SECONDARY MARKETS
CONTENTS
 Function
of Secondary Markets
 Trading Locations
 Market Structures
 Perfect Markets
There are actually two levels of the
capital markets in which investors
participate:
 Primary
Markets
 Secondary
Markets


Businesses and
governments raise capital
in primary markets ,
selling stocks and bonds
to investors and collecting
the cash.
In secondary markets,
investors buy and sell the
stocks and bonds among
themselves.The issuer of
the asset doesn’t receive
funds from the buyer.
Functions of Secondary Markets

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Provides regular information about the
value of security.
Helps to observe prices of bonds and their
interest rates.
Offers to investors liquidity for their
assets.
Secondary markets bring together many
interested parties.
It keeps the cost of transactions low.
TRADING
LOCATIONS
LONDON INTERNATIONAL STOCK
EXCHANGE
FRANKFURT STOCK EXCHANGE
PARIS BOURSE
TOKYO STOCK EXCHANGE
ISTANBUL STOCK EXCHANGE
MARKET STRUCTURES


Continuous markets, prices are
determined continuously throughout the
trading day as buyers and sellers submit
orders.
Call market, in which orders are batched
or grouped together for simultaneos
execution at the same price.A market
maker holds an auction for a stock at
certain times in the trading days.

Example:Given the order flow at
10:00,the market clearing price of a
stock may be $70; at 11:00 of the
same trading day, the market
clearing price goes up $80 with
different order flows.(example for
continous markets)

Example:London
gold bullion
market, which is a
call market, and
records prices set
at the ‘morning
fix’ and the
‘afternoon
fix’.These fixes
take place at the
two call auctions
which are held
daily.
PERFECT MARKET

In perfect market,
all buyers and sellers
are price takers and
market price is
determined at the
point that supply
equals demand.
FEATURES OF PERFECT MARKETS

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There are many buyers and sellers so that
no one individual can influence market
price.
Producers and consumers have perfect
knowledge of events in the market.
Firms and customers act individually to
maximize their position.
There are no barriers to entry or exit.
SECONDARY MARKET TRADING
MECHANICS
TYPES OF ORDERS
1-Market Orders
The simplest type of order is the market order,an order
executed at the best price available in the market.If more
buy orders and sell orders reach market at the same time,
the price can obtain.Buyers give priority offering lower price.
Sellers give offering higher price.
If there are more than one order at the same price.The
priority rule is based on the time of arrival of the order.
The danger of a market order is that an
adverse move may take place between the
time the investor places the order and the
time the order is executed.
2-Limit Orders
It designates a price treshold for the execution of
trade.It is a conditional order.
A buy limit order indicates that the security may be
purchased only at the designated price or lower.
A sell limit order indicates that the security may be
sold at the designated price or higher.
The danger of limit order is that it comes
with no guarantee it will be executed at all.
The designated price may not be obtainable.
3-Stop Order
Stop order specifies that the order is not be
executed until the market moves to a designated
price at which time it becomes a market order.
A stop order to buy specifies that the order is
not to be executed until the market rises to a
designated price.
A stop order to sell specifies that the order is
not to be executed until the market price falls
below a designated price.
Two dangers of stop order:
1-Security prices sometimes exhibit
abrupt price changes.
2-Stop order can be subject to the
uncertainty of the execution price.
4-Market if Touched Orders
This order becomes a market order if a designated
price is reached.However,a market-if-touched order
to buy becomes a market order if the market falls to
a given price.A market-if-touched order to sell becomes a market order if the market rise to a specified
price.
5-Time Specific Order
Orders may be placed to buy or sell
at the open or close of trading for the
day that is time specific orders.
6-Size Related Orders
For common stock,orders are also classified
by their size.
A round lot is typically 100 shares of a stock.
An odd lot is defined as less than a round lot.
A block trade is defined as an order of 10.000
shares of a given stock.
SHORT SELLING
Suppose that an investor expects that the price of a
security will decline and wants to benefit should price
actually decline.
WHAT CAN THE INVESTOR DO
The investor may be able to sell the security
without owning it.This practice of selling securities
that are not owned at the time of sale is referred
to as selling short.
A profit will be realized if the purchase price is
less than the price that the investor sold short the
security.
Tick test rules designate when a short
sale may be executed in order to prevent
investors from destabilizing the price of a
stock when the market price is falling.
A short sale can be made only when either
1-The sale price of the particular stock is
higher than the last trade price(It is
referred to as an uptick trade)
2-There is no change in the last trade price of
particular stock and the previous trade
price must be higher than the trade price
that preceded it.(It is referred to as a zero
uptick.)
What is Margin Transactions?


Investors can borrow cash to buy
securites themselves as collateral.
Mr. Brown
has
$ 10.000
borrowed
10.000
buy
500 shares
$
buy
500 shares

A transaction in which an investor
borrows to buy additional securities
using the securities themselves as
collateral is called buying on margin.
The funds borrowed to
buy the additional stock
will be provided by a
broker, and the broker
gets the money from a
bank. The interest rate
that banks charge
brokers for these
transactions is known as
the call money rate
(also called the broker
loan rate).
Margin requirements


The initial margin requirements is the
proportion of the total market value of
the securities that the investor must pay
for in cash.
Maintenance margin requirement is
the minimum amount of equity needed
in the investor’s margin account as
compared to the total market value.
Role of brokers
and dealers
in real markets
Brokers

A broker is an entity that acts on behalf
of an investor who wishes to execute
orders. In economic and legal terms, a
broker is said to be an “agent” of the
investors.

Brokers aid investors
by collecting and
transmitting orders
to the market, by
bringing wiilling
buyers and sellers
together,by
negotiating
prices,and by
executing order. The
fee for these service
is the broker’s
commission.
Dealers as market makers
Unmatched or unbalanced
flow causes two problems.
1. The security’s price may
change abruptly even if
there has been no shift in
either supply or demand
for the security.
2. Buyers may have to pay
higher than marketclearing prices if they want
to make their trade
immediately.

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The fact of imbalances explains the need
for the dealer or market maker, who
stands ready and willing to buy a
financial asset for its own account.
Dealers perform 3 functions in markets;
1.
They provide the opportunity for
investors to trade immediately
rather than waiting for the arrival
of sufficient orders on the other
side of the trade(“immediacy”) and
dealers do this while maintaining
short-run price stability
(“contunity”)
2.
3.
Dealers offer price information to
market participants
Incertain market structures, dealers
serve as auctioneers in bringing order
and fairness to a market.
What factors determine the price dealers
should charge for the services they provide?
(bid-ask spread)

One of the most important is the order
processing costs incurred by dealers.

Dealers have to be
compensated for
bearing risk. A dealer’s
position may involve
carrying inventory of a
security(a long position)
or selling a security that
is not in inventory(a
short position).
MARKET EFFICIENCY


Operationally efficient
market
Pricing efficient capital
market
OPERATİONAL EFFICIENCY
In an operationally
efficient market
investors can obtain
transaction services as
cheaply as possible
given the costs
associated with
furnishing those
services.

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Firstly United states exchanges
were forced to adopt a system of
competitive and negotiated
commissions.
France adopted a system of
negotiated commissions for large
trades in 1985.
İn 1986 London Stock Exchange
abolished fixed commissions.
PRICING EFFICIENCY

Pricing efficiency refers to a market
where prices at all times fully reflect
all available information that is
relevant to the valuation of
securities
EXPECTED RETURN
The expected return
=
EXAMPLE
initial price of share is 10 TL.
The end of the year share price will
be 12 TL.
Dividents of company is 1.50 TL.
The expected return = 1.50+2/10
3.5/10 = % 35 is rate of
expected return
THREE FORMS
In defining the relevant information set
that
prices should reflect. Pricing efficiency of a
market was classified in three forms.

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Weak efficiency
Semi-strong efficiency
Strong efficiency

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Weak efficiency : means that
price of the security reflect the past
price and trading history of the
securities.
Keen investors looking for profitable
companies can earn profits by
researching financial statements.


Semi-strong efficiency : means
that the price of the security reflects
all public information which includes
but is not limited to historical price
and trading patterns.
Meaning that neither fundamental
nor technical analysis can be used
to achieve superior gains.

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Strong efficiency : exists in a
market where the price of security
reflects all information whether or
not it is publicly available.
Not even insider information could
give an investor the advantage.
TRANSACTION COSTS

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Transaction costs consist of
commissions, fees, execution costs
and opportunity costs.
Commissios are the fees paid to
brokers to trade securities.


Fees are seperated two group
custodial fees and transfer fees.
Custodial fees are fees charged by
an instution that hold securities in
safekeeping for an investor.
EXECUTION COSTS

Execution costs represent the
difference between the execution
price of a security and the price that
would have existed in the absence
of the trade.
OPPORTUNITY COSTS

The cost of not transacting
represents an opportunity cost.
It may arise when a desired
trade fails to be executed. This
component of costs represents
the difference in performance
between an investor’s desired
investment and the same
investor’s actual investment
after adjusting for execution
costs,commissions and fees.
PREPARED BY
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HATUN AYDAN
HİLAL DURMUŞ
TUBA TEKİN
ALİ ÖNER