WEEK 2 - Equity Market Trading

Question 1

What is an equity?

Answer 1

A share in the ownership of a company, entitling the owner to payment of dividends and also to the right to vote at annual general meetings.

Anyone can buy public equity

Question 2

What is Public Equity?

Answer 2

listed on a stock exchange and ‘admitted’ for trading

Question 3

What is Private Equity?

Answer 3

Not publicly listed or traded

Held by special individuals

Question 4

What is Market Cap?

Answer 4

The total value of shares according to market price

Question 5

How do you calculate Market Cap?

Answer 5

Share price X Total No. of issued shares

Question 6

What is each share measured in?

Answer 6

GBp (Pence)

Question 7

What is the Ex-dividend?

Also something called inc dividend IDK what that is

Answer 7

A point in time where if you buy that stock after that time you cannot receive the nearest dividend

Question 8

How often is a dividend paid?

Answer 8

Interrim: 6 Months

Full Dividend: 12 months

Question 9

What is the Stock BETA?

Answer 9

Elasticity measure of the average percentage increase in share price when 1% rise in broad index of market prices

e.g. Market goes up 1% (in this context the FT250), Tesco goes up 1.23%

Question 10

What is a defensive stock?

Answer 10

• Shares with BETA less than 1

- Not alter too much when theres a downturn

Question 11

What is a cyclical stock?

Answer 11

• Shares with BETA greater than 1

- Alters a lot when theres a downturn

Question 12

What is the calculations for P/E?

Answer 12

P/E =share price divided by eps

EPS is earnings per share

Question 13

What is the role of the broker?

Answer 13

An exchange member executing one of these stock orders on behalf of a client

Their duty is to buy or sell at the best possible price: as high price as they get when selling
or as a low a price as they can get when buying.

Question 14

What are the differing types of brokers?

Answer 14

Sales and trading:
execute trades on behalf of clients are usually described in their own earnings statements and annual reports as ‘sales and trading’divisions.

Retail broker
helping retail customers buy and sell equities and other securities and also manage their portfolios. (best descirbed as retail broker)

Corporate broker A specialised market niche, largely advisory, helping large companies, “ A uniquely UK concept, corporate brokers advise public companies on
everything from pitching their equity story to building a diverse shareholder register, navigating listing rules to managing results announcements

Question 15

Why have Sales and Trading Brokers started to focus more on client trades and less on trading on their own behalf (proprietary trading)?

Answer 15

• the ‘Volcker rule’ in the 2013

- US Dodd-Frank act,

Question 16

What is the Volcker rule?

Answer 16

Federal regulation that generally prohibits banks from conducting certain investment activities with their own accounts and limits their dealings with hedge funds and private equity funds, also called covered funds.

Prevents banks from proprietary trading and limits interactions with hedge funds and private equity funds (covered funds)

Question 17

What is the Dodd-Frank Act?

Answer 17

the Financial Stability Oversight Council and Orderly Liquidation Authority monitor the financial stability of major financial firms whose failure could have a serious negative impact on the U.S. economy

provides for liquidations or restructurings via the Orderly Liquidation Fund

…among other things

Question 18

What are the ways to get direct access to the market without being a part of the LSE?

Answer 18

1)High Frequency Trading:
Last two decades a number of specialised ‘high frequency trading funds’ using artificial intelligence to conduct very short term proprietary trades (measured in ‘nanoseconds’)
Rapidly buy and sell equities on algorithms

2) As a human ‘day trader’ using the London Stock Exchange direct market access system of DMA

Question 19

What are Order books?

Answer 19

Market data about stocks in two levels

Level 1: Focuses on ‘bid-offer’ spread

Level 2: Focuses on history of Buy/Sell Orders (shows whole order book)

• Outer columns shows quantities (limit orders)
• Inner columns shows prices

Question 20

What is NMS?

Answer 20

Normal Market Size
the amount of a particular stock that you could purchase on that day in current trading conditions, without moving the best bid or ask price.

Question 21

What is the Regulation NMS (US) and the “Markets and

Financial Instruments Directive” (European Union)?

Answer 21

Introduction of rules that ended stock
exchange monopolies on providing electronic order books

Improved fairness in price execution as well as improve the displaying of quotes and amount and access to market data.

supported competition amongst multiple trading venues for ‘order flow’ i.e. for the execution of client order.

Question 22

What is Algorithmic Trading?

Answer 22

Using computers to break up larger client orders (those much bigger than ‘normal market size’) into smaller parts and allocating them to different venues/ feeding the orders carefully and gradually into the market in order to minimise price impact

Question 23

What is it called if a person does what algorithmic trading does?

Answer 23

(for very large orders to big even for automated algorithmic trading)

Called ‘working and order’, which may involve contacting and discussing with potential buyers and explaining the reasons behind the sale/ purchase

Question 24

READING

Answer 24

Further reading on equity trading. Rowland (2015) “Never a dull moment” Best Execution,
https://www.bestexecution.net/trading-venues-evolution-never-stops/

A good article from The Economist (2016) “Complicate then Prevaricate”
https://www.economist.com/finance-andeconomics/2016/02/27/complicate-then-prevaricate

Or, again PhD level, Petralla (2009) “MIFID, Reg NMS and competition amongst trading venues in Europe and the United States”,
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1442874 SSRN-