1.2 The essence and significance of the stock market
With this view, the entire stock market can be divided into:
- The latter, in turn, is divided into
- Exchange or organized and
The primary market is the market for the initial placement of securities. It covers the very first issues of securities and partly the following new issues of old securities. It is on the primary market that enterprises receive funds from the placement of shares and bonds and finance their production process. There are open placement and closed.
Private placement is the placement of securities among a previously known circle of investors at a price agreed in advance with them.
Open or public offering (unlike a closed one) in principle allows you to purchase placed securities to any investor. Such placement is available only for companies organized in the form of OJSC (Open Joint-Stock Company). The company can post its new share issues as many times as possible by closed subscription, but the company’s first public offering (IPO, initial public offering) is once in a lifetime. It usually precedes the plans to withdraw the company’s securities to the exchange market. To organize the public placement of securities, companies are attracted by investment advisers and underwriters, who undertake the organization of the issuer’s representation to a wide range of investors and the placement of its securities.
The secondary market of securities is intended for redistribution of rights to the share of property or debts of the issuer. The issuers themselves in the secondary market do not receive any financing.
The central place in the stock market is the stock market. On the stock exchanges are the most significant turnover of trading. OTC market plays a supporting role in the stock market of the state. Usually in the over-the-counter market, securities that are not traded are traded. These are low-liquid securities of new or regional companies, the demand for which is not so great that the issuer was interested in organizing their exchange circulation. Transactions on the over-the-counter market are made directly between the buyer and the seller. Accordingly, there is a risk of non-payment on the stock exchange and the risk of non-payment, which reduces liquidity and increases transaction costs. So, the exchange is the most convenient place for conducting operations with securities. The members of the stock exchange or members of the relevant section of the exchange directly enter the stock exchange. Such members can only be licensed participants of the stock market, namely: brokers and dealers, as well as banks that have broker licenses or a dealer. Thus, the investor gets access to the exchange through an intermediary – a broker. It is the broker who is responsible to the exchange for possible consequences of illegal actions of its customers, leads their investment accounts and gives them the opportunity to make stock transactions for commission.
Consider the typical organizational structure of a modern electronic exchange. Under the electronic exchange, we mean an area where all bids for bids are received via closed electronic communications systems, rather than by open screaming, and immediately find a display in the trading system. So, the stock exchange should have in its composition:
1) The actual trading system, where orders for purchase and sale are accumulated, their “pairing” occurs in case of a price coincidence, i.e. registration of transactions themselves with various instruments and records in the relevant accounting registers.
2) The settlement (clearing) chamber, which keeps track of the money of bidders, delivers money for each transaction to sellers of securities and writes off money from buyers’ accounts, performs external and internal money transfers,
3) the Depository Center, which, like the clearing house, keeps records securities of bidders, carries out the delivery of securities to the accounts of buyers, writes off the securities from the accounts of sellers, carries out securities clearing by the results of trades in authorized depositories.
All these operations are performed by the exchange automatically. This allows modern investors to carry out a number of transactions on their accounts during the day.
Another important role played by an organized stock exchange is to ensure the liquidity of securities.Liquidity is the ability to quickly or without significant overhead to sell or buy a security. Due to the large number of bidders and a large number of securities traded and bought simultaneously, the liquidity of securities can be quite high. A measure of liquidity is the difference between the best purchase price and the best selling price, referred to the average of these two prices.
The Exchange provides liquidity conditions for each specific paper in two ways: reasonable tariff policy, which attracts private investors, and the establishment of an institute of market-makers. A market maker is a bidder who, by agreement with the exchange, must maintain the difference in purchase prices-sales of no more than a certain amount. For this, the market maker receives from the exchange the possibility of making transactions on preferential terms with securities that he supports (reduced commissions or their complete absence).
1.3 Russian and Western stock exchanges
In this section, we want to show, on the example of four specific exchanges, the general principles of the exchange trading system and some specific differences. The Moscow Interbank Currency Exchange (MICEX) will be considered in more detail.
Differences between exchanges and trading floors are insignificant and erased as the market develops.
Let’s start with the oldest global trading platform – the New York Stock Exchange (New York Stock Exchange, NYSE, www.nyse.com). This is an example of a stock exchange, trades on which are supported by so-called specialists. A specialist is a bidder who monitors the course of trading on a specific paper for which he is responsible. One specialist is assigned to each paper. And the expert himself can work with several papers and be responsible for them. The primary duty of a specialist is to ensure the liquidity of this paper by maintaining bilateral quotations and executing transactions on these quotes. The specialist assumes the obligation to maintain the spread (the difference of quotations for sale and purchase) at a level not more than certain. If there is no one willing to sell the paper, then the specialist must display and keep the offer for the sale of securities. If there are no people willing to buy paper, then the specialist is obliged to put up and keep an offer for the purchase of securities. Thus, on the stock exchanges organized according to the principle of work of experts, trade participants see only the tip of the iceberg. Namely: the highest bid price (bid, bid price, demand price) and the size of the purchased lot (bid size) on the one hand, as well as the lowest price for the sale (ask, offer, ask price, bid price) and the size of the sold ask size on the other. In addition, information is available on the prices and volumes of recent transactions. price of demand) and the size of the purchased lot (bid size) on the one hand, as well as the lowest asking price (ask, offer, ask price, bid price) and the size of the sold lot (ask size), on the other. In addition, information is available on the prices and volumes of recent transactions. price of demand) and the size of the purchased lot (bid size) on the one hand, as well as the lowest asking price (ask, offer, ask price, bid price) and the size of the sold lot (ask size), on the other. In addition, information is available on the prices and volumes of recent transactions.
Consider another example of an organized trading platform – NASDAQ. This is an example of the so-called dealer market. There is no single specialist for each traded paper. Instead, there are market makers and dealers. The duty of the dealer – the market maker – is to maintain bilateral quotes. Accordingly, such a participant must be present on the market for each paper, where he is listed as a market maker. This means that the market maker is obliged to quote quotes for a purchase or for sale, and if another market participant appeals to him with a proposal to carry out a deal on declared terms, then the latter simply must do it. In the electronic system NASDAQ, therefore, not only the best offers on any paper are seen, but the whole depth of the market, that is, in general, all offers for purchase and sale, as well as the name of the dealer, who put forward every concrete proposal. The deals themselves can be concluded both by telephone and by electronic system, with which each market maker is connected. Only NASD members can participate in the auction, and when the broker’s client wishes to make a deal in such a system, his broker either issues a client’s application for the market on his own behalf (in the case of a limited bid) or makes a deal with another bidder (in the case of a market order ). The dealer market is best suited to market requirements in the case of low-liquid stocks and low trading volume. However, with an increase in the number of bidders and the volume of transactions they make, it becomes inefficient compared to the specialist market. Only NASD members can participate in the auction, and when a broker’s client wishes to make a deal in such a system, his broker either issues a client’s application for the market on his own behalf (in the case of a limited bid) or makes a deal with another bidder (in the case of a market order ).The dealer market is best suited to market requirements in the case of low-liquid stocks and low trading volume. However, with an increase in the number of bidders and the volume of transactions they make, it becomes inefficient compared to the specialist market. Only NASD members can participate in the auction, and when a broker’s client wishes to make a deal in such a system, his broker either issues a client’s application for the market on his own behalf (in the case of a limited bid) or makes a deal with another bidder (in the case of a market order ). The dealer market is best suited to market requirements in the case of low-liquid stocks and low trading volume. However, with an increase in the number of bidders and the volume of transactions they make, it becomes inefficient compared to the specialist market. The dealer market is best suited to market requirements in the case of low-liquid stocks and low trading volume.However, with an increase in the number of bidders and the volume of transactions they make, it becomes inefficient compared to the specialist market. The dealer market is best suited to market requirements in the case of low-liquid stocks and low trading volume. However, with an increase in the number of bidders and the volume of transactions they make, it becomes inefficient compared to the specialist market.
The analogue of the NASDAQ dealer market in Russia is the RTS stock exchange (Internet address: http://www.rts.ru). Initially, the RTS was positioned as a trading system. Today, the RTS Stock Exchange is the most dynamically developing stock market platform. In addition to the main “section” of the actual trading system of the RTS, which has been preserved since the old times, trade is also being conducted on other sites. It:
- a section of guaranteed quotations of RGCs of the RTS, where there is exchange trading on the most liquid corporate securities,
- section of the FORTS derivatives market, where futures and options are traded on securities of leading Russian issuers and major stock indices,
- the trading section of bonds RTS Bonds, and finally,
- a joint project of the RTS and the St. Petersburg Stock Exchange – the organization of trading in shares in RAO Gazprom.
In the main section, bidders display quotes and conclude deals on shares, choosing the settlement currency and the way of performance of obligations. As a rule, the delivery of securities to the buyer occurs on the third day after the conclusion of the transaction, although options are possible, when the re-registration of securities lasts two weeks or more. The main players here are dealers and market makers, whose clients are large Western funds and institutional investors. The basic currency of the transaction price is the US dollar. Settlements for transactions also take place mainly in US dollars, but can also take place in rubles of the Russian Federation. A small private investor in this market has nothing to do. The large size of traded lots and significant overheads make its presence here economically unprofitable. In addition, this site is not available for online trading.
In the section of the RTS SHG, trade is conducted with smaller lots. Here, calculations are made only in national currency. The use of the electronic system ensures the immediate conclusion of transactions, and the RTS Clearing Center guarantees their execution, since the mandatory full deposit of cash and securities with the Settlement Bank and the Settlement Depository has been introduced. Trading in RTS СГК is carried out only under the securities entering into the list for СГК. The main disadvantage for private investors in trading in the SGC system is the limited list of securities available for trading, still large spreads between the prices of the buyer and the seller, and, accordingly, the low liquidity of the market. As an advantage over the stock section of the MICEX, which will be discussed below,
In the FORTS derivatives market section, there is trading in futures and options. The ability to trade via the Internet, open positions in both the long and short sides, as well as the opportunity to work with small amounts of collateral, made this site very popular among Russian speculators.
In the trading section of RTS Bonds, trade can be conducted by state, municipal, as well as corporate bonds and eurobonds.
Let us turn to the description of the largest Russian trading platform – the Moscow Interbank Currency Exchange (MICEX), whose server is located at http://www.micex.com. The MICEX is an example of another construction of the bidding mechanism. In addition, it is simultaneously the largest site for today, at which the most significant turnover of trading in shares takes place. By trading on the MICEX are connected regional currency exchanges, combined with the MICEX in a single interregional trading system. MICEX’s trading representatives in the regions are the St. Petersburg Currency Exchange (SPCEX), the Siberian Interbank Currency Exchange (UICE), the Ural Regional Currency Exchange (URVB), the Nizhny Novgorod Currency and Stock Exchange (NVSE), the Asia-Pacific Interbank Currency Exchange (ATMVB)
Providing the maximum possible guarantees for the execution of transactions is the main principle of the work of the exchange. Settlements on exchange transactions are made on the principle of delivery against payment through specialized organizations – the MICEX Settlement House (RP) and the National Depository Center (NDC), which performs clearing functions on securities. We have already touched on the role and functions of clearing and clearing houses in the previous section. Let’s just note that the principle of delivery versus payment means that when making transactions, the transfer of both cash and securities between the parties to the transaction occurs simultaneously.
In the MICEX trading system, there is both an institute of specialists and an institute of market-makers. All transactions are carried out automatically by executing matching pairs of applications. That is, if the system has an application for the purchase of 100 shares at a certain price and there is an application for sale, say 250 of the same shares at the same price, then they are executed in the same amount. In our example, 100 shares will be bought and sold, and in the trading system there will be an unfulfilled application for the sale of 150 securities. Priority in the execution of applications is the price (in the first place, orders are executed at a better price), and secondly, the time of the application. With equal prices, the application will be executed first, which was previously submitted.
Participants in trading on the MICEX, unlike, say, bidders on the NYSE, see the depth of the market, that is, the first ten best bids and the top ten bids for those with volumes that are bought and sold. In this case, unlike the trading system of the RTS or NASDAQ, participants are deprived of the opportunity to know who exactly is behind one or another application. Such a bidding system has a lot of advantages, but there are also disadvantages. In particular, if the paper is weakly liquid, then the purchase order may be in the trading system for a long time, and there is no guarantee that it will be executed.
And the last thing that is important to know when trading on the stock exchange is the concept of a lot of securities. Trade on any exchange site is carried out by lots of securities, that is, lots in multiples of a certain number. The standard lot includes 100 securities. But at a high price for paper, the lot can include 10 papers, and even one single paper.