Equity Market

Summaries

3 origins of stock exchanges (bourses)

- Private bourses (but publicly regulated, most dominating)

- Public bourses (originated from France)

- Banker bourses (monopolized by bankers, from Germany)

Order-driven markets: All the buy and sell orders are shown to the public. However, there is no guarantee of transaction. Good for small transaction (e.g. Paris Bourse, Frankfurt DAX, Tokyo Nikkei)

Price-driven markets: Only see market makers’ bid-ask. There is guarantee of transaction as the makers keep inventory and match different traders. Good for large block transaction (e.g. US Nasdaq)

NYSE is a combination. It shows makers bid-ask and also details of traders

Taxes:

1)      Capital Gains – taxed by residing country

2)      Income Tax – Foreign country applies withholding. Local tax based on gross with credit equals to withholding

3)      Transaction Taxes

Costs:

Tangible cost: commission, tax, fee

Intangible costs:

1)      market cost – differences between the time submitted and executed (this is due to liquidity issue)

2)      opportunity cost – cost of failing to execute (15-day return of unexecuted shares)

*** there is trade off between market and opportunity costs

How to reduce execution costs:

1)      Program trades – trade a whole basket (avoid unfavorable position of some stocks)

2)      Internal crossing – trading between internal clients. Used mostly in passive strategy

3)      External crossing using ECN (electronic crossing network)

4)      Principal trades – a principal acts a dealer and commit to take opposite position

5)      Agency trades – have broker to help to search for best price (but not acting as principals)

6)      Futures trades

7)      Indication of interest – dealers help to search for counterparts