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FINANCIAL MARKETS
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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.
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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
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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
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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.
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Financial Markets 1 : What is a Market?
Types of Markets : Order driven or Price driven
- OTC (Over The Counter)
- Electronic platforms
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Financial Markets 1 : What is a Market?
The participants :
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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
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Financial Markets 1 : What is a Market?
Market members and investors :
- Buy side : investors
- Sell Side : intermediaries
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Financial Markets 1 : What is a Market?
Kind of asset management :
- Traditionnal (banks, funds) : passive management
- Hedge funds : agressive management
- Private banks : taylor made
Difference between securities and derivatives
-
Securitites = ownership
Securities = issued by the company
Destruction of value
Cannot loose more than the price
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Derivatives = contract limited in time
Derivatives = issued by anyone
Breakeven game
Can loose more than the price
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Financial Markets 1 : What is a Market?
How to invest
- Hedging = avoid loosing money by risk covering using futures and options
- Speculation = buying and reselling in assumption of a price trends. Short term
- Arbitrage = taking advantage of market anomalies. Huge amounts for small profits
- Market Making = contract to ensure liquidity on a market.
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Financial Markets 1 : What is a Market?
Market organization
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Financial Markets 1 : What is a Market?
Front Office
Where the trading takes place
- Traders
- Sales
- Support (Financial analysts, Quants, IT)
Middle Office
Where account allocation and risk management takes place
Back Office
Where administrative procedures takes place (Settlement, accounting, payment,
checking, etc.)
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Financial Markets 1 : What is a Market?
Terminology
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Financial Markets 1 : What is a Market?
The Market’s Orderbook
1 orderbook by instrument
- Market depth : all pending
orders
- Market by limit
- Best limits
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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.
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Fixing Procedure
Remember :
- The Buy Limit (bid) is the maximum price that the trader wants to
buy
- The Sell Limit (ask) is the minimim price that the trader wants to
sell
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Continuous Trading
Buy 100 at 125€
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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 : limit order, market order, at any price
- 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
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Financial Markets 1 : What is a Market?
List of Electronic market places
Rank
Economy
1
2
3
4
5
6
7
8
United States
Europe
United States
Europe
Japan
United Kingdom
China
Hong Kong
Canada
India
9
India
10 Brazil
11
12
13
14
15
16
17
18
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Australia
Germany
China
Switzerland
Spain
South Korea
Russia
South Africa
Stock Exchange
NYSE Euronext
NASDAQ OMX
Tokyo Stock Exchange
London Stock Exchange
Shanghai Stock Exchange
Hong Kong Stock Exchange
Toronto Stock Exchange
Bombay Stock Exchange
National Stock Exchange of
India
BM&F Bovespa
Australian Securities
Exchange
Deutsche Börse
Shenzhen Stock Exchange
SIX Swiss Exchange
BME Spanish Exchanges
Korea Exchange
MICEX
JSE Limited
Location
Market
Capitalization
(USD Billions)
New York City
New York City
Tokyo
London
Shanghai
Hong Kong
Toronto
Mumbai
Mumbai
São Paulo
Sydney
Frankfurt
Shenzen
Zurich
Madrid
Seoul
Moscow
Johannesburg
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Trade Value
(USD Billions)
15,97
19,813
4,931
13,439
3,827
3,613
2,717
2,711
2,17
1,631
3,787
2,741
4,496
1,496
1,368
258
1,596
801
1,545
868
1,454
1,062
1,429
1,311
1,229
1,171
1,091
949
1,628
3,572
788
1,36
1,607
408
925
340
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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
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