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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
SASE
“Municipal Bonds”, Feđa Krivošević, SASE
LOGO
“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
“Trading on the Sarajevo Stock Exchange”, Almir Mirica International Burch University, May 13th, 2013
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
“Trading on the Sarajevo Stock Exchange”, Almir Mirica International Burch University, May 13th, 2013
When you think about Stock Exchange...
Classification of trading systems
“Trading on the Sarajevo Stock Exchange”, Almir Mirica International Burch University, May 13th, 2013
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
“Trading on the Sarajevo Stock Exchange”, Almir Mirica International Burch University, May 13th, 2013
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
“Trading on the Sarajevo Stock Exchange”, Almir Mirica International Burch University, May 13th, 2013
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
“Trading on the Sarajevo Stock Exchange”, Almir Mirica International Burch University, May 13th, 2013
Buy-side Sell-side
Best bid Best ask
Auction Trading System
“Trading on the Sarajevo Stock Exchange”, Almir Mirica International Burch University, May 13th, 2013
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
price
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
“Trading on the Sarajevo Stock Exchange”, Almir Mirica International Burch University, May 13th, 2013
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
price
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
“Trading on the Sarajevo Stock Exchange”, Almir Mirica International Burch University, May 13th, 2013
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 the Sarajevo Stock Exchange”, Almir Mirica International Burch University, May 13th, 2013
Trading on SASE
“Trading on the Sarajevo Stock Exchange”, Almir Mirica International Burch University, May 13th, 2013
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
“Trading on the Sarajevo Stock Exchange”, Almir Mirica International Burch University, May 13th, 2013
Basic order types on SASE
“Trading on the Sarajevo Stock Exchange”, Almir Mirica International Burch University, May 13th, 2013
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
days)
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
“Trading on the Sarajevo Stock Exchange”, Almir Mirica International Burch University, May 13th, 2013
Market Watchlist
“Trading on the Sarajevo Stock Exchange”, Almir Mirica International Burch University, May 13th, 2013
All Symbols
“Trading on the Sarajevo Stock Exchange”, Almir Mirica International Burch University, May 13th, 2013
All Symbols
“Trading on the Sarajevo Stock Exchange”, Almir Mirica International Burch University, May 13th, 2013
Market by Order Overview
“Trading on the Sarajevo Stock Exchange”, Almir Mirica International Burch University, May 13th, 2013
Market by Order Overview
“Trading on the Sarajevo Stock Exchange”, Almir Mirica International Burch University, May 13th, 2013
Market by Order: single orders are shown
Market by Price and Trades
“Trading on the Sarajevo Stock Exchange”, Almir Mirica International Burch University, May 13th, 2013
Market by Price and Trades
“Trading on the Sarajevo Stock Exchange”, Almir Mirica International Burch University, May 13th, 2013
Market by Price: Aggregate offering / demand at prices is shown
Order entry mask
“Trading on the Sarajevo Stock Exchange”, Almir Mirica International Burch University, May 13th, 2013
Price protection mechanism
“Trading on the Sarajevo Stock Exchange”, Almir Mirica International Burch University, May 13th, 2013
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
“Trading on the Sarajevo Stock Exchange”, Almir Mirica International Burch University, May 13th, 2013
After the trade - Clearing & Settlement
“Trading on the Sarajevo Stock Exchange”, Almir Mirica International Burch University, May 13th, 2013
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
“Trading on the Sarajevo Stock Exchange”, Almir Mirica International Burch University, May 13th, 2013
Prime market - Continuous trading - Static limits: -5/+10% - Dynamic limits: +/-3%
Company shares
Closed Invetment
Fund shares
State (Entity) & Corporate
Bonds
Market Segmentation – FREE MARKET
“Trading on the Sarajevo Stock Exchange”, Almir Mirica International Burch University, May 13th, 2013
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
“Trading on the Sarajevo Stock Exchange”, Almir Mirica International Burch University, May 13th, 2013
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
“Trading on the Sarajevo Stock Exchange”, Almir Mirica International Burch University, May 13th, 2013
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...
“Trading on the Sarajevo Stock Exchange”, Almir Mirica International Burch University, May 13th, 2013
Price of stock = HOPE / FEAR - GREED
“Introduction to Valuation”
Feđa Krivošić, SASE
LOGO
THANK YOU FOR YOUR ATTENTION!
Interesting literature
“Trading on the Sarajevo Stock Exchange”, Almir Mirica International Burch University, May 13th, 2013
“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
“Trading on the Sarajevo Stock Exchange”, Almir Mirica International Burch University, May 13th, 2013