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1、Lecture 2,Trading of Securities,Primary Market,Initial public offering(IPO)a private firm“going public”for the first timeSeasoned new issues an existing listed firm issues new sharesPublic offering sold to the public then traded immediately in the secondary marketPrivate placement sold to selected i
2、nstitutional investors,lock-up period applies;more common for debt securities and less for stocks,IPO process,An investment bank underwrites the issue by helping the issuer to resell the new shares under:(1)firm commitment(2)best efforts Road show and book building-gather info from institutional inv
3、estors about the pricing and quantity of the IPOInstitutional investors have an incentive to tell the truth because IPO shares are allocated partly based on their interests,Why are IPOs usually underpriced?,Under-pricing may represent a payment for useful info contributed by institutional investors
4、during the book building processUnder-pricing may reflect a risk premium b/c some investors are more well-informed than others(winners curse story)Not all IPOs are underpriced and some even cannot be sold to the market,Type of Markets,(1)Brokered market 經紀制度Brokers bring buyers trade on their own ac
5、countProfit from the bid-ask spread:buy securities at the bid price and sell at the ask pricee.g.FX market dealers,Type of Markets,(3)Auction market 競價制度All traders converge physically or electronically and orders matched centrallyMore efficient than dealer and brokered markets allow trades to bypas
6、s the brokers and market makers(or minimize their importance)Continuous auction market-orders are matched continuously according to price and time stampsCall(auction)market-orders are accumulated and executed together at one market clearing priceE.g.Both HKSE and NYSE use call auction at the beginni
7、ng and continuous trading later in the regular trading session,Type of Markets,(1)Organized exchanges Specific geographical locations called trading floors,where buy and sell orders are matched in an auctionBrokers play a role to channel buy and sell orders to the trading floorDealers(market maker)u
8、sually play a rather limited role in organized exchanges,Type of Markets,(2)Over-the-counter(OTC)markets Brokers/market makers linked to one another via telecom networkOTC markets are dealer-oriented market where traders negotiate with each otherEach stock has multiple dealersNo membership requireme
9、nts,less restrictive listing requirements than organized exchange,easier for large block trades,popular for other assets besides stocks(bonds,swaps,futures),Type of Markets,Third market-trading of exchange-listed stocks in OTC markets is called“third market”Note:“First market”refers to exchange-list
10、ed stocks traded on exchanges,“second market”refers to OTC-listed stocks traded OTCThis market is popular because its trading hours are not constrained,Type of Markets,(3)Electronic Communication Networks(ECNs)ECNs are electronic auction trading systems that automatically match buy&sell orders Essen
11、tially operate like a giant auction houseBypass dealers and brokersLow transaction costsConsiderable anonymity,Specialist trading system at NYSE,Specialists market is a hybrid mechanism that combines elements of dealership and brokerage services in auction system Each stock is assigned to one specia
12、list Each specialist deals in multiple stocksSpecialists are both a broker and a dealer:1)brokerage function(earn commission)match orders submitted from other brokers2)dealership function(earn bid-ask spread)-trade assigned stocks on their account to maintain a fair and orderly market,Trading Mechan
13、ism,Fair and orderly market means a mkt with(1)reasonable depth and(2)price continuityTo provide market depth,specialists must trade and might suffer trading loss from:-trading with informed traders-having to trade against the market trend To provide price continuity,specialists strive to maintain a
14、 narrow spreadSpecialists have an incentive to perform their jobs well because most of their profits come from their brokerage function,What to specify in placing an order?,1)Specify input order price(s)depending on the type of order2)Specify the no.of shares3)Specify trading conditionsAll-or-nothin
15、g qualifier-confines the order to be either executed immediately in full or rejectedOrder watching service keep the order in the trading system for a period,Type of Orders,Pure Orders1)Market order2)Limit order:(a)regular limit order(b)enhanced limit order ELO3)Stop Order:(a)stop loss order(b)stop b
16、uy orderHybrid Orders1)Special limit order SLO2)Stop limit order:(a)stop loss limit order(b)stop buy limit order,Type of Order:Market order 市價盤,No input order price is required Market orders are executed immediately at the best prevailing price availableExecution price may not be equal to the observ
17、ed market price when the order was submitted All-or-nothing qualifier and order watching services are not available,Type of Order:Limit order 限價盤,You need to input a“limit”priceLimit buy order(1)limit bid P:max P you are willing to pay(2)Ensure execution price limit bid P Limit sell order(1)limit as
18、k P-min P you are willing to sell(2)Ensure execution price limit ask price Both all-or-nothing and order-watching can be specified,Type of Order:Limit order 限價盤,In a limit order book,2 price queues:a bid queue and an ask queue(w/i each different price queues)The highest bid on the bid queue is the c
19、urrent bid,or best bidThe lowest ask on the ask queue is the current ask,or best askOrders are automatically matched whenever current bid and ask“cross”each other At any time,current ask current bidCurrent ask current bid=inside quotes,1st type of limit order:regular limit order(use a limit sell ord
20、er as example),1)If limit ask price is set current bid Order unfilled&put in the ask queue2)If limit ask price is set=current bid Order fully or partially filled at the input order price,unfilled quantity will be put in the ask queue3)If the limit ask price is set current bid Order rejected!,2nd typ
21、e of limit order:enhanced limit order ELO,An ELO offers more flexibility in setting the input order priceInput order price can be set up to 4 price spreads beyond the best price on the other side of the market ELO allows order matching of up to five price queues(i.e.current bid/ask+next 4 spreads),s
22、tarts at the current price queueAny unfilled quantity will be converted into a Limit Order at the same input order price,2nd type of limit order:enhanced limit order(use limit sell order as example),1)If limit ask price is set current bidSame as limit order case2)If limit ask price is set=current bi
23、d Same as limit order case,2nd type of limit order:enhanced limit order(use limit sell order as example),3)If the limit ask price is set current bid Limit order case:Order rejected!ELO case:Ok as long as limit price is not more than 4 spreads below current bidOrder fully or partially filled,starting
24、 at the current bid,all the way to the input order price,Hybrid order:Special limit order,A hybrid of market and limit orders effectively a market order with a limit price to ensure that execution prices are not worse than itThe only restriction on input order price:it must results in execution,i.e.
25、Limit ask price current bidLimit bid price current askSLO allows order matching of up to five price queues(current bid/ask+next 4 spreads),starting at the current price queueAny unfilled quantity will be cancelled,Hybrid order:Special limit order(use limit sell order as example),1)If limit ask price
26、 is set current bidOrder rejected2)If limit ask price is set=current bid Order fully or partially filled at the input order price3)If the limit price is set current bid Order fully or partially filled,starting at the current bid,match up to 4 additional queues,Type of Order:Stop Order,Essentially an
27、 order that remains“dormant”until it is“triggered”by a condition:when the market price hits a pre-specified stop priceOnce triggered,the order will be executed immediately at the best available price(i.e.becomes a market order)All-or-nothing qualifier is not available Order watching service is avail
28、able2 types of stop order:stop loss order and stop buy orders,1st type of stop orderStop Loss Order 止蝕盤,An order to sell a stock that you longInput a stop loss price The stock is sold via a market order when market price“hit”the stop-loss price from aboveTwo trading motives:(1)to cut loss(2)to prote
29、ct gain,2nd type of stop order:Stop Buy Order,An order to buy a stockInput a stop buy price The stock is purchased via a market order when market price“hit”the stop-buy price from belowPurpose:to ensure you can buy a stock before it gets too expensiveStop buy order be used in combination with short
30、selling a stock,Hybrid order:Stop Limit Order,A hybrid of stop order and limit orderA stop order with a limit price attached to eliminate the uncertainty of the execution priceTwo input order prices must be set:(1)a stop price(2)a limit price,Hybrid order:Stop Limit Order,In a stop loss limit order,
31、you set(1)a stop loss price and(2)a limit ask price In Chinese,it is called 止蝕限價盤In a stop buy limit order,you set(1)a stop buy price and(2)limit bid price,Hong Kong Stock Exchange,Trading is conducted on Mon to Fri1)Auction SessionPre-opening Session9:30 am-10:00 am2)Continuous Trading SessionMorni
32、ng session10:00 am 12:30 pmAfternoon session2:30 pm to 4:00 pm,Pre-opening session,Only allow market order(at-auction order)and limit order(at-auction limit order)At-auction order enjoys a higher matching priority than an at-auction limit orderOrders are accumulated and all executed at the same mark
33、et clearing priceProvides a mechanism to determine an opening price for each securityHelp avoid significant price fluctuations at the commencement of the Morning Trading Session,Continuous Trading Session,The following types of orders are accepted by the auction system(AMS/3)(1)limit order(2)enhance
34、d limit order(3)special limit orders,Transaction costs,Brokerage commission(negotiable,usually 0.125%-0.25%)Stamp duty 0.1%Transaction levy for SFC 0.004%Investor compensation levy for SFC 0.002%Trading fee for HKEx:0.005%Trading tariff for HKEx:$0.5 per tradeYour broker will charge custodian fee an
35、d dividend deposit fee,Clearing and settlement,Hong Kong uses T+2 settlementStock Exchange Participants are required to settle with the Central Clearing and Settlement System all transactions on the second Settlement Day following the transaction day,Long and Short Positions,Taking a long position 長
36、倉 Buy&hold a securityExpect to profit when sell at a higherprice laterTaking a short position 短倉/淡倉/空倉(a.k.a.short selling 拋空/沽空)borrow and sell a securityExpect to profit when buy back later at a price below the short selling price,Securities trading account:Cash Account versus Margin Account,Cash
37、account 現金戶口-Pay full price of a securities-Applied to long position only-Your broker is not allowed to re-pledge your stocks to banks as collateral,Securities trading account:Cash Account versus Margin Account,Margin account 孖展戶口-Pay partial price of a securities-Borrow either cash or shares-Applie
38、d to both long&short positions-Your broker is allowed to re-pledge your stocks,even if you have never used the margin facility,Use Margin Account to Long,Borrow part of the purchase cost from your stockbrokerNeed to deposit the purchased stocks in your margin account as collateralMargin account asse
39、t side:=MV of the stocks deposited+margin deposit(later,if any)Margin account liability side:=Margin loan borrowedNet worth=Asset-Liability,Use Margin Account to Long,Must have enough assets in your margin account to keep the NW 0Margin or margin ratio=NW/TAYour margin must not fall below two minimu
40、m required levels:(1)initial margin IM:applies when you first buy the stock(40-50%)(2)maintenance margin MM:applies afterward as long as your margin loan is outstanding(20-30%),Use Margin Account to Long,When you first long the stock:Total Asset Liability+NWN P NP0 x(1-IM)NP NP0 x(1-IM)What is your
41、margin ratio when you first long the stocks?As time goes by,what happen to your margin ratio?,Use Margin Account to Long,If the margin ratio falls to the MM,a margin call is issuedAdditional liquid assets must be deposited to bring up the margin ratioFailing that,the stockbroker will sell your stock
42、s and get back its money back Your long position is said to be closed by the broker 斬倉Will you make a profit in this case?,Use Margin Account to Long,Dollar Return/share=Pt+1 Pt+DIVt-INTtInvestment=m(Pt),where the m is the margin ratio you put down,m IMIf we ignore DIV and INT,Margined a/c return r
43、M=(Pt+1-Pt)/(mPt)Cash a/c return r C=(Pt+1-Pt)/Ptr M=(1/m)r CIf m=0.25,then r M=4 r C1/m=leverage ratio 槓桿率,槓桿借貸比率,Use Margin Account to Long,How to find the long margin call price PM?Set the margin ratio=MM=MMPM=,Use Margin Account to Short,Borrow shares from your stockbroker and sell them immediat
44、ely(short selling price)The proceeds is deposited in the margin a/c as collateral for the borrowed sharesDeposit additional liquid assets in your margin a/c=some%of the borrowed shares MV IM and MM are applied hereBuy back the shares later and return them to“cover”or close the short positionAim:Buy
45、back price short selling price,Use Margin Account to Short,Margin account asset side(1)Proceeds from short-selling+(2)Additional cash/liquid assetsMargin account liability side=MV of the stocksNet worth=Assets LiabilityMust have enough assets in your margin account to keep the NW 0Margin or margin r
46、atio=NW/T L,Use Margin Account to Short,When you first short sell the stock:Total Asset Liability+NWN P0+IM x N P0 N P N P0+IM x NP0-NPWhat is your margin ratio when you first short sell?As time goes by,what might happen to your margin ratio?,Use Margin Account to Short,A maintenance margin(MM)is im
47、posed after the initial time and remains in effect until your short position is closed MMMargin call price PM is obtained by setting margin ratio=MMPM=,Use Margin Account to Short,Dollar Return/share=Pt Pt+1-DIVtInvestment=m(Pt),where the m is the margin ratio you put down,m IMIf we ignore DIV:Margi
48、ned a/c return r M=(Pt-Pt+1)/(mPt)Cash a/c return*r C=(Pt+1-Pt)/Pt*Short-selling must be done in a margin a/c,here I mean 100%IMr M=(1/m)r C,Pooling 匯集安排,Your brokerage would usually ask for a written authorization to re-pledge your securities in the margin accountThat authorization enables the brok
49、erage to pool and re-pledge margin clients securities as collateral to secure bank borrowings for the brokerageA margin clients securities may be re-pledged in this way even if the client have fully paid for all your share purchases and have not used the margin facility,Pooling Risk 匯集風險,If the brok
50、erage becomes insolvent,the bank may liquidate the securities collateral re-pledged to it by the brokerage in order to discharge the brokerages indebtednessIn such a case,a margin client may not be able to recover all the securities in his margin account,Regulation on short salesTick test rules,Prev
