Markets: Overview
Agenda
• Borrowing
• Lending
• Trading
• Financial Markets
• Overview: Primary / Secondary Markets
• Trade Lifecycle
• Players in Financial Markets (Brokers / Market Maker / Clearing Agent / Custodians)
• Secondary Markets: OTC vs Exchange Traded
• Cash Markets: Equity and Fixed Income
• Derivatives Markets
• Money Market
• FX Market
• Commodities Market
• Financial Instruments
• Equity
• Fixed Income
• FX
• Derivatives – Futures / Forwards / Options / Swaps
• Commodities
• Other Activities
• Fee based activities (Broking)
• Trade Finance
• Securitization
• Regulatory Bodies and their Roles
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Financial Markets
- where people can trade financial instruments
- At low transaction costs
- And at prices that reflect supply and demand
Financial Markets
Capital Markets Derivatives Market Money Market FX Market
For For For Transfer of For International
Raising Capital Risk Transfer Liquidity Trade
Equity Market Debt Market
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Primary Markets vs Secondary Markets
• Both come under Capital Markets
• Newly formed securities – Primary Markets, like IPO/FPO or NFO
• Transaction is between issuer and investor
• Buy/sell existing securities – Secondary Markets
• Transaction is among investors
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Case Study … Primary Markets … IPO
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Primary Mkts: Facebook IPO – May 18, 2012
CEO • Mark Zuckerberg
Exchange • NASDAQ
Underwriter • Morgan Stanley
• $34-$38 per share, raised due
Price Band to high investor demand
IPO Valuation • $104 bn
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Primary Mkts: Facebook IPO – May 18, 2012
CEO • Mark Zuckerberg
Exchange • NASDAQ Services provided by
Exchange:
1) Issue /redemption of
Underwriter • Morgan Stanley Securities
2) Secondary Market trading
3) Capital events like
• $34-$38 per share,Dividend
raised due
Payment
Price Band to high investor demand
Types of Exchange:
1) Open outcry : NYSE
IPO Valuation • $104 bn 2) Electronic : NASDAQ
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Primary Mkts: Facebook IPO – May 18, 2012
CEO • Mark Zuckerberg
Exchange • NASDAQ
Underwriter • Morgan Stanley Underwriter:
Investment Bank which helps
• $34-$38 per share,raised corporations
due to raise capital
Price Band to high investor demand from investors.
Bought Deal:
Buys securities from issuer and
IPO Valuation • $104 bn sells to investors, make profit
Best Efforts
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Primary Mkts: Facebook IPO – May 18, 2012
CEO • Mark Zuckerberg
Exchange • NASDAQ
Underwriter • Morgan Stanley
• $34-$38 per share, raised due
Price Band to high investor demand
IPO Valuation • $104 bn
Valuation (Market Capitalization):
Share Price * No of shares outstanding
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Case Study … Secondary Markets
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Secondary Markets
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Secondary Markets
Refers to any collection of financial assets
such as stocks, bonds and cash.
May be held by individual investors and/or
managed by financial professionals, hedge
funds, banks and other financial institutions.
Portfolio is designed according to the
investor's risk tolerance, time frame and
investment objectives.
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Secondary Markets … contd
Change is with respect to
previous day closing
price…
Can you buy in one
exchange and sell in
another?
~ Arbitrage
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Secondary Markets … contd
IOC – Immediate or
Cancel
VTC – Valid till cancelled -
remains in the system
until the trading member
cancels it.
Max no of days the
VTC/GTD order can
remain in the system is
notified by the Exchange
from time to time after
which the order is
automatically cancelled by
the system
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Secondary Markets … contd
Limit order - An order
placed with a brokerage to
buy or sell a set number of
shares at a specified price
or better.
Market order is at market
price
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Case Study: OTC vs Exchange Traded
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OTC vs Exchange Traded
OTC (Over the Counter) Exchange Traded
Decentralized - Multiple mediators to link Transactions completed through a
buyers and sellers centralized source
Non-standard products Standardized products
Unregulated, untrustworthy, risk of default Better transaction enforcement
Stricter security
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OTC vs Exchange Traded
If it were Exchange Traded:
1) All apartments are similar
in nature …
2) Known builder, Lesser
chances of default
If it were OTC:
1) Almost similar to requirements
2) Not sure about builder/property
ownership
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Players in Financial Market
• Why are Financial Market Participants required?
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Players in Financial Market … contd
Retail Investors B Institutional Investors
U
Individual Y
Have Free
Cash to
Invest
S Pension Funds
I Mutual Funds
HNI
D
E
A brokerage firm is a
financial institution that
Brokerage Houses facilitates the buying and
selling of financial
securities between a
buyer and a seller.
Invest in
Shares of
Apple from
Seller
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Players in Financial Markets …contd
A stock broker buys / Exchange
sells stocks through a
stock exchange or over
the counter, in return for
a fee or commission
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Players in Financial Markets … contd
After Trade Execution on an
Exchange (or OTC),
Clearinghouse stands in
between two clearing firms.
Services provided by Depository:
1) Dematerialization
Purpose is to reduce the
2) Transfer of ownership
settlement risk
Investor has to open Demat
account with D/P to avail of
Clearinghousethe services provided by
Depository
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Players in Financial Markets … contd
Securities
Regulatory
Board
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Depository and Depository Participant
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Examples of Market players in USA / India
Player USA India
Brokerage Ameritrade / Charles ICICIDirect / Motilal Oswal /
Schwab HDFC Securities etc
Exchange NASDAQ / NYSE NSE / BSE
Depository DTCC NSDL
Clearing House DTCC CCIL/NSCCL
Regulatory Body SEC – Securities SEBI
CFTC – Commodities
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Buy side …
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Functions – FO/BO/MO
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F/Office Analyses portfolio
Trader
Sales Does C/p
team risk analysis
Contacts…
Performs deal pricing
and valuation
Interbank / Corporate customer
Deal captured and
in ‘Q’ for processing Deal rate given
Customer static to customer
data captured
If customer accepts
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M/Office
…and sent to
customer
Deal workflow Deal
created confirmation
drafted…
Deal economics
validated
Customer
Pick deal from ‘Q’ verifies,
for processing signs…
Deal status
changed to
‘Matched’
Confirmation
It’s a deal matching
…and sends
back to bank
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B/Office
DR/CR Nostro / Trading /
customer A/c
Payment Depending upon
workflow created Payment / Receipt
Select deal for RTGS
initiating payment
Extract matched
deals settling today Deal
matured
Probe and resolve
unmatched items
Reports prepared Daily reconciliations
Sent to Mgmt, Traders and Regulators
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Questions?
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Quiz …
• 1) Is an Exchange required for Secondary Market?
• 2) Classify these instruments as OTC or Exchange Traded:
• a) FX b) Swaps c) Options d) Futures f) Commodities
• 3) Is an IPO necessary for raising money via Equity?
• 4) I plan to buy a stock at INR 35. Currently the stock price is trading at
INR 38. What's the kind of order I should put in the market?
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Foreign Exchange Markets - Overview
• Forex Markets
• Overview:
• Global Decentralized trading of international currencies – OTC
• Huge trading volume: one of the largest asset classes in the world
• High liquidity
• Continuous operation
• Exchange rates determined by multitude of factors
• Uses leverage to enhance profit and loss margins
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Foreign Exchange Markets - Size
• Market size
• Average daily turnover of $3.98 trillion in global FX market in April 2010
• London dominance, quoted price is usually London market price
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Foreign Exchange Markets - Participants
• Market participants – Level of Access
• Interbank Markets
• Traders of respective banks trade with each other
• Access to Best Pricing
• Small Banks
• Access through Larger banks
• Better pricing that Corporations
• Corporations
• Access through Banks
• Better pricing than individuals
Better Pricing
• Individuals
• Personal Transactions
• Access through Intermediaries
• Least Favourable Pricing
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Foreign Exchange Instruments
• Purpose:
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Foreign Exchange Markets - Trivia
• Cable ? • GBP/USD
• Mio ? • 1 million
• Aussie? • AUD/USD
• Guppy? • GBP/JPY
• If USD/JPY = 96.1016 and • EUR/USD = EUR/JPY / USD/JPY
EUR/JPY = 124.872, = 124.872/96.1016
what is EUR/USD? = 1.29937
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