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:
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Notes
- 1.
Cf. Glossary, which is an integral part of this book: every term and every abbreviation in bold are explained in the glossary.
- 2.
A trade takes place when a buy order and a sell order of the same stock are matched and executed, identically in price, time, size, and place.
- 3.
The Financial Conduct Authority (FCA) was formed in 2013 as one of the succeeding agencies of the Financial Services Authority (FSA) in the UK. It is a quasi-governmental agency that regulates retail and wholesale financial service provider. The second agency formed is the Prudential Regulation Authority (PRA). As part of the Bank of England it oversees the regulation and supervision of banks, investment firms, etc.
- 4.
MiFID is short for the European Markets in Financial Instruments Directive, in force since 2007, that is currently under review. The EU Commission’s proposal for a revised directive is hence called MiFID II.
- 5.
Do the right things!
- 6.
Ockham’s razor is a principle of logical problem solving stating that out of a selection of hypotheses, the simplest or the one with the least assumptions should be used to proceed.
- 7.
Do the things right!
- 8.
- 9.
Bullets 1–4: 19 Abs. 4 BörsG; bullets 5–7: §§ 12–14 BörsO FWB.
- 10.
The investment process is described in detail in Book II, Chapter XII.
- 11.
See Chap. 4.
- 12.
Cf. [2], Equity Markets in Action, pg. 10ff.
- 13.
Cf. [3].
- 14.
Including equal treatment regarding access, transparency, information (ad hoc information and market data), fees, and functionality.
- 15.
The rollout of a new market model is a major technological project with key elements like member education and training (traders, IT departments, middle and back-office); tuning the system in terms of latency, volume, and functionality; getting started in time with members, surveillance, market operations, and other dependent entities like CCPs, settlement, and custody organizations.
- 16.
C.f.: DBAG White Paper 2014, pg. 8.
- 17.
With this structure, CCPs’ lines of defense withstand an equity market drop of 30 % ([4], p. 23).
- 18.
For example: [5], Clearing Conditions for Eurex Clearing AG, Chapter I, Part 1, Top 2.1: https://www.eurexclearing.com/blob/clearing-en/51612-136778/238376/34/data/clearing_conditions_en_ab_18_11_2013.pdf.pdf.
- 19.
For example: [5], Clearing Conditions for Eurex Clearing AG, Chapter I, Part 1, Top 3: https://www.eurexclearing.com/blob/clearing-en/51612-136778/238376/34/data/clearing_conditions_en_ab_18_11_2013.pdf.pdf.
- 20.
See [6].
- 21.
See [6].
- 22.
For example volatility risk, counterparty risk, market risk, country and currency risk, liquidity risk, hedging risk.
- 23.
Round-trip time refers to the time order processing takes from an intermediary via order book and matching to the CCP and back to the intermediary.
- 24.
Each specific situation in the CLOB has exactly one execution price.
- 25.
For price discovery only in technologically determined exceptional cases parallel.
- 26.
In philosophy an axiomatic system has to be consistent, whereas price discovery as a system has to be consistent AND complete (cover all possible cases).
- 27.
Cf. [7].
- 28.
Cf. Chap. 4.
- 29.
Deutsche Bank quarterly report (30.09.2014).
- 30.
Deutsche Börse Group (31.12.2014).
References
U.S. Code Chapter 2B - SECURITIES EXCHANGES: http://www.law.cornell.edu/uscode/text/15/chapter-2B
Schwartz, Robert A. / Francioni, Reto (2004): Equity Markets in Action. The Fundamentals of Liquidity, Market Structure & Trading. Hoboken: Wiley.
John Losee, A Historical Introduction to the Philosophy of Science (Oxford; Oxford University Press, 2001) 228; cited according to Thomas S. Kuhn, The Essential Tension (Chicago; University of Chicago Press, 1977), 321–2.
Eurex Clearing / Deutsche Börse Group (2014): How central counterparties strengthen the safety and integrity of financial markets. Frankfurt / Main: Deutsche Börse AG.
Clearing Conditions for Eurex Clearing AG: https://www.eurexclearing.com/blob/clearing-en/51612-136778/238376/34/data/clearing_conditions_en_ab_18_11_2013.pdf.pdf
Clearstream / Accenture (2014): Collateral Management. Unlocking the Potential in Collateral: http://deutsche-boerse.com/INTERNET/MR/mr_presse.nsf/0/DE08E32FA7CC4EFBC125790B004A79F4/$File/CM_PoV_Clearstream_Collateral_Management_sept2011.pdf?OpenElement
Gómez-Pérez, A./ Fernández-Lopez, M./ Corcho, O. (2004): Ontological Engineering. Berlin: Springer
Deutsches Börsengesetz: https://www.gesetze-im-internet.de/bundesrecht/b_rsg_2007/gesamt.pdf
Börsenordnung für die Frankfurter Wertpapierbörse: http://www.deutsche-boerse-cash-market.com/blob/1198492/a29dc9dfa533193a4ef54319da7f63ae/data/2016-03-18-Boersenordnung-fuer-die-frankfurter-wertpapierboerse.pdf
Acknowledgments
The author would like to acknowledge the valuable contribution of Mr. Ulrich Strohmeier and thank him for his continued support regarding Section 2.11 New Customer Needs.
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Francioni, R. (2017). An Exchange and Its Value Chain. In: Francioni, R., Schwartz, R. (eds) Equity Markets in Transition. Springer, Cham. https://doi.org/10.1007/978-3-319-45848-9_2
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