ADNEOM Benelux Financial Markets
Financial Markets 1 • Objectives of this training : • Introduction to Capital Markets • Introduction to financial products : bonds, stocks, options, futures, foreign exchange • Give bases to Fixed Income mathematics, statistics for finance, risk. • Introduction to the main legal side • Assets & Liabilities management • GOAL : understand how all those notions are working together • Application : understand the financial crisis • For beginner as we don’t have time to go deeper.
Financial Markets 1 : What is a Market? • History : • - First to exchange of goods • Need of centralization and control (taxes) • Role : • Stimulating and financing the economy • Ensuring capital liquidity (primary market, secondary market) • Measuring economic activity
Financial Markets 1 : What is a Market? The Concept of Market Law of supply and demand The Exchange is the place where supply meets demand
Financial Markets 1 : What is a Market? Market Efficiency At any given time, prices fully reflect all available information on a particular stock and/or market. Paradox : if markets were really inefficients, no speculation is possible. In fact markets are partially efficients.
Financial Markets 1 : What is a Market? • Types of Markets : Order driven or Price driven • OTC (Over The Counter) • Electronic platforms
Financial Markets 1 : What is a Market? The participants :
Financial Markets 1 : What is a Market? • Market Authorities : • Regulating the Market • Protecting the Investors • The Exchange : • Matches and records trades • Broadcast prices in real-time • The Clearing House : • Organize the settlements of the operations • Margins calls
Financial Markets 1 : What is a Market? • Market members and investors : • Buy side : investors • Sell Side : intermediaries
Financial Markets 1 : What is a Market? • Kind of asset management : • Traditionnal (banks, funds) : passive management • Hedgefunds : agressive management • Privatebanks : taylor made • Differencebetweensecurities and derivatives • Securitites = ownershipDerivatives = contractlimited in time • Securities = issued by the companyDerivatives = issued by anyone • Destruction of value Breakevengame • Cannotloose more than the price Can loose more than the price
Financial Markets 1 : What is a Market? • How to invest • Hedging = avoidloosing money by riskcoveringusing futures and options • Speculation = buying and reselling in assumption of a price trends. Short term • Arbitrage = takingadvantage of market anomalies. Hugeamounts for small profits • MarketMaking = contract to ensureliquidity on a market.
Financial Markets 1 : What is a Market? Market organization
Financial Markets 1 : What is a Market? • Front Office • Where the tradingtakes place • - Traders • - Sales • - Support (Financial analysts, Quants, IT) • Middle Office • Whereaccount allocation and risk management takes place • Back Office • Where administrative procedurestakes place (Settlement, accounting, payment, checking, etc.)
Financial Markets 1 : What is a Market? Terminology
Financial Markets 1 : What is a Market? • The Market’sOrderbook • 1 orderbook by instrument • Market depth : all pending orders • Market by limit • Best limits
Financial Markets 1 : What is a Market? Market rules Pre opening auctions : before the openning, fixes the opening price (fixing) Continuous trading : for liquid instruments Fixings : for less liquid instruments, 2 fixings per day Closing auctions : at the closing, fixes the closing price (5 to 10 minutes) Trading after closing : possibility of buying or selling at the closing price after the closing, during 5 or 10 minutes. Instruments suspension when something happens to the company Instrument freezing is a security procedure occuring when a value is increasing or decreasing too much. The quotation is freezed during 2 minutes.
Fixing Procedure • Remember : • The BuyLimit (bid) is the maximum pricethat the trader wants to buy • The SellLimit (ask) is the minimimpricethat the trader wants to sell
Continuous Trading Buy 100 at 125€
Financial Markets 1 : What is a Market? • Composition of an order • References : ISIN or Mnémonic of the instrument, quantity, side (sell or buy), clearing and client account • Type of price : limitorder, marketorder, atanyprice • Validity : All or None, Stop order (stop loss, stop limit) • Type of execution : DAY, GTD, GTC, FOK, FAK • Tactics • Iceberg, Stop Countdown, Market Phase, Linked instrument
Financial Markets 1 : What is a Market? List of Electronic market places
Financial Markets 1 : What is a Market? MIFID Markets in Financial Instruments Directive Opens the financial markets to the concurrence => new electronic platforms like Chi-X, Turquoise, Equiduct Allow in-house reconciliation Protect customers