Chapter 5: Secondary Markets

Question 1

How are markets sometimes characterised as?

Answer 1

price discovery mechanisms

Question 2

How do brokerages operate?

Answer 2

Advise clients
Facilitate the transactions between two parties, does not take on any principal
Earn comission

Question 3

What is acting as a broker sometimes known as?

Answer 3

Dealing as agent

Question 4

How do dealers operate?

Answer 4

A dealer can buy or sell securities directly from clients
Investment banks tend to act as dealers on stock exchanges

Question 5

What are dealers sometimes known as?

Answer 5

Dealing as principal

Question 6

What does ATSs stand for?

Answer 6

Alternative trading systems

Question 7

How would an investment bank utilise an ATS, Alternative Trading System.

Answer 7

Internalising customers trades by executing them against other customers’ trades or firms own inventory

Question 8

What are regulated markets (MiFID)

Answer 8

Stock exchanges

Question 9

What are multilateral trading facilities (MTFs)

Answer 9

Systems other than stock exchanges which bring together multiple parties to trade

Question 10

What are systematic internalisers? (SIs)

Answer 10

Investment firms that on a regular and organised basis deal on their own account when executing client orders outside of markets.

Question 11

What is the trading venue for trading non-equities called per MiFID?

Answer 11

OTF - Organised Trading Facility

Question 12

What does OTC refer to?

Answer 12

Over the counter - dealers trading with one another off exchange

Question 13

What does Dark pool refer to?

Answer 13

Trading outside exchanges and only announcing traded price once deal is complete
Good for large transactions

Question 14

What are dark pools known as in US and UK?

Answer 14

US - ATSs
UK - MTFs

Question 15

When can securities being offered not need to be registered with the SEC?

Answer 15

If they conform to registrations set forth in Regulation D

Question 16

What are the various rounds of equity funding called?

Answer 16

A,B,C,D etc.

Question 17

What is an example of an offering that does not need to be registered with the SEC under Reg D?

Answer 17

Tech companies looking for funding in exchange for equity

Question 18

What are frontier markets sometimes known as?

Answer 18

Pre-emerging

Question 19

What is the SZSE?

Answer 19

Shenzen Stock Exchange
For small-mid companies in China

Question 20

What are Chinese A and H shares?

Answer 20

A-Shares - mainland shares, hard for foreign investment
H-Shares - listed in HK, popular with global investors

Question 21

What is a quote-driven system? And one example

Answer 21

Market makers agree to buy and sell a set minimum number of shares at quoted prices
E.g. NASDAQ

Question 22

What is an order-driven system? And one example

Answer 22

Investors indicate how many securities they want to buy or sell and at what price. System brings these orders together. Common in equities.
e.g. NYSE, TSE, LSE

Question 23

Which trading system provides more liquidity?

Answer 23

Quote-driven

Question 24

What is an example of a hybrid system?

Answer 24

LSE’s Stock Exchange Electronic Trading Service – quotes
and crosses (SETSqx)

Question 25

How are German and French bonds sold?

Answer 25

Auctions

Question 26

What are GEMMs obligations?

Answer 26

Two-way prices Bid on gilts Provide info to DMO on trade info

Question 27

What are GEMMs privileges

Answer 27

Bid on GILTs Trade as DMO CP Access gilts inter-dealer brokers (IDBs)

Question 28

Who does a GEMM not need to provide two way quotes to?

Answer 28

Other GEMMs / IDBs

Question 29

What is a Gilt Inter-Dealer Broker?

Answer 29

Arrange deals between GEMMs anonymously Cannot take on principal, acts as agent Settles the transactions as if it were the principal Can only act as a broker between GEMMs

Question 30

What are execute and eliminate orders?

Answer 30

Execute as much of the trade as possible and cancel the rest

Question 31

What is a fill-or-kill order

Answer 31

Fill the entire order immediately or cancel it

Question 32

What is a all-or-none order

Answer 32

Same as fill-or-kill but will only be cancelled at the end of the day

Question 33

Benefits of CCP?

Answer 33

Reduced CP risk Anonymity Reduced admin (only one CP) Netting Improved prices (more participants)

Question 34

What is an IDB, Inter-Dealer Broker?

Answer 34

Exchange member firm that has registered to act as an agent between dealers (e.g. market makers) Provides anonymity

Question 35

Can an exchange block a trade?

Answer 35

Yes, they can halt trading

Question 36

Who maintains the FTSE 100 index?

Answer 36

FTSE Russell

Question 37

What is the STOXX index?

Answer 37

Global developed markets

Question 38

What is the FTSE All-Share

Answer 38

Full listing on the LSE in £/EUR 600 companies

Question 39

What is a total return index?

Answer 39

One that factors in dividend reinvestments

Question 40

How are stocks weighted in a free-float factor index?

Answer 40

Free float calculated to nearest 5%

Question 41

What is a decentralised dealer market structure?

Answer 41

Where investors can buy/sell without a centralised location No exchange

Question 42

What is an example of a centralised corporate bond exchange?

Answer 42

LSE's ORB Order Book for Retail Bonds

Question 43

How can dealer-to-dealer bond trading occur?

Answer 43

Phone IDB voice broking the deal Electronically via a trading platform etc MTS Cash or BrokerTec

Question 44

How can dealer-to-customer trading occur?

Answer 44

Voice trading Electronic platform, TradeWeb, MTS Bondvision, Bloomberg FIT, Liquidnet and MarketAxess

Question 45

How do dealer-to-customer systems operate?

Answer 45

On a RFQ, request for quote basis Investors will request quotes from many dealers platforms

Question 46

What are the two factors that affect bond pricing?

Answer 46

Issuer and market factor

Question 47

What are the issuer factors that will affect price? (3)

Answer 47

Credit rating Structure/seniority of issue Yields on other benchmark bonds

Question 48

What are the market factors that will affect bond pricing? (3)

Answer 48

Liquidity Method of trading Ability to borrow