Interconnection Trading System
Warrants, Certificates and other products
MARKET MODEL DESCRIPTION
January 2015
S.I.B. Market Model Warrants, Certificates and Other Products.
TABLE OF CONTENTS
1.
INTRODUCTION ________________________________________________________ 4
1.1. Background ______________________________________________________________ 4
1.2. Institutional market configuration ____________________________________________ 4
1.3. Market model structure _____________________________________________________ 4
2.
PRODUCTS _____________________________________________________________ 6
2.1. General product description _________________________________________________ 6
2.2. Warrants _________________________________________________________________ 6
2.3. Certificates _______________________________________________________________ 8
2.4. Turbos / Turbos Pro _______________________________________________________ 9
2.5. Bonus / Bonus Cap _________________________________________________________ 9
2.6. Inlines ___________________________________________________________________ 10
2.7. Discounts ________________________________________________________________ 10
2.8. StayHigh / StayLow _______________________________________________________ 11
3.
MARKET PHASES AND SCHEDULES _____________________________________ 11
4.
MARKET SEGMENTS ___________________________________________________ 11
4.1. Main Market_____________________________________________________________ 12
4.2. Blocks __________________________________________________________________ 12
4.3. Special Trading __________________________________________________________ 13
5.
ORDER TYPE __________________________________________________________ 13
5.1. Standard order type _______________________________________________________ 13
5.2. Quote Order _____________________________________________________________ 14
6.
PRICE UNITS (TICK SIZE)_______________________________________________ 15
7.
AGENTS INVOLVED IN THE MARKET ___________________________________ 15
7.1. Issuers __________________________________________________________________ 15
7.2. Brokers-dealers, brokers and financial institutions _____________________________ 16
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S.I.B. Market Model Warrants, Certificates and Other Products.
7.3. Specialists _______________________________________________________________ 16
8.
BASIC TRADING RULES ________________________________________________ 17
8.1. Open market. Basic trading rules ____________________________________________ 17
8.2. Auctions. Equilibrium price fixing rules ______________________________________ 17
9.
VOLATILITY AUCTIONS AND PRICE RANGES ___________________________ 18
9.1. Volatility auctions ________________________________________________________ 18
9.2. Dynamic Price and Dynamic Range __________________________________________ 19
10.
INFORMATION DISSEMINATION ______________________________________ 19
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S.I.B. Market Model Warrants, Certificates and Other Products.
1. INTRODUCTION
1.1. Background
On 11 November 2002, the SIBE (Spanish Stock Exchange Interconnection System)
introduced the Warrants, Certificates and Other products module to admit financial products
different to those traded on SIBE before this date, as described briefly in this document. Securities
that began to be traded under the new module came from the Fixed-Income system of the Madrid
Stock Exchange, where they had been traded up to then.
The launch of the Warrants, Certificates and Other products module is due to the growing
demand for these products in Spain and in Europe, and the request of issuers that work in Spain
for a dynamic, flexible and technically solid market designed specifically for these products in our
country.
1.2. Institutional market configuration
The institutional configuration of these Warrants, Certificates and Other products market
does not differ to the traditional stock market in its main stakeholders. As with this latter market,
the Warrants, Certificates and Other products market is part of the Stock Exchange
Interconnection System (S.I.B.).
The institutional structure is constituted by traditional stock market stakeholders (market
participants under the form of Securities Brokers, Brokers/Dealers and Financial Institutions) as
well as two essential figures of this new module: Issuers and Specialists
1.3. Market model structure
This document is divided into different sections with the intention of providing a view of
the new module implemented in the S.I.B for Warrants, Certificates and Other products as a
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whole. Below you will find a description of the section content in the order that they appear in this
document:
•
The first section named PRODUCTS gives a general view of how the different
asset types included (or that may be included) in this module work with a
description of some basic concepts of the same in relation to Warrants, Certificates
and Other products.
•
MARKET PHASES AND SCHEDULE describes the trading phases that this
module has during a session and how it is structured. You will also find the current
schedules for each stock exchange within the specific Warrants, Certificates and
Other Products module.
•
In MARKET SEGMENTS, the trading of each module segment is specified and
the characteristics of each market segment are described, namely: main market,
blocks and special trading.
•
ORDER TYPE describes the type of orders that may be entered in the system.
There is also a specific section for quote orders.
•
PRICE UNITS (TICK) clarifies what the minimum price variation is for securities
traded in this module.
•
AGENTS INVOLVED IN THE MARKET provides an unexclusive classification
of the main stakeholders involved in this module in its various phases. It
particularly goes into detail in the role that Issuers and Specialists play in this
market.
•
BASIC TRADING RULES section explains in detail the rules that govern the
market distinguishing between two very different periods: the auctions
(equilibrium price fixing rules) and the open market (basic trading rules).
•
VOLATILITY AUCTIONS AND PRICE RANGES is the section that explains
price variation management based on volatility auctions and price ranges. The basic
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S.I.B. Market Model Warrants, Certificates and Other Products.
concepts of this management are defined
•
INFORMATION DISSEMINATION explains the specialized information flow
content provided in detail taking into account that this is an anonymous market
(the information on the buyer and seller is not disclosed in order book or in trade
log).
2. PRODUCTS
2.1. General product description
The Warrants, Certificates and Other products module is designed in order to incorporate
various financial product types that have in common their evolution and valuation linked to an
underlying asset that may be a share, an index, a basket of shares or indexes, raw materials,
exchange rates or interest rates among others. Similarly, these products usually have an expiration
date. In addition, they are all traded, cleared and settled like shares. The features of each
individual product are defined in the following sections:
2.2. Warrants
A warrant is a tradable security issued by an institution1 for a time period that gives the
right (and not the obligation) by paying a price to buy (call warrant) or to sell (put warrant) a
specific amount of an asset (underlying asset) at a specified price (strike) over the duration of its
life or on its expiration date depending on its style. From this short definition, some basic
concepts are taken and defined as follows:
•
Time period: This refers to the warrant’s expiration date, which indicates the date
from when the warrant no longer exists. The expiration date may or may not
1
The institution that issues the warrant is the Issuer which will be discussed in more detail in the section called “Agents involved in the
market”.
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S.I.B. Market Model Warrants, Certificates and Other Products.
coincide with the warrant’s last trading day in the Stock Exchange Interconnection
System.
•
Warrant price: This is the premium, that is to say, the effective price on what
trades are executed on the Stock Exchange Interconnection System. The premium
will be closely tied to the price evolution of the underlying asset related to the
warrant.
•
Call warrant: this is a purchase warrant, that is to say, it gives the right to buy the
underlying asset.
•
Put warrant: this is a sales warrant, which gives the right to sell the underlying
asset.
•
Ratio: This is the number of underlying asset units that a warrant gives the right to
buy (call) /sell (put)2.
•
Strike: Established by the Issuer, it is the price at which the holder has the right to
buy (call) / sell (put) the underlying asset at the time of exercising the warrant3.
•
Style: A warrant can be American-style or European-style. If the warrant is
American, it may be exercised during the warrant’s life. On the other hand, if it is
European, it can only be carried out on the warrant’s exercise date.
Previously, in the paragraph on warrant price, we said that the premium evolution is
closely linked to the underlying asset price. Below, and without going into exhaustive detail, we
have illustrated how to relate the investor’s position in relation to risk in accordance with his/her
expectations on the future evolution of the underlying asset price, basically taking into account
whether it is a call warrant or a put warrant.
2
There is also the reverse concept, called Parity: number of warrants necessary for the right to buy (call) / sell (put) a specific number of
underlying assets.
3
Exercising a warrant is when the warrant holder exercises his/her right to buy (call warrant)/ sell (put warrant) the underlying asset that the
warrant refers to. Exercising a warrant involves its settlement, either by physical delivery of the underlying asset or cash (in euro). The S.I.B.
applies the latter method.
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S.I.B. Market Model Warrants, Certificates and Other Products.
Buyer warrant call
Seller warrant call
Profits ( + )
Profits ( + )
Underlying asset price
Premium
Premium
Underlying asset price
(1)
Losses ( - )
Losses ( - )
Buyer warrant put
Seller warrant put
Profits ( + )
Profits ( + )
Underlying asset price
Premium
Premium
Losses ( - )
Underlying asset price
Losses ( - )
The above graphs, well known in basic literature on options, are easy to read and we will
only look at the following example:
Specifically, a call warrant buyer (first graph) pays a premium to buy the warrant (a right
that when exercised means acquiring the underlying asset). Premium payment is shown in the
graph as a loss (in the sense that it is an expenditure for the buyer). As the underlying asset
increases higher than the exercise price, the call warrant holder is in a more advantageous position
(his/her profits are increasing) as s/he has the right to buy the underlying asset at the exercise
price which is lower than the price that this underlying asset is trading at in the market
(graph (1)
price).
2.3. Certificates
Certificates authorize their holder to receive from the issuer on the settlement date a
determined amount on the certificate nominal value in accordance with the underlying asset
variation. Specifically, the holder directly assumes the profit or loss in accordance with the
underlying asset evolution.
Given the certificate’s nature, it is based on an initial underlying asset price and in
accordance with its evolution; the returns to be obtained for the certificate are produced upon its
expiration date or on the exercise dates.
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S.I.B. Market Model Warrants, Certificates and Other Products.
The final returns on certificates depend on the investment strategy and performance of the
underlying asset.
2.4. Turbos / Turbos Pro
Turbo Warrants may have early termination in relation to the expiration date established in
the issue conditions. The early termination possibility is determined by a barrier level. When the
underlying asset price reaches or exceeds the barrier level, the Turbo Warrant is terminated early
(knocked-out).
In the case of Turbo Call warrants, early termination is produced if the Underlying Asset
level is “less than or equal to” the barrier established in the issue conditions.
In the case of Turbo Put warrants, early termination is produced if the Underlying Asset
level is “more than or equal to” the barrier established in the issue conditions.
When the aforementioned conditions are met, Turbo Warrants terminate early without any
value and are delisted.
Taking the previous information into account, Turbo Warrants are characterized by high
leverage that is reflected in the premium level (or Turbo Warrant price). Similarly, its price
evolution is mainly determined by the underlying asset price evolution and not so much by its
volatility or expiration term.
Within this same product category, we also find the so-called ‘Turbo Pro’. These
incorporate two thresholds (knock-in barriers) that form an activation price range. Therefore,
Turbo Pros will remain inactive in the market until the level of the underlying asset trades within
the mentioned range. Once activated, Turbo Pros act as any other Turbo.
2.5. Bonus / Bonus Cap
Bonus warrants offer the performance of its underlying asset and, as long as the level of
the latter does not reach a determined lower barrier during the lifecycle of the product, the issuer
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S.I.B. Market Model Warrants, Certificates and Other Products.
guarantees a minimum selling price or ‘bonus’. Therefore, if the level of the underlying asset
reaches this lower barrier, then the Bonus Warrant loses its ‘bonus’ guarantee but remains active
on the market.
Within this same product category, we also find the so-called ‘Bonus Cap’. These
incorporate a limit to the potential upside performance of the product that is placed at the same
level of the ‘bonus’ guarantee, whether it is still active or not at its expiration date.
2.6. Inlines
This type of warrant grants the right to receive a fixed amount of money on the expiration
date, assuming that the value of the underlying asset is still within the limits or established
barriers.
Inline warrants have both an upper and lower barrier between which the underlying asset’s
price must stay during its lifecycle. If the underlying asset’s price touches either of the barriers,
the inline warrant will expire automatically without value.
2.7. Discounts
The Discounts are investment products, with the characteristic of offering a maximum
return calculated from the difference between the upper and lower barriers. They can be either
bullish, Call Discount, or bearish, Put Discount.
The Call Discounts offer a maximum yield when the level of the underlying asset is equal
or higher than the upper barrier on the maturity date, or whenever it has remained above the lower
barrier during the entire life of the product. If it breaches the lower level the product will remain
active in the market but it will no longer deliver the maximum yield unless the first previously
described circumstance occurs. If at maturity the underlying asset is below the lower barrier, the
Discount would be worth 0.
The Put Discount has a similar behaviour but in reverse.
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S.I.B. Market Model Warrants, Certificates and Other Products.
2.8. StayHigh / StayLow
The StayHigh and StayLow Warrants incorporate a mechanism of knock-out that offers
the holder of the product a potential settlement of 10 Euros:
• The holder of the StayHigh will receive the maximum settlement if during the life of the
product the price of the underlying asset is above the lower barrier predetermined. The warrant
will be deactivated if the price of the underlying asset reaches the lower barrier, in which case its
value will be 0.
• The behaviour of the StayLow is similar but in the opposite direction. The holder of the
warrant will receive the maximum settlement if the price of the underlying asset is below the
upper barrier. In case it exceeds this upper barrier, its value will be 0.
3. MARKET PHASES AND SCHEDULES
Market phases in an ordinary session are structured from the Continuous Trading (its
schedule is from 09:00 to 17:30) during which there may be Volatility Auctions (one or several
securities) that originate from the actual market (depending on prices introduced in the market4) or
those exceptionally generated from the Supervision Department if deemed necessary due to
circumstances of a security or group of securities. On the other hand, during the same schedule as
Continuous Trading, (from 09:00 to 17:30) blocks can be executed under a specific segment. In
addition to this Ordinary session period, there is the Special Trading5 phase that occurs from
17:40 until 20:00.
4. MARKET SEGMENTS
The market is made up of three segments: the main market, blocks and special trading.
4
See section: “Volatility Auctions and Price Ranges” for a detailed explanation of the original of Volatility Auctions in accordance with the
dynamics of the order book itself.
5
For a more detailed explanation of the type of trading dealt with during this period, see the following section called “Market Segments” in
the section corresponding to Special Trading.
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S.I.B. Market Model Warrants, Certificates and Other Products.
4.1. Main Market
The Main Market is the general trading segment. This deals with carrying out ordinary
trading and it is structured by the order book that is continuously updated in accordance with
order entries, trades, modifications and cancellations.
It is in this Main Market where, as we said in the previous section, there is a continuous
trading period that may be temporarily interrupted by Volatility Auctions on one or several
securities. It is also where the official trading prices pronounced by Sociedad de Bolsas are
ultimately agreed.
In the Main Market during the open market period, the order book is public (the best bid
and ask prices can be seen) however it remains anonymous (neither buyer nor seller participating
in each side can be identified nor the trades that take place). With regard to auction periods, the
order book only shows the balance price calculated at all times.
The open session ends without auction at 17.30, being the closing price of the session the
midpoint between the best bid and ask positions held by the specialist of the security, rounded up.
In the absence of these positions or if the closing price is outside the security’s dynamic range or
the security is suspended from trading, the closing price shall be the price of the last trade in the
session. In the absence of the above, the closing price shall be the reference price of the session.
4.2. Blocks
This segment deals with the execution of fixed price trading of a high number of
securities. The justification of this segment is based on the opportunity of negotiating large
volumes with a maximum percentage deviation on market prices, thereby avoiding market price
distortion of the security in question.
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Nevertheless, the blocks (trades or cross trades of a large number of securities) have
certain price and volume conditions that need to be followed for their execution6. Specifically,
they need to reach minimum 50,000 euro. With regard to price requirements, the price range that
the block can be executed on is the maximum and minimum limit marked by the dynamic range in
relation to the current dynamic price of the security in question at all times.
4.3. Special Trading
The special trading segment has a schedule that runs from 17:40 to 20:00. During this
period, trades (or cross trades) are executed at a set price and they may be Communicated or
Authorized7. As with block execution, special trading needs to meet price and volume
requirements for their execution8, although these requirements are different to those for the block
segment.
5. ORDER TYPE
5.1. Standard order type
The Warrants, Certificates and Other products module only allow limit orders.
•
Limit orders: on the open market, these are orders to be executed at their limit price or
better. Buy orders are executed at this price or at a lower price on the opposite side of
the order book. Ask orders are executed at their limit price or at a higher price on the
opposite side of the order book.
These orders allow:
6
An additional requirement for a block to be executed is: at the time of the execution the security cannot be in auction, suspended or
interrupted.
7
The difference between the two trading types is that while those Communicated only need to be within certain price and volume
parameters. The Authorized trading requires authorization from the Trading and Supervision Commission on the basis of documentation
provided by the participants intervening in that trade.
8
The applicable regulation on special trading is contained in the Circular 1/2001 of Sociedad de Bolsas (“Operating regulations of the Stock
Exchange Interconnection System”).
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-
To express the wish to trade up to/ from a certain price.
-
To execute an order against existing orders on the market at a price that is not
worse than the limit price and to leave the rest on the market at the limit price.
These orders may be entered both on the open market and during auctions.
Limit orders, on the open market are executed at the best opposite-side prices on the
order book (provided that these prices are equal to or better than the price of the
incoming limit order). Once in the order book, the limit order is always executed at its
limit price (unless it is included in an auction and the auction price is better than its
limit price).
They all have a one day validity period, so they are all valid until the end of the session
that is taking place. This means that non-traded or partially traded orders are automatically
removed from the system after the session ends.
With regard to the trading capacity, there is a difference between acting on its own
account, as an agent for a customer or as a market specialist.
5.2. Quote Order
The quote order is an instrument provided to the specialists so that they can give liquidity
to the market more easily and efficiently than through simple orders.
The SMART quote order is made up of two individual orders, each one with its own
identity.
Each user may only have one quoted order active per security.
Quoted orders can be traded at all times against simple orders and may activate auctions
just like any other order.
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6. PRICE UNITS (TICK SIZE)
Price units or tick size (minimum variation between two different prices on the same
security) in the Warrants, Certificates and Other products module is 0.01 euro irrespective of the
price that the security has. Any price expressed with maximum 4 whole and 2 decimal numbers is
accepted.
7. AGENTS INVOLVED IN THE MARKET
There are several types of agents involved in this market, particularly if we look at the
different market stages, starting when a new security is issued until a trade is crossed on it. We
can make three main categories of agents in accordance with the functions that each one does:
•
Issuers.
•
Brokers-dealers, brokers and financial institutions
•
Specialists.
All of these agents are subject to supervision, inspection and control by the Comisión
Nacional del Mercado de Valores (CNMV) in everything related to securities market
performance. The CNMV is the public agency whose purpose is the regulation, supervision and
inspection of the securities market and of the activities of all individuals and legal entities that
participate in it.
7.1. Issuers
Issuers provide the securities that will trade in the Warrants, Certificates and Other
products module once authorized by CNMV provided that all formal requirements are met.
In fact, a warrants issue often includes several securities (they can exceed 500) and it
needs to pass several legal requirements before being listed:
1. Issue notification to the CNMV.
2. Previous delivery and registration of documents accrediting issue agreement,
characteristics of securities to be traded, and holders’ rights and obligations.
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3. Verification and registration of issuer’s audited annual reports and prospectus on
projected issue.
7.2. Brokers-dealers, brokers and financial institutions
Brokers-dealers, brokers and financial institutions are the traditional participants in the
equity markets of the Spanish Stock Exchanges Governing Bodies.
These market participants are the link that the final investor can use to enter orders in the
SMART platform. The main difference between these institutions is that brokers can only trade on
behalf of third parties while broker-dealers and financial institution can trade on behalf of third
parties and on their own behalf.
7.3. Specialists
The Specialists carry out an essential role in the Warrants, Certificates and Other products
module, especially regarding the daily quotation of bid and ask prices and volumes. Each security
is required to have a specialist and there can only be one specialist per security.
With regard to the role of these Specialists, it is necessary to point out that while this
module is similar in its trading method to the typical order book, being an order-driven one, its
liquidity is guaranteed by these Specialists in such a way that this order book is complemented
with their role. On the other hand, as previously mentioned, these Specialists have a new dynamic
and simple tool for quoting bid and ask prices on the market: the quoted order. The Specialists
must comply with the applicable regulation on specialists at all times9.
9
The applicable regulation on specialists in the Warrants, Certificates and Other products modules is contained in the Circular 1/2002 of
Sociedad de Bolsas (“Operations Regulations of the negotiation segment of Warrants, Certificates and Other products in the Stock Exchange
Interconnection System”) and in the Trading Instruction No. 53/2002 (“Special presence parameters in the negotiation segment of Warrants,
Certificates and Other products”). To be concise, the regulation speaks about requirements for maximum range, minimum effective amount
and reaction time.
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8. BASIC TRADING RULES
8.1. Open market. Basic trading rules
During the open market, orders are entered, modified and cancelled; and when applicable
traded.
The open market situation in the Warrants, Certificates and Other products module is
going to be the most usual situation (unless there is an extremely volatile situation where many
volatility auctions take place on several securities or there is an auction on a determined security
for exceptional reasons). During this period, there are several basic rules to follow (same as in the
equity market) and these are summarized in the following points:
•
Price-time priority of orders: orders with the best price (highest bid and lowest ask)
have priority in the book. When prices are the same, those orders entered first have
priority.
•
Best opposite side price: orders entered in the system are executed at the best opposite
side price. In other words, a buy order which can be executed will do so at the price/s
of the first order/s on the sell side of the order book. Equally, an ask order entered in
the system which can be executed at that moment will be executed at the price/s of the
first order/s on the buy side of the order book. In addition, it is necessary to point out
that orders may be fully executed (in one or several trades), partially executed, or may
not be executed. Therefore, each new incoming order may generate several trades.
8.2. Auctions. Equilibrium price fixing rules
Auctions are periods when orders are entered, modified and cancelled but trades do not
take place until the end of this auction. During this period, and in real time, an equilibrium price is
calculated in accordance with the supply and demand leading to trades at the end of the auction at
the last equilibrium price calculated (securities allocation).
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With regard to equilibrium price fixing rules that govern in auctions, there is no difference
to those that govern the equity market, and they are established in accordance with the following
four rules:
1) The price that would produce the trade of the highest number of securities is chosen.
2) If there are two or more prices at which the same number of securities can be traded,
the auction price shall be that which leaves the smallest surplus. The surplus is defined as the
difference between the volume offered and the volume in demand to be traded at the same price.
3) If the two above conditions are met, the price on the side with higher volume (more
weight) will be chosen.
4) If the three above conditions are met, the one closest to the last one traded will be
chosen as the auction price. In the event that this price is within the auction potential price range
(highest and lowest limit), the last one traded will be taken. If there is no last price, or it is not
within the price range of the dynamic range, the price closest to the reference price will be taken
as the last price.
9. VOLATILITY AUCTIONS AND PRICE RANGES
9.1. Volatility auctions
The duration of Volatility Auctions in the Warrants, Certificates and Other products
module is 5 minutes plus a random end of 30 seconds during which the auction ends at any time
and without prior notice, and the securities allocation process takes place (cross trading at the
equilibrium price in the auction sale). If upon market closing, there is one or several securities in
auction, the system will automatically allocate them at session closing (17:30).
Volatility Auctions will take place due to dynamic range rupture.
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9.2. Dynamic Price and Dynamic Range
In the Warrants, Certificates and Other products module, only a range type called dynamic
is established.
At the start of the session, the updating of the dynamic price with which the dynamic
range is applied is regarding the reference price. During the session, the dynamic price and range
is applied regarding the last price traded; whether the execution of the incoming order is in the
open market or the result of a volatility auction.
The dynamic range is defined as the maximum variation permitted (symmetric) with regard to the
dynamic price and it is expressed as a percentage.
•
For warrants, the dynamic range levels are determined by the warrant price as follows:
Securities with price less than 0.10 euro: 500%
Securities with price more than or equal to 0.10 euros and less than or equal to 1.00 euro: 50%
Securities with price more than 1.00 euro: 15%
•
In the case of certificates and Structured Bonds, the range will be 15%.
•
For Turbo warrants, the dynamic range applicable will be 500%.
•
For Other products, the dynamic range applicable will be 500%.
The Volatility Auction takes place when there is an attempt to trade a security outside of
the limits defined by the dynamic price range.
If the price from a volatility auction is not within the dynamic range, the auction will be
automatically extended and the Supervision Department will be in charge of taking the necessary
measures to resolve the matter.
10. INFORMATION DISSEMINATION
The SMART platform that supports the Warrants, Certificates and Other products module
disseminates detailed information in real time, both trades that are going on and the system’s
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order book.
In this way, this information flow informs the recipient institutions of each trade that is
taking place in the market in real time and of the order book evolution during the session.
The following content is offered:
•
Trades: a message is issued each time there is a trade in the system. Information regarding
the price, volume and trade time is given (buyer and seller of this trade do not appear).
•
Order Book: a message is issued each time there is a change in the best five (5) bid and/or
ask positions.
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