Ch 3

Part 2

OTHER EXCHANGES

2

Regional exchanges

• stocks may be listed on both NYSE and regional exchange

• 5 regional exchanges• cheaper seat prices

REGIONAL EXCHANGES:

• REGIONAL EXCHANGES:– Boston– Cincinnati– Chicago– Pacific– Philadelphia

4

REGIONAL EXCHANGES:

For Options • Chicago Board Options Exchange

– one of the largest

– For Futures• The Chicago Mercantile Exchange

– offers interest rate, commodities, and index futures contracts

5

AMEXNYSE Amex Equities, formerly known as the American Stock Exchange (AMEX).

• AMEX was a mutual organization owned by its members. • Until 1953, it was known as the New York Curb Exchange.• On January 17, 2008, NYSE Euronext announced it would acquire

the American Stock Exchange for $260 million in stock. • On October 1, 2008, NYSE Euronext completed acquisition of the

American Stock Exchange.• Before the closing of the acquisition, NYSE Euronext announced

that the Exchange would be integrated with the Alternext European small-cap exchange and renamed the NYSE Alternext U.S.

• In March 2009, NYSE Alternext U.S. was changed to NYSE Amex Equities.

OTC markets• NASDAQ is an OTC market:

It was created by the National Association of Securities Dealers (NASD)

• It is an American stock Exchange

• "NASDAQ" originally stood for "National Association of Securities Dealers Automated Quotations".

• It is the 2nd largest stock exchange by market capitalization in the world, after NYSE

• As of January 13, 2011, there are 2,872 listings• The NASDAQ has more trading volume than any other

electronic stock exchange in the world.• ECNs (Electronic communication networks)• electronic network of dealers all over the world• more than one dealer per stock

Nasdaq

• Not the only OTC system, but the largest• over 4000 companies listed

– mkt. value $2 trillion (2/28/03)

• leader in daily share volume• over 500 dealers• listing requirements

TOKYO STOCK EXCHANGE

– Has introduced major reforms:• introduced CORES (Computer-Assisted Order Routing and

Execution System)• introduced FORES (Floor Order Routing and Execution

System)• Saitori System of Trading • follows IYATOSE Method at market open similar to a call

market– Zaraba used where orders are processed continuously

10

TORONTO STOCK EXCHANGE

– Uses CATS (Computer-Assisted Trading System)– Similar to IYATOSE trading in Tokyo

11

REGULATION OF SECURITIES MARKETS

• THE FOUR PILLARS OF SECURITY REGULATION:– The Securities Act of 1933– The Securities Exchange Act of 1934– The Investment Company Act of 1940– The Investment Advisors Act of 1940

12

Member

• They perform various activities at the exchange• The president, Chairperson and director may be

out of the members• They are allowed to execute trade by using the

facilities provided by the exchange

Institutional trading

• vs. retail trades– institutional trades are larger– special execution– over 50% of NYSE share volume

block trades

• An order/trade submitted for sale or purchase of a large quantity of securities. Also known as "Block Order".

• large # shares in one stock• executed in “upstairs” market

– other firms directly take other side of trade

• remainder executed on trading floor or Nasdaq (downstairs)

Upstairs Market• “The trading of securities, such as stocks, that occurs

within a broker-dealer firm instead of at an exchange”.

Or • Between two broker-dealers in the over-the-counter

(OTC) market. • In an upstairs market transaction, the broker-dealer

typically represents both parties (buyer and seller).

Program trades• large # shares, different stocks• Usually consisting of baskets of fifteen stocks or

more• Computerized trading used by institutional

investors

• Used by mutual funds for asset allocation• want

– low commissions– prevent frontrunning

what is frontrunning?

“It is the illegal practice of a broker executing orders on a security for its own account while taking advantage of advance knowledge of pending orders from its customers”.

When orders previously submitted by its customers

will predictably affect the price of the security, purchasing first for its own account gives the broker an unfair advantage.

example• broker buys ahead of large buy order

– broker buys first– large buy order pushes up price– broker’s holdings increase in value

• result– frontrunning starts to push up price, so firm does

not get best price

LONDON STOCK EXCHANGE– The Exchange was founded in 1801 – As of December 2010, the Exchange had a market

capitalization of US$3.6 trillion, making it the 4th largest Stock Exchange in the world by this measurement (and the largest in Europe)

– ending fixed commissions• introduced SEAQ (Stock Exchange Automated Quotations)• attracted trading in non-UK stock

20

Global platform for global institutional investors

21

Global institutional

investor base

Local market

US Institutional

Investors

144A

Regional fundsand retail investors

USA Middle EastAsia Eastern EuropeEurope UK

London Stock Exchange - key statistics

22Source: London Stock Exchange statistics – December 2007

Total companiesDomestic: 2,550International: 675

Market capitalisation Main Market: UK listed: US$3,570bnInternational listed: US$4,398bnAIM: US$181bn

Turnover value (Jan-Dec 2007) Main Market: US$8,054bnAIM: US$150bn

London Stock Exchange

0

1000

2000

3000

4000

5000

6000

7000

Lond

on

New York

Bosto

n

Los A

ngeles

Paris

San F

rancis

co

Frank

furt

Chicago

Mun

ich

International

Domestic

23Source: IPREO 2007

More international equity assets under management

London has a far bigger international presence and weight. 45% of equity assets under management are invested in international markets.New York is a larger but mainly domestic market.

Equity assets under management by centre.

In US$ billions

0

50

100

150

200

250

300

350

400

450

2000 2001 2002 2003 2004 2005 2006 2007 2008

London Stock ExchangeNasdaqNYSE

24

The platform of choice for international companies

In 2006: London Stock Exchange - 367 new companies joined in 2006. NYSE, Nasdaq & Hong Kong Stock Exchange had 332 IPOs in 2006.$104bn raised on the London Stock Exchange, $40bn on NYSE, and $29bn on Nasdaq

In 2007:London Stock Exchange - 252 new companies joined the London Stock Exchange, 142 new companies on Nasdaq, 67 on NYSE$88bn raised on the London Stock Exchange.

Source: London Stock Exchange and WFE – December 2007

Q1, 2008

Comparing UK and US as listing locations

London and New York exchanges offer optimal profile London has world’s highest reputation for regulation and governance Principles-based (UK) versus rule-based (US) approach

London has the most liquid equity market in Europe London has the world’s most successful growth market (AIM) London Stock Exchange offers world’s only location for liquid and transparent

trading of GDRs

London combines simple, flexible disclosure with high reputation of regulators

US disclosure regime more prescriptive, exacerbated by need to protect against opportunistic securities litigation

London offers rapid turnaround by regulators, and limits the time regulators can take to approve offer documents

US: SEC review periods longer, with no certainty on turnaround time AIM offers potentially shorter transaction timetable

25

Timing

Disclosure

Trading

Cost-benefit analysis favours London

Profile

Comparison of international listing locations

High profile

Rapid timing Simplified disclosure

Trading / liquidity

London Stock Exchange

NYSE / Nasdaq

Bovespa

26

Optimal Least suitable

Strategic financings from global companies will converge on London or New York

An intelligent approach to regulation

27

Balance Competing

Needs

Companies Investors

Minimise bureaucracy

and cost

Maximise protection

US

UKRanked first in corporate governance standards by GMI, Deminor and Davis Global Advisors

Increased cost of compliance and risk premium (Financial Executive & Korn Ferry Surveys)

Principles based - “comply or explain”

Rules based - prescriptive and expensive

Corporate governance: overall rating by country

3.34

4.20

4.73

5.08

5.61

5.85

6.15

6.40

7.25

7.31

7.39

7.40

0 1 2 3 4 5 6 7 8

China

Mexico

Spain

India

Switzerland

Norway

Germany

Finland

USA

Canada

Ireland

UK

28

Principles-based regulation: high standard, pragmatic application No equivalent to Sarbanes-Oxley section 404

An intelligent approach.

Most advanced regulation and governance

Source: Governance Metrics International, 2007

The world’s capital market

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New York Listing• Higher cost• Slower to market• Higher risk• Sarbanes Oxley• Section 404• Class actions

London Listing• Access to global capital• Lower cost• Lower risk• Faster to market• Intelligent regulation

Understanding Stock Market

Investment

• Households earn income.• Income is payments received by a household by

selling or renting productive resources.• Households usually spend some of their income and

save some of it.• Saving is income not spent on consumption or taxes.• Some households use their savings to purchase

stocks.• Internationally stock trading is done by household

but in Pakistan?

The Stock Market and Stock Exchanges

• Stock market—a network of exchanges and brokers– Exchange—a physical marketplace

(NYSE, AMEX, regional exchanges)– Broker—individual whose job is to

assist people in buying and selling securities

• Work for brokerage firms• Members of stock exchange

Trading—The Role of Brokers• What brokers do…

– An investor will open an account with a broker and place trades via telephone or online

– Local broker will forward order to floor broker on trading floor of exchange

– Floor broker trades on the floor of the exchange• Each stock is traded in a particular spot on the

exchange floor using an auction-like process– Trading is supervised by a specialist

» Specialists make markets in designated securities

– Confirmation of trade is forwarded to local broker and investor

Schematic Representation of a Stock Market Transaction

Information about “The Stock” Market

Most newspaper and Online stock tables provide the following information:

• Price (of a share)• Volume (number of shares sold)• Dividend (profits paid to stockholders)• Price-earnings ratio

Online Stock Trading Model

Customer(trader)

Online Broker

Market-maker

Clearing-house

StockExchangecustomer’s

account

Online Trading in Pakistan

• Not really online as it is partial onlineFollowing steps are involved on Broker end:• Maintain Direct connection with iKATS (Internet Karachi

Automated Transaction System)– Backbone software of Karachi Stock Exchange

controlled by SECP (Securities & Exchange Commission of Pakistan)

• Maintain link account with Central Depository Company, controlled by SECP (Securities & Exchange Commission of Pakistan) to control online transfer of shares

• Transparent account Maintenance of clients• Maintain manual cash handling system• Secure interface to the clients• Efficient Support System

Steps required on Client End:• As cash involvement is handled off line, so bank

account is normally used• Send money from bank account with account

opening form to the chosen broker

• Broker on receiving money will verify the details and open account with him

• Get to know the online interface. Normally three types of interfaces working in Pakistan– Online Website– Software which connects to the web server on it’s

own– Through Short Messaging Service over Mobile

Phone

Online Stock Trading Model

Customer(trader)

Online Broker

iKATS

CDC

StockExchangecustomer’s

account

• Online Demonstration of one of the major online brokers (AKD Securities – Akeel Karim Deddy Securities )

www.akdtrade.com

After opening an account, you need to login through this interface

Note the secure server presence

After logging-in, it will display the following home window showing different options to go for

• The first & Basic thing is Research. All brokerage houses do conduct their own research and place them online for their users.

• Like in AKD Securities, they make two reports, one showing the last week’s trends in general and predicting the trend for next week and other daily report, which takes one sector and explores it. Sample is something like this

Other major important resources for the research are• Contacts • Hard to Believe but players don’t tell everything

ONLINE • Market Watch• Different TV Channels like Business Plus & Indus

Plus (Few Programs are really Excellent), Geo (Tezi Mandi)

• Different Newspapers & Magazines like Business Recorder, Dawn, Pakistan & Gulf Economics

• Different Websites, Business Recorder, KSE Official Website

• KSE Official Website has lots of material

Where as Business Recorder has lots of Organized Information

How to Trade?• Best option is

to read NOTICES everyday before start trading because they may have something which effects you today

Trading Section• You need to

place order

• If you are not sure about the company symbol, then you can search the symbol using following screen

• You can cancel the order if it’s not executed

• You can view the status of your order