Secondary securities market
Types of secondary securities markets
Secondary securities market - the aggregate of economic relations concerning the circulation (alienation) of securities between market participants arising after the process of their issue (placement), and their retirement from treatment.
Thus, the secondary market is an endless series of transitions of ownership rights to previously placed (issued) securities, as well as relations regarding the termination of the existence of a security.
Termination of a relationship about a security is possible:
1) with the final withdrawal of the security by the issuer from circulation. This process is called quenching. This happens at the end of the life cycle of fixed-term securities (bonds, bills, etc.);
2) temporary withdrawal of securities from circulation. Temporary redemption by the issuer of shares from shareholders may arise in cases provided for by law. But the shares are not extinguished. During the year the issuer can sell them again, but if this fails, then it must withdraw shares from circulation completely (pay off) and reduce their authorized capital by the amount of their nominal value.
This implies that the secondary RZB is not only the market for their circulation, but also the market for their full or temporary withdrawal (repayment). The cancellation process is constantly present on the secondary market in relation to the derivatives. However, the basis of this market is, of course, the process of their circulation.
Alienation ( appeal ) security is the process of changing its owner (owner).
This process is carried out in a variety of legal forms, the main of which are:
• buying and selling - the basic way to go from one owner to another, because in this case there is a real market relationship between the seller and the buyer - the equality relationship, or exchange of equivalents;
• exchange (exchange) - a form of market exchange, only there is no exchange for money;
• donation - one person grants the securities to another person for free;
• inheritance - transfer of rights to the securities of the deceased investor to his heirs;
• confiscation - the free seizure of securities in the ownership of the state as a sanction for an offense (crime, administrative misdemeanor, etc.).
Alienation of securities on the market, as a rule, takes the form of bilateral transactions or is carried out by concluding contracts between transaction participants. The contract in this case is a mutual agreement of the parties related to the appearance, termination or change of property rights with respect to the security itself.
As already mentioned, the basis for circulation of securities on the secondary market is the transaction for their sale and purchase in the exchange and over-the-counter markets.This place is called a stock exchange (or simply a stock exchange).
OTC (unorganized or street ) RZB is a system of economic relations between market participants, carried out in the absence of a single place and organizer of the bidding process. This is a decentralized form of trading in securities.Historically, trading in securities has evolved from unorganized to organized forms. With the passage of time, generally recognized rules for the trading of securities were developed, and market participants emerged who specialized in such trading. These professional participants gradually came to understand that their commercial affairs would go better if they merged into a certain trading community, known as the "stock exchange".
However, the exchange market is not able to cover all trading in securities, which was facilitated by the following reasons:
- the presence of physical limitations inherent in any trading platform;
- economic feasibility (limited).
Modern OTC RZB is not an antipode of the exchange market in the sense of their opposition as spontaneous and highly organized. In practice, the exchange and over-the-counter markets complement each other and together they constitute a full-blown RZB. Legislation that regulates relations at the RCB does not divide the market into parts, but only emphasizes its stock market segment. Therefore, the participants of the over-the-counter market adhere to the general market rules of economic turnover in this market.
The development of computerized forms of trading in securities leads to the erosion of the differences between the exchange and OTC markets, turning the RCB into a single organized market in which both the boundaries of the exchange market and the decentralized nature of the over-the-counter market are eroding.
There are many varieties of secondary markets (except for exchange and over-the-counter), on which securities purchase and sale transactions can be concluded. There are markets for certain types of securities: stock markets, bonds, bills of exchange, state, corporate, mortgage securities, etc. There are markets in terms of organization: spontaneous (unorganized) and organized.
The government securities market is always separated from the corporate securities market and its "site", and by participants, and by legislation. In this market the rules are established by the state, and not by the stock exchange or other professional market participants.Bill market is a relationship about the purchase and sale of bills, usually commercial banks (credit institutions), and therefore it is the banking market of bills. The bill legislation is of an international nature, unlike legislation on other types of securities, therefore the market of bills exists separately from the markets of other securities. The market of mortgage securities in our country has just begun to emerge, but like the bill market, it usually functions largely according to its specific legislative norms and is not an exchange market.
Natural ( unorganized) market is the simplest form of organizing a stock market. The spontaneous market is like an ordinary market place where goods are sold and bought. Sellers and buyers, communicating with each other, determine the level of demand and supply for certain stock values and conclude deals directly with each other. At the same time, the terms of the transaction do not become the property of a wide range of persons. The fact of the transaction depends on the case that reduces the seller and the buyer, and the conditions for performing various trading operations can vary significantly even if they occur at the same time.
Over time, the spontaneous stock markets give way to organized markets that exist in the following forms:
• simple auctions;
• double auctions;
• dealer market.
Simple auction markets are characterized by the monopoly position of the seller and the set of buyers. In this case, sellers in advance of the start of trade meetings submit proposals for the sale of stock instruments, which are reduced to quotation bulletins. Quoting bulletins are distributed to participants of trade meetings, which, if they have an interest in the proposed values, join each other in competition for the right to acquire it, consistently assigning ever higher prices. The buyer is the one who will assign the highest price (Figure 3.3).
Fig. 3.3. The scheme of the mechanism for organizing a simple auction
Simple auction markets are not effective in all cases. If sellers do not have an absolute monopoly on the tools they offer, and if there is not a sufficiently high demand for their goods, then a simple auction can be fraught with a number of problems. Within the framework of a simple auction, those sellers who before the others put up the goods for sale are the ones who prefer to sell, since the first buyers, as a rule, agree to pay the highest prices for the right to purchase it. As the most interested participants are eliminated from the auction, the price of the goods is reduced, and each subsequent seller is only in virtue of his position in the queue for the right to sell is in worse conditions than his predecessors. Therefore, the more individuals are willing to sell homogeneous goods, the less reason to hold simple auctions.
Meanwhile, securities are precisely a commodity, characterized by great homogeneity and the presence of a significant number of potential sellers. An exception to this rule are only some types of government securities placed on the primary market, for the distribution of which the state has a complete monopoly. Therefore, simple auction markets (except for the above-mentioned special cases) in countries with developed market economies have not received wide distribution.
With double auction trading, the competition takes place not only between buyers for the right to purchase stock instruments, but also between sellers for the right to realize them (Figure 3.4).
Fig. 3.4. Scheme of the mechanism for organizing a double auction
Double auctions can be on-call and continuous.
On-line the market exists with a small concentration of supply and demand for stock instruments (low liquidity of securities). For some time, there is an accumulation of orders (orders) for the acquisition (sale) of stock instruments. In orders indicate the type of securities, prices (marginal or without a limit, ie any) and the volume of securities.
The length of the period of accumulation of orders is the greater, the less liquid the market remains. Unconditional priority on the part of both sellers and buyers receives instructions, the depositors of which agree to any price at the conclusion of transactions. Further on the part of sellers, priority is given to instructions with the lowest prices, and on the buyers side - orders with the highest prices. In the event that the same prices are specified in different orders for buying or selling, seniority acquires orders with the largest amount. The priority of filing applications is not taken into account, and in this respect all participants in on-line trade are put on equal terms. After the acceptance period ends, official prices are set for each type of stock instruments.
Algorithms for calculating prices can be very diverse. At the same time, practice has become widespread in which transactions are made at prices that allow the highest volume of trading operations. Only those sales orders are used, the marginal prices of which are equal or lower than official prices, and only those purchase orders whose marginal prices are equal to or higher than official prices.
Basically, all orders are satisfied at the same prices. Part of the instructions, which can not be satisfied within the framework of official prices, remain without execution. Then again comes the period of accumulation of orders, and the bidding process is repeated at first.
Continuous auction markets are advisable provided that securities are constantly in demand and constantly offered. At the same time orders for the purchase and sale of securities are executed immediately after they are received.
A continuous double auction market is used on stock exchanges where securities are sold and purchased, constantly offered and always being in high demand. The price in this market should be determined either by specially authorized persons or by computer systems that satisfy the application for a particular algorithm.
Not all stock values enjoy such high demand, able to conduct a continuous double auction trade. The vast majority of securities circulate outside the stock exchange. At the same time, a set of professional participants of the securities market, which have the opportunity to purchase and sell equity instruments on their own account, can form the so-called dealer market. Dealers who divide the market or other stock instruments, publicly announce the prices of purchase and sale. Dealers are required to make transactions with any persons at the prices that they publicly announced and do not have the right to avoid concluding such transactions.
The main characteristics of secondary RZB include depth, width and level of resistance. Depth and width RZB is determined by the volume of demand or supply at each specific price level. The more people want to buy or sell a security at a particular price, the larger the volume of their applications, the wider and deeper the secondary market. Resistance characterizes the price range in which market participants are willing to buy or sell securities. The wider this range, the more likely that the market will remain liquid.
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