Thị trường tài chính và các định chế tài chính_ Chapter 12

Stock Market Transactions cont’d Placing an order cont’d  Stop-loss orders:  Are orders where the investor specifies a selling price that is below the current market price of the stoc

Chapter 12

Market Microstructure

and Strategies

Chapter Outline

have decreased

Stock Market Transactions

 Placing an order

 Brokerage firms:

stock

exchange through a telecommunications network

 Full-service brokers offer advice to customers on stocks to buy

or sell

 Discount brokers only execute the transactions

 The larger the transaction amount the lower the percentage

charged by many brokers

Stock Market Transactions (cont’d)

 Placing an order (cont’d)

 Investors communicate their order to brokers by specifying:

 A market order to buy or sell a stock means to execute the

transaction at the best possible price

 A limit order differs from a market order in that a limit is

placed on the price at which a stock should be purchased or

sold

Stock Market Transactions (cont’d)

 Placing an order (cont’d)

 Stop-loss orders:

 Are orders where the investor specifies a selling price that

is below the current market price of the stock

 Are typically placed by investors to either protect gains or limit losses

 Stop-buy orders are orders where the investor

specifies a purchase price that is above the current market price

Stock Market Transactions (cont’d)

 Placing an order (cont’d)

 Placing an order online

provide access to information

accounts

Charles Schwab, Datek, E*Trade, and National Discount Brokers

Stock Market Transactions (cont’d)

 Margin trading

 A margin trade involves cash along with funds

borrowed from the broker

 The Federal Reserve imposes margin

requirements which limit the amount of credit

brokers can extend to their customers

 Currently, at least 50 percent of an investor’s invested funds must be paid in cash

 Margin requirements are intended to ensure that investors can cover their position if the value of their investment

declines over time

Stock Market Transactions (cont’d)

 Margin trading (cont’d)

 Investors:

 Must establish a margin account with their broker

 Are required to satisfy a maintenance margin

 Initially satisfy the maintenance margin with the initial

INV SP

Computing the Return on A

Margin Purchase

Billy purchases a stock on margin, borrowing 50% of the funds

necessary to complete the purchase The stock is currently priced

at $50 per share, and the stock pays an annual dividend of $.50

per share The brokerage firm charges an annualized interest rate

of 8% After one year, the stock is sold at a price of $55 per share

What is the return on the margin transaction

$55

INV SP

R

Computing the Return on A

Margin Purchase (cont’d)

Reconsider the previous example, but assume that the stock declined from $50 to $47 per share over the one year period What would

the return on the margin transaction have been in this case

?

%18

$47

INV SP

R

Stock Market Transactions (cont’d)

 Margin trading (cont’d)

 Impact on returns (cont’d)

 Purchasing stock on margin increases the potential return but magnifies the potential losses

Computing the Return on A Cash Purchase

Compute the return that would have been realized in the previous two examples if Billy had paid the entire price of the stock, without

Stock Market Transactions (cont’d)

 Margin trading (cont’d)

 Margin calls

 If the investor’s equity no longer represents the minimum percentage of the stock’s value required by the broker, the

investor may receive a margin call

 With a margin call, the investor is required to provide more collateral (cash or stocks) or sell the stock

 The volume of margin lending on the NYSE reached a peak of $278 billion in March 2000 and declined to $165 billion by August 2001

Stock Market Transactions (cont’d)

 Short selling

 In a short sale, investors place an order to sell a

stock that they do not own

 Short sellers:

 Anticipate a price decline

 Essentially borrow the stock from another investor and will ultimately have to provide that stock back to the investor

 Make a profit equal to the difference between the original sell price and the price paid for the stock after subtracting any dividend payments made

Stock Market Transactions (cont’d)

 Short selling (cont’d)

 Measuring the short position of a stock

 The ratio of the number of shares sold short divided by the total number of shares outstanding is a measure of the degree of short positions

 The short interest ratio is the shares sold short divided by the average daily trading volume

short sales

Stock Market Transactions (cont’d)

 Short selling (cont’d)

 Using a stop-buy order to offset short selling

 Investors who have established a short position commonly request a stop-buy order to limit their losses

 e.g., an investor sells shares short for $50 per share and places a stop-buy order with a purchase price of $60

approximately $60 per share

Stock Market Transactions (cont’d)

 Investing in stock indexes

 Indexing may represent as much as 30 percent of all stock

investments

 Purchasing an index entails lower transactions costs than

specific stocks

 Several studies found that actively managed stock portfolios

do not outperform stock indexes

 The AMEX created exchange-traded funds (ETFs), which

are funds designed to mimic particular stock indexes and are traded on a stock exchange

Stock Market Transactions (cont’d)

 Investing in stock indexes (cont’d)

 Comparison of ETFs to mutual funds

 The share price adjusts over time in response to the change in the index level for both ETFs and index funds

 Both pay dividends in the form of additional shares to investors

 Both involve relatively simple portfolio management

 Unlike mutual funds, ETFs can be traded throughout the day

 ETF holders can defer capital gains to the time they sell shares

 A disadvantage of ETFs is that there are transaction costs

Stock Market Transactions (cont’d)

 Investing in stock indexes (cont’d)

 Types of ETFs

index

baskets of stocks matched to the S&P 500 index

Index

stock indexes of specific countries

How Trades Are Executed

 Floor brokers:

 Are situated on the floor of stock exchanges

 Receive requests from brokerage firms to fulfill

orders and execute them

How Trades Are Executed (cont’d)

 Specialists and market-makers

 Specialists:

 Can serve a broker function

 Gain from the bid-ask spread

 Take position in specific stocks to which they are assigned

 Have access to the limit order book

 Typically handle between 5 and 8 stocks each

 Are mostly employed by one of seven specialist firms

 Are required to signal floor brokers if they have unfilled orders

How Trades Are Executed (cont’d)

 Specialists and market-makers (cont’d)

 Specialists (cont’d):

 Make a market in stock they are assigned by standing ready to buy or sell assigned stocks if no other investors are willing to participate

 Participate in about 10 percent of the value of all shares traded

 Can set the spread to reflect their preferences

How Trades Are Executed (cont’d)

 Specialists and market-makers (cont’d)

 Front running involves the specialist setting a price below the price offered by other investors

the price reverses as a result

stocks must be executed on the exchange that offers the best price

How Trades Are Executed (cont’d)

 Specialists and market-makers (cont’d)

 Transactions in the Nasdaq market are facilitated by market makers, who:

 Stand ready to buy stocks in response to customer orders made through a telecommunications network

 Benefit from the spread between the bid and ask prices

 Can take positions in stocks

 Often take positions to capitalize on the discrepancy between the prevailing stock price and their own valuation

How Trades Are Executed (cont’d)

 Effect of the spread on transactions costs

 The spread:

 Is the difference between the ask and bid prices and is commonly measured as a percentage of the ask price

 Is separate from the commission charged by the broker

 Has declined substantially over time due to increased efficiency of executing orders and increased competition from ECNs

Computing the Spread

Your broker quotes a bid price of $28.50 and

an ask price of $29.05 for Palmetto stock

What is the bid-ask spread

?

% 89 1

05 29

$

50 28

$ 05 29

$ Spread







How Trades Are Executed (cont’d)

 Effect of the spread on transactions costs

(cont’d)

 The spread is influenced by the following factors:

 Order costs (+) represent the cost of processing orders, including clearing costs and recording transactions

 Inventory costs (+) represent the cost of maintaining an inventory of a particular stock

inventory is high

 Competition (–) reduces the spread

 Volume (–) increases liquidity and reduces the risk of a sudden decline in the stock’s price

How Trades Are Executed (cont’d)

 Electronic communication networks (ECNs):

 Are automated systems for disclosing and sometimes

executing stock trades

 Were created in the mid-1990s to publicly display buy and sell orders of stock

 Were adapted to facilitate the execution of orders and normally serve institutional rather than individual investors

 Are appealing to traders because they do not require traders

to execute the transaction

 Now account for about 30 percent of the total trading volume

on the Nasdaq

 Execute a small proportion of all transactions on the NYSE

How Trades Are Executed (cont’d)

 Electronic communication networks (ECNs) (cont’d)

 Some ECNs focus on market orders while others focus on limit orders

is immediately executed

 Archipelago serves as an ECN for many online buyers and

sellers

trading of NYSE, AMEX, and Nasdaq stocks

 Island facilitates the trading of about 100 million shares per

day on the Nasdaq

 Instinet facilitates daily stock transactions requested by U.S

financial institutions after the U.S exchanges are closed

How Trades Are Executed (cont’d)

 Electronic communication networks (ECNs) (cont’d)

 Interaction between direct access brokers and ECNs

website that allows investors to trade stocks without the use of a broker

can execute the trade

FidelityTrading, and NobleTrading

requirements

How Trades Are Executed (cont’d)

 Program trading

 The NYSE defines program trading as the simultaneous

buying and selling of a portfolio of at least 15 different stocks that are in the S&P 500 index and have an aggregate value of more than $1 million

 The most common program traders are large securities firms

 Program trading is commonly used to reduce the susceptibility

of a stock portfolio to stock market movements

 Program trading can be combined with the trading of stock

index futures to create portfolio insurance

 More than 20 million shares per day are traded as a result of

program trading

How Trades Are Executed (cont’d)

 Program trading (cont’d)

 Impact of program trading on stock volatility

 Program trading can cause share prices to reach a new equilibrium more rapidly

 Furbush found that greater declines in stock prices were not systematically associated with more intense program trading during the 1987 crash

 Roll found that markets that do not use program trading declined more than markets using program trading around the 1987 crash

How Trades Are Executed (cont’d)

 Program trading (cont’d)

 Collars applied to program trading

 Collars (“curbs”) on the NYSE restrict program trading when the DJIA changes by 2 percent from the closing index on the previous trading day

the stock’s price was an uptick

the stock’s price was a downtick

 Collars are intended to prevent program trading from adding momentum to the prevailing direction of movement

Regulation of Stock Trading

 Stock trading is regulated by the individual exchanges and by the SEC

 The Securities Act of 1933 and the Securities Exchange Act of

1934 were enacted to prevent unfair or unethical trading

practices on the security exchanges

 The NYSE:

surveillance

volume

Regulation of Stock Trading

(cont’d)

 In 2002, the NYSE required its listed firms to

have their board of directors composed of a

majority of independent members

 Intended to reduce potential conflict of interests

 The NYSE was criticized in 2003 for not abiding by some of the governance guidelines it was requiring

of other firms

Regulation of Stock Trading

 Trading halts:

 Can be imposed for individual stocks if the stock exchange

believes market participants need more time to receive and

absorb material information

 Are intended to reduce stock price volatility

Regulation of Stock Trading

(cont’d)

 Securities and Exchange Commission (SEC)

 The Securities Act of 1933 and the Securities Exchange Act of 1934:

financial reports

 According to SEC regulations:

could affect their stock price

they do not have inside information

Regulation of Stock Trading

(cont’d)

 Securities and Exchange Commission (SEC)

(cont’d)

 Structure of the SEC

 Composed of five commissioners appointed by the U.S

president and confirmed by the Senate

 Commissioners have five-year staggered terms

 One commissioner chairs the SEC

 Commissioners assess whether existing regulations are successfully preventing abuses ad revise regulations as needed

Regulation of Stock Trading

(cont’d)

 Securities and Exchange Commission (SEC)

(cont’d)

 Key divisions of the SEC

 The Division of Corporate Finance reviews the registration statement filed when a firm goes public, corporate filings, and proxy statements

 The Division of Market Regulation requires the orderly disclosure of securities trades by various organizations

 The Division of Enforcement assesses possible violations

of the SEC’s regulations and can take action against individuals or firms

Regulation of Stock Trading

(cont’d)

 Securities and Exchange Commission (SEC)

(cont’d)

 SEC oversight of corporate disclosure

 In October 2000, the SEC issued Regulation FD

investors at the same time

to disclose less information

 SEC oversight of analyst recommendations

 The SEC has become concerned about analyst recommendations that appear excessively optimistic

How Barriers to International Stock Trading Have Decreased

 Reduction in transaction costs

 Some countries have consolidated their exchange, increasing efficiency and reducing transaction costs

 Reduction in information costs

 Information via the Internet

 Attempts to make accounting standards uniform across

countries

 Reduction in exchange rate risk

 The euro should lead to more stock offerings in Europe by

U.S and European-based firms