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2017 | Book

Exchange Organizations: Thoughts and Reflections Read chapter Read first chapter

Equity Markets in Transition

The Value Chain, Price Discovery, Regulation, and Beyond

Editors: Reto Francioni, Robert A. Schwartz

Publisher: Springer International Publishing

Part of: Springer Professional "Wirtschaft+Technik" , Springer Professional "Wirtschaft"

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About this book

This book underscores the complexity of the equity markets, the challenges they face, and the fact that they are still a work in process. Three interacting forces drive market change: competition, technology change, and regulatory change. The markets have one major objective in particular to achieve: the delivery of accurate price discovery for both traders and the broader market. Are we getting it? Are competition, technology, and regulation acting together to improve market quality, or are they adding to the complexity of the markets and making accurate price discovery harder to achieve? The difficulty of addressing these issues and reaching a consensus regarding public policy is reflected in the diverse opinions expressed in this book.

From an institutional perspective, the volume’s contributors highlight the interconnectedness of all aspects of the internal and external environment within which exchange organizations act. Equity Markets in Transition underscores how technological evolution and recent regulatory changes have influenced the business, and how these developments have opened new possibilities for exchange organizations and for equity markets as a whole, including such issues as the impact of equity markets on job creation.

The book combines both a theoretical and a practical approach. Part I presents a theoretical overview of the international equity market business, including an overall description of the value chain of stock trading that includes deep dives on every decisive step. Part II contains contributions from various business specialists who have specific practical and academic knowledge of the different steps. Equity Markets in Transition represents a unique combination of theoretical and practical analysis that offers first-hand insights on all relevant interactions and interrelations among the various parts of the exchange business, with an emphasis on facilitating analysis of the status quo and of emerging trends regarding business models, regulation, and the development of the competitor, customer and investor sides.

Table of Contents

Frontmatter

The Value Chain of Exchange Organizations: Systematic Overview

Frontmatter
Chapter 1. Exchange Organizations: Thoughts and Reflections
Abstract
The stock market’s animal spirits are symbolized by the striking bronze sculpture of an oversized bull installed in 1989, deep in the heart of New York’s Financial District in downtown Manhattan. It is a charging bull, the work of artist Arturo Di Modica. The bull speaks of pure force, unfettered optimism, and aggressive dynamism. And it is quintessentially American, as well as being a grand celebration of Wall Street.
Reto Francioni
Chapter 2. An Exchange and Its Value Chain
Abstract
This book covers price discovery at stock exchanges with reference to both the primary and the secondary market. Markets are constructed as liquidity pools and, therefore, the main task of a stock exchange is twofold:
Reto Francioni
Chapter 3. Primary Market: Bringing Products to the Market
Abstract
Savings and investments between suppliers and users of capital are channeled by the capital markets from retail and institutional investors to businesses, government, individuals, and others. Capital markets are vital to the functioning of an economy since capital is a critical component for generating economic output. Capital markets include the primary markets that sell new stock and bond issues to investors as well as the secondary markets for the trading of existing securities.
Cord Gebhardt, Jan Strecker
Chapter 4. Secondary Market: Trading, Price Discovery, and Order Matching
Abstract
Price discovery is achieved as orders are submitted to a market and turned into trades. A transaction price is, of course, determined each time a trade is consummated, but price discovery refers to something more fundamental. Price discovery refers to the search for a value that best reflects the broad market’s desire to hold shares of a stock. In economic parlance, price discovery involves the search for an equilibrium value. While price determination occurs on a trade-by-trade basis, price discovery is achieved only as a substantial set of orders is brought together, generally over a succession of trades.
Reto Francioni, Martin Reck, Robert A. Schwartz
Chapter 5. Clearing
Abstract
Once a trade is executed, further actions are essential to finally settle it. At this point in the value chain—that is, post-execution—clearing is the next step. Clearing is the general term for the risk management and operational processing needed to ensure that the commitment made from the trade execution is concluded on the settlement side, a final step involving the exchange of shares for money and other critical procedures. In this final step, a central counterparty, or CCP, steps in between the original trading parties, becoming the new seller to the original buyer, and the new buyer to the original seller.
Thomas Laux
Chapter 6. Securities Services: Settlement, Custody and Financing
Abstract
Securities services, an essential and constant part of the capital market industry, have historically escaped the limelight. Securities service infrastructure has shown its resilience—and sheer importance—in the face of market upheaval during the financial crisis of 2008. And yet, in many important ways, securities services have recently taken center stage in the regulatory environment. Why this sudden and acute regulatory interest today?
Marc Robert-Nicoud
Chapter 7. Information Technology
Abstract
Superior information technology (IT) is the essential success factor in any exchange organization worldwide, regardless of the instruments being traded for a panoply of asset classes that can range from shares and bonds to derivatives and commodities.
Matthias Kluber
Chapter 8. Contractual Relationships Across the Value Chain
Abstract
Three layers must be carefully considered in describing an equity market’s value chain, from processing orders for trading at an exchange to the clearing and settlement of transactions: the trading layer, the clearing layer and the settlement layer. These layers are technically integrated by straight-through processing (STP) of transactions. In this chapter, however, we will focus on the legal level, i.e. the regulatory and contractual relationships that are required. At minimum, these are the relationships that are usually established on each layer to execute and process securities transactions along the value chain.
Matthias Stötzel
Chapter 9. Financial Market Regulation
Abstract
A well-functioning financial system is indispensable for economic growth. To that end, the overall objective of the current regulatory reform process is to guarantee, globally, financial market stability. In this context, one of the most important preconditions for stability is a system of working financial market infrastructure (FMIs). Every analysis of financial markets must naturally account for its infrastructure regulations.
Reto Francioni, James H. Freis Jr., Alexandra Hachmeister

Trading of Financial Instruments: Selected Topics

Frontmatter
Chapter 10. Security Market Microstructure: The Analysis of a Non-frictionless Market
Abstract
The capital asset pricing model describes a frictionless world characterized by infinite liquidity. In contrast, trading in an actual marketplace is replete with costs, blockages, and other impediments. Equity market microstructure focuses on how orders are handled and turned into trades in the non-frictionless environment. For over three decades, the literature has grown while, concurrently, trading systems around the world have been reengineered. After depicting the frictionless CAPM, we consider the development of microstructure analysis, concentrating on issues germane to market architecture. We then consider the design of one facility, Deutsche Börse’s electronic platform, Xetra. Important insights were gained from the microstructure literature during Xetra’s planning period (1994–1997), and Xetra’s implementation marked a huge step forward for Germany’s equity markets. Nevertheless, academic research and the design of a real-world marketplace remain works in progress.
Reto Francioni, Sonali Hazarika, Martin Reck, Robert A. Schwartz
Chapter 11. Exchanges: Link to the Real Economy
Abstract
As reflected in a book by the British economic historian Niall Ferguson [1], the story behind the ascent and decline of nations can also be told as a story of their stock exchanges and financial markets. As competing nations went head to head in the battle for power, the ability to finance wars and buy influence proved to be hugely important: access to capital markets and financial innovations were a key strategic advantage for kings and rulers alike.
Michael Heise
Chapter 12. The Role of High-Frequency Trading in Modern Financial Markets
Abstract
In the past decades, financial markets have undergone a profound change driven by a combination of technological advancement and fierce competition between both market participants and marketplaces. The technological advancement has moved market venues from floor to electronic venues and in that process generated substantial benefits to the investing public as cost of market entry has been drastically reduced with respect to:
Wolfgang Eholzer, Randolf Roth
Chapter 13. High Frequency Trading: Market Structure Matters
Abstract
Although both media and the public seem to discuss the perceived dangers and threats of electronic trading only since the US flash crash in 2010, in reality, the shift towards electronic trading has been a long-lasting evolution. Often, the starting point of electronic trading is said to be the year 1971, when the National Association of Securities Dealers Automated Quotation (Nasdaq) became the first electronic stock market displaying quotes for 2500 over-the-counter securities. A significant migration process from over-the-counter and traditional floor trading to fully electronic markets took place on both sides of the Atlantic between the late 1970s and the mid-1990s. Starting from the electronification of major international exchanges, significant technological innovations emerged that successively walked up the value chain and led to a far-reaching automation of trading processes; first at Sell Side institutions and in a next step by their customers, i.e., Buy Side firms.
Reto Francioni, Peter Gomber
Chapter 14. Global Developments in Equity Trading
Abstract
Global equity markets have experienced a dramatic transformation over recent years, spurred by rapidly advancing electronic trading technologies, intense competition, and a challenging regulatory environment. Equity derivatives markets have likewise evolved rapidly. These derivatives include options on individual equities and stock indexes; futures on stock indexes and individual equities; exchange traded funds (ETFs); over-the-counter (OTC) equity swaps; structured derivatives; and some rather unique new products based upon volatility and dividends.
Phupinder Gill
Chapter 15. From the End of Bretton Woods to the Global Financial Crisis: 40 Years of Turbulence
Abstract
The Great Financial Crisis in 2008 did major damage to the world’s financial system and showed the importance of maintaining financial stability as a public policy goal. This chapter recalls how this issue has been addressed since the Great Depression in 1929. It also reflects on the impact of globalization, information technology, rise of institutional investors, and deregulation across the financial sector. Finally, it discusses the ever-growing complexity of the financial system and analyses whether the necessary reform process for banks and the financial infrastructure is complete.
Hugo Bänziger
Chapter 16. Risk and Representation: The Limits of Risk Management
Abstract
Much was debated in the past years about the causes of the financial crisis which was triggered by the collapse of the US real estate market and the implied huge losses in complex-structured credit securities by large financial institutions, mostly banks. The crisis also reveals fundamental failures in the measurement, management, and transfer of risk in the financial system as well as methodological weaknesses (to say the least) in the regulation of financial institutions. Much has been learned about the (il-)liquidity of markets and its self-reinforcing effects, but the real problem is deeper.
Heinz Zimmermann
Chapter 17. T2S: Creating a New Post-trade Landscape
Abstract
Today, although being highly efficient in national markets, the European settlement infrastructure provides a complex, highly fragmented picture, which is characterised by national specificities and barriers. This prevents competition and efficient cross-border settlement at reasonable costs and also comes with operational risks. Target2-Securities (T2S) sets out to provide an infrastructure which will remove those handicaps. But once the infrastructure is in production starting in 2015, T2S is supposed to act as a game changer which will initiate a sustainable transformation of the whole post-trade securities servicing industry.
Karla Amend, Matthias Papenfuß
Chapter 18. IT in Transition
Abstract
Financial markets are currently going through a substantial period of transition, probably the most significant in living memory. This is leading to a fundamental review of the historical business models of all participants from exchanges, sell- and buy-side firms along with vendors (both data aggregators and application providers), suppliers of base technology and value-added services. No participant is left unaffected. To refer to it as a transition could be a major understatement, revolution maybe a more appropriate metaphor. These changes are ongoing and, when the transformational journey is complete, the markets will without doubt look very different than they do today.
Philipe Enness, Andrew Graham
Chapter 19. The Future of Finance: FinTech, Tech Disruption, and Orchestrating Innovation
Abstract
At its most basic, money is not much more than a piece of information. Financial markets, in turn, are at heart sophisticated means of exchanging the particular kind of information money stands for. It is hardly surprising then that the financial industry has always had a keen interest in information technologies, going back to the days of the telegraph and ticker tape.
Oliver Bussmann
Chapter 20. Equity Capital Market Expectations of Corporate Issuers: The Fresenius Perspective
Abstract
Fresenius is a global healthcare company with more than €20 billion in annual sales and more than 200,000 employees worldwide. During this past decade, our sales have increased almost threefold from €7.1 billion to €20.3 billion. Our market cap has increased from €2.4 billion to €20.1 billion in the same period. Our Deutsche Börse/Frankfurt Stock Exchange listing and XETRA trading experience are key components of Fresenius’ growth story. Healthcare markets around the world are consolidating fast and while the industry particularly lends itself to debt financing, access to equity capital is a necessity to manage our overall financial risk. Over the last 10 years alone, we went through three capital increases from approved capital to finance growth projects.
Ulf Schneider
Chapter 21. The Investment Process
Abstract
While being at the core of every asset manager’s business, the investment process is a discipline that is still subject to continuous efforts for professionalisation and standardisation. The reasons are manifold. First, clients are becoming more demanding and the evaluation of the investment process is an integral part in their choice of the investment manager. Furthermore, in Germany an increasing number of institutional clients rely on consultants in their choice of an asset manager, a development pioneered in the Anglo-Saxon investment business. These consultants also put the quality of the investment process at the top of their priority lists, when it comes to evaluating asset managers. And finally, asset managers themselves recognise the benefits of a rigorous investment process for their business.
Asoka Wöhrmann
Chapter 22. Institutional Investors and Exchange Organizations
Abstract
To begin this chapter, it is best to first take a step back and have a brief look on the last few years:
Asoka Wöhrmann
Chapter 23. Equity Market Fragmentation in the Swiss Market
Abstract
The implementation of MiFID has lead to fragmentation of liquidity in European equity trading. We analyze longterm effects of MiFID on liquidity with a new sample of Swiss stocks and do not find evidence for a worsening of market quality. In contrast, liquidity measures indicate a general increase in market quality. The analyzis of information information processing on Chi-X and the Swiss exchange reveals that according to Hasbrouck information shares, the determination of a leading market is not conclusively possible. By applying an autoregressive conditional intensity (ACI) model that explicitly takes the asynchronous structure of order arrivals into account, we find strong evidence that Chi-X is the leading market in terms of intensity based information shares.
Andreas Grünbichler, Alexander Kohler, Rico von Wyss
Chapter 24. Takeover Regulation as Part of a Functioning Equity Market
Abstract
Takeover regulation, providing rules for public tender offers aiming at acquiring shares of a target company listed on a regulated market, has become an integral component of a functioning equity market.
Christian Zschocke
Chapter 25. Implementing MiFID2: The View of a Cash Equities Trading Venue
Abstract
MiFID1 has been published ten years ago. Its review focuses on the fixing of its loopholes and imperfections, but also on the strengthening of market integrity and financial stability. MiFID2 introduces new provisions regarding algorithmic trading and HFT. It strengthens transparency for trading venues by introducing volume caps for regulated dark pools. It also strengthens transparency in bilateral trading as it introduces a trading obligation for shares, which will shift bilateral trading away from the OTC space. In concert with this, investment firms that trade frequent, systematic and substantial with their clients on a bilateral basis will have to obtain SI status, providing more transparency than it is the case today. Despite these developments that will improve the market structure for cash equities, there are also some potential pitfalls which could be avoided during the implementation of the Level 2 measures and before MiFID2 provisions becomes effective.
Miroslav Budimir
Chapter 26. European Financial Integration: Monetary Union, Banking Union, Capital Markets Union
Abstract
Since the Treaties of Rome were concluded in 1957, the history of Europe has been marked by an ever-deepening integration. To some degree this process has certainly been driven by the idea that in a globalised world only a united and strong Europe can succeed. In 1954, Jean Monnet, one of the founding fathers of the European Union, said: “Our countries have become too small for today’s world, when compared to the potential of modern technical means and in relation to the dimension of America and Russia today, China and India tomorrow [1]”. In that sense, European integration and also the introduction of the euro could be interpreted as a response to globalisation—as an attempt to create a strong regional pole in an increasingly multipolar world.
Andreas Dombret
Backmatter
Metadata
Title
Equity Markets in Transition
Editors
Reto Francioni
Robert A. Schwartz
Copyright Year
2017
Electronic ISBN
978-3-319-45848-9
Print ISBN
978-3-319-45846-5
DOI
https://doi.org/10.1007/978-3-319-45848-9