Ch 3

Part 1

Chapter 3

Securities Markets

Definition• “A market for facilitating the buyers and sellers

for buying and selling (trading) the financial assets (securities)”.

• Primary: where the securities are traded at the time of their initial issuance.

• Secondary: A market for trading the financial assets (securities) that were previously issued.

KSE

Contracts at the stock marketReady Contract:• The current buying and selling of stocks Future Contract• The future trade• About 100 companies deal with future trade

Bhata or (Short Sell)-In the past bhata was allowed for both ready and future-Currently bhata is allowed on 1 day basis

Mark II, III

• The means through which you can buy on margin a/c

• About 18% of interest is paid on margin loan

Badla Trade• It is similar like margin purchase.• The initial margin requirement is 25%• Here the purchases of stocks are financed by big

investors who charge high interest.• Shares are held by the big investors as collateral• Normally the interest is about 35% – 40% • When the share prices are high interest is about

50% - 100%

Disadvantages of Badla Trade• Legally not allowed by the Government• One of the most risky way to buy stocks• Initially the big investors finance the stock

purchases• But as the price of shares rise • They increase the interest rate, even 100% • Further, they forcefully sell your shares • Huge supply of shares decline’s their value• As a result market goes down

Central Depository Company of Pakistan Ltd.• CDC is an electronic book entry system used to record and maintain

securities and their transfer’s registration.

• The system changes the ownership of securities without any physical movement of certificates and execution of transfer instruments.

• Incorporated as a public limited company in 1993

• It is the only depository in Pakistan.

• The Company started operations in September 1997.

• It is the sole entity handling the electronic (paperless) settlement of transactions carried out at all three stock exchanges of the country.

• Regulated by the SECP, Has branches in Karachi, Lahore and Islamabad.

• It was primarily established to operate the Central Depository System (CDS) for equity, debt and other financial instruments that are traded in the Pakistani Capital Market.

• It provides depository services to a wide range of Capital Market participants which includes:

- Brokers- Asset Management Companies- Banks (including Custodian Banks) and - General retail investors.

• Now it also provides services that are beyond the traditional depository services.

CDS• It is an electronic book-entry system used to

record and maintain securities and to register the transfer of securities.

• It is Installed by an IBM-led association

Aim of CDC

• To contribute to the country's ability to support an effective capital market system

• To attract institutional and retail level investors from Pakistan and abroad.

• It also serves to link up the Issuers and Registrars of securities and the market for the purpose of executing corporate actions like disbursement of corporate benefits and carrying out mergers and splits.

Taking Step towards capital market developmentIt has diversified its operations • In 1999, Investor Account Service (IAS), It allows retail investors to open and maintain securities’

accounts directly with CDC. • In 2002, Trustee and Custodial Services (T&C) It enlisted Open-end and Closed end Mutual Funds and

Voluntary Pension Schemes. • In 2008, Share Registration Services (SRS) It provides issuing companies facilities of registrar and transfer

agent services, Including registration and verification of shares and records

and customer dealing on behalf of issuer companies.

Types of CDC Accounts:• Main Account for Brokers ( a gateway account)

• House Account (a family account of the Broker)

• Sub-Account (An investor account with CDC through Broker)

Investor Account Services:Facilitating the Investors to open their independent

CDC Accounts• Initial Account Opening Fee: Rs.500/-.• Annual renewal Fee Rs.500/-.

Assessing Securities

Market Summary

Display of Buy Order

Display of Sell Order

Symbol Summary

Functions of Stock exchange

Regulatory Structure

LSE KSE ISE

CDC

Governing Rules

Board of Directors

Stock Market

Exchanges Physical location for trading

Member Trading is done by members

Seat Members own a seat on the exchange

Listed stocks Stocks traded on exchange

NYSE

NYSE• Also known as the “Big Board”• About 2800 listed U.S. companies• 450 non-U.S. companies• $18 trillion market value• 1366 seats

Post Stocks are trade at post on the trading floor– There are about 20 posts– Trading about 100 stocks

Categories of Members

• Commission Brokers

• Floor Brokers

• Floor Traders

• Specialists

Commission Brokers- They take orders placed by customers with their respective firm- Brokerage firms receive commissions by customers

Floor Brokers- They assist commission brokers when there are too many orders- Also known as two dollar brokers

Floor Traders- They trade for themselves- They are not allowed to execute public orders- They make money by taking advantage of temporary mispricing- They try to buy low and sell high- Also known as registered competitive market makers,

competitive traders, registered traders

Specialist They perform two major tasks1. Any limit order that commission broker is unable to execute is

handed over to him- (Part of commission is paid to him)

2. They can also act as a dealer for securities for which they are specialist.

- They are supposed to buy and sell on their own account and must maintain a fair and orderly market for stock (the price imbalances keeping in view up tick rule)

• Act as buyer or seller as needed• Match buyers and sellers• Maintain order priority

Each stock has at least one specialist– 10 specialist firms, 470 specialists– Each specialist has 5-10 stocks

NYSE- Brokers buy a seat on the exchange for between $2-2.65

million each year

- It accounts for 85-90% of trading on US exchanges (1.425 million trades/day)

- Only 70% of the trades in stocks listed on the NYSE are actually executed on the NYSE

- It requires that firms must be of interest enough to generate high volumes of trading

NYSEHow a trade is executed

1) investor contacts the broker to sell/buy 2) floor broker goes to specialist’s trading post where many other brokers are also trying to participate in a trade3) the specialist helps to match up a buyer and a seller by matching the highest bid with the lowest offer 4) when this match is made the trade is executed5) the specialist assistant then enters the trade into the point-of-sale workstation

Call & Continuous Markets

• Call Markets: Here trades are allowed only on a specified times when the securities are called and the individuals willing to buy or sell are brought together.

• Continuous Markets: Here trade may occur at any time only the investors are needed.

Liquidity: (marketability)• It allows investors to convert securities into cash

at the price of previous trade, assuming that no new information has arrived since the previous trade.

• Organized Exchanges: Place where trade is done under a set of rules &

regulations, NYSE, AMEX

• NYSE SEATS:–purchased from a current member

– give privileges to members to execute trades

–held by individuals as well as brokerage firms

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Criteria to list at the stock exchange

– the degree of national interest

– relative position and stability in the industry

–prospects of maintaining its relative position

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TRADING HALTS

• THE EXCHANGE MAY IMPOSE TRADING HALTS

–Trading Halts:• A temporary suspensions of trading in a

listed firm’s shares

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CIRCUIT BREAKERS

–Circuit Breakers: Rule 80A• Rule states that if the Dow Jones Industrial

Average (DJIA) moves 50 or more points from a previous closing price

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CIRCUIT BREAKERS

–Circuit breakers: Rule 80B• if a 350 point change before 3 PM occurs,

the NYSE shuts down for one-half hour

• if a 550 point change (total) occurs after the reopen, NYSE shuts down for 1 hour.

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THIRD MARKETS

• “Trading by non exchange-member brokers /dealers and institutional investors of exchange-listed stocks”.

A name for a market where • any trading of NYSE security is permitted• trading hours are not fixed• trading is not bound by NYSE trading halts or circuit

breakers

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FOURTH MARKETS

“The direct trading of exchange-listed securities between institutional investors”

• Without the benefit of a broker– Trading facilitated by an automated system

INSTINET• give quotations and executions information

immediately

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