CAPITAL MARKET WORKSHOPS

Transcription

1 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, 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

2 LOGO

3 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

4 Functions of a Stock Exchange 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

5 When you think about Stock Exchange...

6 Classification of trading systems 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

7 Electronic Order Book 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

8 Importance of order ranking Buy side Sell side Order Volume Price Price Volume Order A ,00 29, F B ,00 31, G C ,00 31, H D ,45 36, I E ,35 38, J Order book ranking defines the sequence of order execution

9 The Real Order Book Best bid Best ask Buy-side Sell-side

10 Auction Trading System 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 09:00-12:0x Pre-Open 12:0x* 12:05 13:30 Open (Auction) Pre-Open What can be done? Order entry & editing Matching of orders Order entry & editing 14:00 Closed Order overview * Random interval; x={0..300} seconds

11 Continuous Trading System 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 09:00-10:0x Pre-Open 10:0x* 10:05 13:30 Opening Auction Open What can be done? Order entry & editing Matching of orders Order entry & editing; trading 14:00 Closed Order overview * Random interval; x={0..300} seconds

12 Calculation of Auction Price Order # Volume Bid-price Ask-price Volume Order # a e b f c g d h Price Demand Supply Traded volume 96,00 90 (a+b+c+d) ,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) ,00 10 (a) 90 (e+f+g+h) 10

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14 Trading on SASE 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

15 Trading schedule

16 Basic order types on SASE 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 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: KM) Protects large investors from adverse price movements on the market

17 SASE Trading Workstation

18 Market Watchlist

19 All Symbols

20 All Symbols

21 Market by Order Overview

22 Market by Order Overview Market by Order: single orders are shown

23 Market by Price and Trades

24 Market by Price and Trades Market by Price: Aggregate offering / demand at prices is shown

25 Order entry mask

26 Price protection mechanism 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

27 Graphical representation

28 After the trade - Clearing & Settlement 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

29 Market segmentation PRIME MARKET Company shares Prime market - Continuous trading - Static limits: -5/+10% - Dynamic limits: +/-3% Closed Invetment Fund shares State (Entity) & Corporate Bonds

30 Market Segmentation FREE MARKET Primary Free market Continous trading; - 10/+15% static limits; Most liquid 30 securities Free market (Dynamic limits:+/-3%) Secondary Free market Tertiary Free market Auction trading / 2 daily auctions; -20/+30% static limits Auction trading / 1 daily auction; +/-5% static limits; No issuer information available Auction trading / 1 daily auction; no static limits Bankruptcy market Bankruptcy proceedings started

31 Listing Requirements Prime Market 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 KM Minimal share-class value of 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)

32 Listing Requirements Free Market 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 /semiannual 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

33 After the break... Introduction to Valuation Feđa Krivošić, SASE Price of stock = HOPE / FEAR - GREED

34 LOGO THANK YOU FOR YOUR ATTENTION!

35 Interesting literature 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 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

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