as

well as funds from its Central Bank account to the seller’s cash account. Settlement

is final at 13:00

Guarantee fund at the Securities Registry: in case any member of the

CSD fails to pay his liability on T+2

Custody Banks are members of the CSD clearing and settlement

system. Pre-funding of cash is required on T+2.

Security lending is permitted; short selling not

Market segmentation – PRIME MARKET

Prime market - Continuous trading - Static limits: -5/+10% - Dynamic limits: +/-3%

Company shares

Closed Invetment

Fund shares

State (Entity) & Corporate

Market Segmentation – FREE MARKET

Free market

(Dynamic limits:+/-3%)

Primary Free market Continous trading; -

10/+15% static limits; Most liquid 30 securities

Secondary Free market Auction trading / 2 daily

auctions; -20/+30% static limits

Tertiary Free market

Auction trading / 1 daily auction; +/-5% static

limits; No issuer information available

Bankruptcy market

Auction trading / 1 daily auction; no static limits

Bankruptcy proceedings started

Listing Requirements Prime Market

General characteristics: the securities can be traded in

an organized manner, they are fully paid for, transferable

without restrictions

Specific criteria for the Prime market:

At least three years of business operations

Existence of three revised annual reports for the last

three years

Minimum capital of 4.000.000 KM

Minimal share-class value of 2.000.000 KM

At least 25% of the shares were offered through a

public share offering

At least 150 shareholders

Continuous transparency requirements

Annual, semi-annual and quarterly financial reports

Ad-hoc publicity (price-sensitive information)

Listing Requirements – Free Market

Primary Free market

30 most liquid shares from the Free market

Semi-annual revisions

Secondary Free market

Entry market segment for issuers which publish their annual /semi-

annual reports and where information about their business is obtainable

If periodical reports are not properly published, demotion to the Tertiary

Free market

Tertiary Free market

Entry market segment for non-transparent open joint stock companies,

whose shares have to be traded on the Stock Exchange

If they fail to provide their reports within 6 months after listing, they are

delisted from the Exchange

Bankruptcy market

For issuers where bankruptcy proceedings have been started

After the break...

Price of stock = HOPE / FEAR - GREED

“Introduction to Valuation”

Feđa Krivošić, SASE

THANK YOU FOR YOUR ATTENTION!

Interesting literature

“Key Microstructure and Policy Issues for Emerging Stock

Markets – What have we learned”, Christopher Green, Victor

Murinde, Rose Ngugi; Finance and Development Research

Programme Working Paper No.16, 2000

“Market Microstructure – A Survey”, Ananth Madhavan,

Journal of Financial Markets 3 (2000), p. 205-259

“Liquidity Supply and Demand in Limit Order Markets”,

Burton Hollifield, Robert A. Miller, Patrik Sandas and Joshua

Slive, Centre for Economic Policy Research Discussion Paper

No.3676

“The Anatomy of a Call Market”, Carl-Heinrich Kehr, Jan P.

Krahnen, Erik Theissen, 2000

“The Informational Content of an Open Limit Order Book”,

Charles Cao, Oliver Hansch, Xiaoxin Wang, 2004

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