Investments Kapitel 3

Chapter
3 Security Markets
Bodie, Kane, and Marcus

Essentials of Investments
12th Edition
3.1 How Firms Issue Securities: Primary vs. Secondary
• Primary market
• Market for new issues of securities
• Secondary market
• Market for already-existing securities.
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3.1 How Firms Issue Securities: Primary vs. Secondary
Primary Secondary
New Issue Created/Sold Current owner sells to
another party
Issuer Receives Issuer Does Not
Proceeds from Sale Receive Proceeds from
Sale
3.1 How Firms Issue Securities: Private vs. Public
Privately Held Publicly Traded

Definition Ownership help by a small Securities sold to the
group of investors general public; investors to
trade shares
Shareholders Up to 499 shareholders Unlimited number
Financial Statements Fewer obligations to Obligated to release
release financial financial statements to the
statements to public public
Primary Offering Sold Directly to a Small Sold to the Public (often
group of Investors with an Underwriter)
3.1 How Firms Issue Securities: Public
• Publicly Traded Companies

• Securities sold to the general public; investors
to trade shares
• Unlimited number of share holders
• Obligated to release financial statements to the public
• Sold to the Public (often with an Underwriter)
3.1 How Firms Issue Securities: IPO
• Publicly Traded Companies

• Initial public offering: First public sale of stock
by a formerly private company
• Underwriters: Purchase securities from issuing
company and resell them
• Prospectus: Description of firm and security
being issued
3.1 How Firms Issue Securities
• Initial Public Offerings
• Issuer and underwriter put on “road show”
• Purpose: Bookbuilding and pricing
• Underpricing
• Post-initial sale returns average 10% or more

“winner’s curse”
• Easier to market issue à costly to issuing firm
Figure 3.1 Relationship among a Firm Issuing Securities, the
Underwriters, and the Public
3.1 How Firms Issue Securities: Shelf Registration
• SEC Rule 415
• Security is preregistered
• Offered at any time within the next two years
• 24-hour notice: Any or all of preregistered

amount may be offered
• Introduced in 1982
Why would a firm use Rule 415?
Underpricing
• For an IPO transaction you need three parties:
- the issuing firm

- an underwriter
- investors.
• Underpricing is costly for the owners of the firm. The shares are sold at too
low a price.
• Underpricing at initial public offering refers to the extent to which a stock's
initial trading price is below its fundamental value, measured by the
percentage change in price following public listing, over a specified period.
• As an example, imagine an IPO for which the shares were sold at $20 and
that the first day of trading shows shares trading at $23.5, thus the associated
underpricing induced is (23.5 / 20) -1 = 17.5%
Figure 3.2 Average First-Day Returns for (mostly) European IPOs
Figure 3.2 Average First-Day Returns for Non-European IPOs
Figure 3.2 Average First-Day Returns 1980 - 2018
3.2 How Securities Are Traded: Financial Markets
• Overall purpose: Facilitate low-cost

investment
• Bring together buyers and sellers at low cost
• Provide adequate liquidity

• Minimize time to trade
• Promotes price continuity
• Set and update prices of financial assets
• Reduce information costs associated with investing
3.2 How Securities Are Traded: Market Types
• Direct Search Markets

• Buyers and sellers locate one another on their
own
• Brokered Markets
• Third-party assistance in locating buyer or seller
3.2 How Securities Are Traded: Market Types
• Dealer Markets
• Third party acts as intermediate buyer/seller
• Auction Markets
• Brokers and dealers trade in one location
• Trading is more or less continuous
3.2 How Securities Are Traded: Order Types
• Market order:
• Execute immediately at best price
• Bid price: price at which dealer will buy security
• Ask price: price at which dealer will sell security
• Price-contingent order:
• Limit buy/sell order: specifies price at which investor
will buy/sell
• Stop order: not to be executed until price point hit
Figure 3.3 Market Orders: Average Market Depth
Figure 3.4 Limit Order
3.2 How Securities Are Traded
• Trading Mechanisms
• Dealer markets
• Over-the-counter (OTC) market: Informal network of
brokers/dealers who negotiate securities sales
• NASDAQ stock market: Computer-linked price
quotation system for OTC market
3.2 How Securities Are Traded
• Trading Mechanisms Continued
• Electronic communication networks (ECNs)
• Computer networks that allow direct trading
• Individual investors need a broker to execute trades
• Specialist markets
• A market maker is a trader that quotes both bid and ask
price to the public
• Provide liquidity to other traders
3.3 Rise of Electronic Trading: Timeline of Market Changes
• 1969: Instinet (first ECN) established
• 1975: Fixed commissions on NYSE eliminated
• Securities and Exchange Act amended to create
National Market System (NMS)
• 1994: NASDAQ scandal
• SEC institutes new order-handling rules
• NASDAQ integrates ECN quotes into display
• SEC adopts Regulation Alternative Trading
Systems, giving ECNs ability to register as stock
exchanges
3.3 Rise of Electronic Trading: Timeline of Market Changes
• 1997: SEC drops minimum tick size from 1/8 to 1/16

of $1
• 2000: National Association of Securities Dealers
splits from NASDAQ
• 2001: Minimum tick size $.01
• 2006: NYSE acquires Archipelago Exchanges and
renames it NYSE Arca
• SEC adopts Regulation NMS, requiring exchanges
to honor quotes of other exchanges
Figure 3.5 Effective Spread vs. Minimum Tick Size
3.4 U.S. Markets
• NASDAQ
• Approximately 3,000 firms
• New York Stock Exchange (NYSE)
• Stock exchanges: Secondary markets where
already-issued securities are bought and sold
• NYSE is largest U.S. Stock exchange
• ECNs
• Latency: Time it takes to accept, process, and
deliver a trading order
Alternative trading systems (ATSs) and
multilateral trading facilities (MTFs)
• An ATS is an electronic trading system operated by broker-dealers. It
functions much like an exchange. The purpose of an ATS is to match buy
and sell orders for its subscribers directly, without the use of an
intermediary third party. The increase in popularity of ATS platforms has
directly resulted in increased liquidity for trading public securities
worldwide.
• ATS platforms are now used across the globe, and are known under several
names, including electronic communication networks (ECNs) in the U.S.,
cross networks, call networks, and multilateral trading facilities (MTFs) in
Europe.
• MTFs and ATSs are noted for high trading speeds (low latency) and
relatively low execution costs.
• The origin of the MTFs regulation in Europe and of the ATSs in US was
driven by a regulatory objective of diminshing the monopoly power of the
single national stock exchanges.
Alternative trading systems (ATSs) an multilateral trading facilities (MTFs)
• ATSs in the U.S. are regulated as broker-dealers and are not subject to the
same regulatory regime as traditional stock exchanges.
• ATSs broadly fall into the following 2 categories:
- ECNs registered with the SEC

- Dark Pools; they offer trading services mainly to institutional
investors and trade large orders (block orders)
• Although dark pools are legal, they operate with little transparency. As a
result, dark pools, along with high-frequency trading (HFT), are often
criticized in the finance industry; some traders believe that these elements
convey an unfair advantage to certain players in the stock market.
3.5 New Trading Strategies
• Dark Pools
• ECNs where participants can buy/sell large
blocks of securities anonymously
• Blocks: Transactions of at least 10,000 shares
Alternative trading systems (ATSs) and multilateral
trading facilities (MTFs)
• MTFs were introduced in Europe in 2007 by MIFID (Market in Financial
Instruments Directive).
• They are a specific type of ATS. Usually they do not have a listing process.
• The trading landscape changed significantly under MiFID II (introduction of

new trading venues, beyond MTFs organized trading facilities, and the SI
(systematic internaliser) which entered into force at the beginning of 2018.
• In 1998 Regulation ATS was adopted by the Securities and Exchange
Commission. Its purpose was to provide a framework for ATS platforms and
provide basic investor protections. Regulation ATS also gave broker-dealers
the option to register as a national security exchange or an alternative trading
system.
Trading venues in MIFID II
• Regulated Market (RM): It’s a multilateral system operated and/or managed by
a market operator, which brings together or facilitates the bringing together of
multiple third-party buying and selling interests in financial instruments in
accordance with non-discretionary rules.
• Multilateral Trading Facility (MTF): It’s a multilateral system operated by an
investment firm or a market operator, which brings together multiple third-party
buying and selling interests in financial instruments in in accordance with non-
discretionary rules.
• Organised Trading Facility (OTF): It’s a multilateral system which is not a
regulated market or an MTF and in which multiple third-party buying and selling
interests are able to interact in the system in a way that results in a contract.
Unlike RMs and MTFs, operators of an OTF have some discretion in execution.
• Are Systematic Internalizers a type of trading venue?
No, Systematic Internalizers are counterparty, not a trading venue. Systematic

Internalizers are firms which, deal on own account when executing client orders
outside a regulated market, an MTF or an OTF.
BATS Global Markets. (former BATS Chi-X Europe)
• Previously a multilateral trading facility (MTF), BATS Chi-X Europe received
Recognized Investment Exchange (RIE) status from the Financial Conduct Authority
(FCA) in May 2013, and was from then authorized to operate a Regulated Market for
primary listings alongside its existing business.
• Initially two separate entities, Chi-X Europe was the first pan-European equities exchange
to launch in 2007; BATS Europe was launched in 2008. In February 2011, BATS Global
Markets agreed to buy Chi-X Europe for $300 million..
• BATS Global Markets is now a global stock exchange operator.
• BATS was founded in June 2005, became operator of a licensed U.S. stock exchange in
2008 and opened its pan-European stock market in October 2008.
• As of February 2016, it operated four U.S. stock exchanges, two U.S. equity options
exchanges, the pan-European stock market, and a global market for the trading of foreign
exchange products.
• BATS was acquired by Chicago Board of Exchange Global Markets in 2017.
• The name 'BATS' was originally an acronym for "Better Alternative Trading System».
Fragmentation of trading
• Trading in a securities market can be “concentrated”, ie when most
trading is conducted at one or two trading centres. Or it can be
“fragmented”, ie when orders are sent to numerous trading venues that
compete with each other.
• Trading venue systems may vary not just in terms of liquidity and
transaction costs, but also in transparency, speed (ie latency) and other
attributes important to (specific segments of) the market. Note that
many of these forms of fragmentation are not (necessarily) due to any
(obvious) regulatory or other policy barriers, and arise from market
forces, notably competition (BIS, 2019).
• While fragmentation in the US and Europe were sparked by changes in
regulation, fragmentation of trading away from established exchanges
in Asia is starting to happen purely due to the emergence of competing
platforms.
Figure 3.6 Market Share of Trading in NYSE-Listed Shares
3.5 New Trading Strategies
• Algorithmic Trading
• Use of computer programs to make rapid
trading decisions
• High-frequency trading
• A subset of algorithmic trading
• Computer programs make very rapid trading
decisions for very small profits
High frequency trading
• The activities of HFT firms have been credited with reducing bid-ask spreads,
thereby making markets more efficient for all involved.
• Despite these researches, HFT may well have an ambiguous impact on market
efficiency and quality and also on price volatility.
• The main concerns with strategies that use high frequency trading techniques
are that some investors can be put at a disadvantage if faster traders are able to
jump ahead of the queue or “front run” when buying and selling stock.
• As a result HFT is an issue of specific interest to scholars and regulators.
The flash crash of 2010
• On May 6° 2010 the DJIA tumbled over 1000 points, which represents a
plunge of over 9% within a couple of minutes.
• The DJIA dip was the biggest ever in its multi-decade history, and it wiped off
over $1 trillion in market value in less than 30 minutes.
• The index quickly recovered a majority of the losses within an hour, with
subsequent investigations revealing that the dip was caused by market
fragmentation, general negative sentiment and large directional bets executed
by algorithmic strategies.
• A flash crash is a sharp and sudden dip in process due to the withdrawal of
orders, with the market then quickly recovering, usually within the same
trading day …. It all happens in a flash.
• There is evidence that flash crashes are fairly common in the market, but the
Flash Crash of 2010 still stands as the biggest and fastest ever in history
Investigations by US SEC and CFTC (Commodities Futures
Trading Commission)
• Shortly after they embarked on investigations on the actual cause of the Flash
Crash.
• A report was release in September 2010 that explained the sequence of events
that led to the crash.
• The explanation received criticism, especially because it came after over 5
months of investigations into an event that lasted just 5 minutes. This alone
proved that the Commissions were running archaic systems.
• It was said that a large mutual fund sold 75,000 e-mini futures.
• In April 2015, London based individual trader Navinder Singh Sarao was
arrested on allegations that his activities on May 6° 2010, caused the Flash
Crash. Sarao’s indictment did not convince many people.
• It is evident how difficult it can be to go after the real operators that are running
sophisticated HFT algorithms in the market.
Circuit breakers
• After the Flash Crash market-wide circuit breakers were adopted by stock
exchanges.
• Circuit breakers are safeguarding mechanisms that temporarily halt continuos
trading when an indicator crosses a pre-specified threshold during volatile
market conditions.
• They can stop the trading of the entire market (market-wide circuit breakers)
or stop the trading of single securities (single-stock circuit breakers).
• In March 2020, the Covd-19 induced volatility led to multiple occurences of
market-wide trading halts, and the effectiveness of the circuit breakers re-
entered the discussion among exchanges, regulators and market participants.
• For instance, in March 2020, market wide circuit breakers were triggered four
times in the U.S., twice in South Korea, six times in Brazil and six times in
Egypt.
Circuit breakers in March 2020
• The turbulent market and the record high trigger of circuit breakers during
March 2020 also prompted security exchanges and financial regulators to
evaluate and revise the design of the trading halts mechanisms.
• For example, the Athens stock exchange lengthened the duration of trading
halts from 2 minutes to 10 minutes. The Indonesia Stock Exchange expanded
the original single-tier circuit breaker system to a three-tier system to allow for
multiple trading halts.
• The U.S. SEC also asked the national exchanges and FINRA to analyze the
volatility events in March 2020 and the corresponding market-wide circuit
breakers. The ensuing report concluded that the market-wide circut breaker
mechanisms worked as intended during the March 2020 events.
• All in all, a flash crash will inevitably happen again. But the lesson learned
ensure that any new occurence won’t be as significant.
Crashes and circuit breakers
• The Flash Crash of 2010 highlighted how the market structure is more
complex and interconnected.
• The crash happened in the equity markets, but it came as a result of large sell
orders placed on e-mini contracts on the futures market.
• This is an illustratrion of why technology is really a double-edged sword.
• On one-hand, there is reduced execution time and costs as well as a quick

flow of information. But on the other hand, markets are now interconnected
and a mishap or technicality in one market can lead to massive consequences
in another.
3.6 Globalization of Stock Markets
• Now trading is automated electronic trading
• The result is 24-hour global markets
• Movement toward market consolidation
Market Consolidations and Mergers
• There are approximately 80 major national stock markets.
• Western and Eastern Europe once had more than 20
national stock exchanges where at least 15 different
languages were spoken.
• It appears that over time a European stock exchange will
eventually develop. However, a lack of common
securities regulations, even among the countries of the
European Union, is hindering this development.
• Today, stock markets around the world are under pressure
from clients to combine or buy stakes in one another to
trade shares of companies anywhere, at a faster pace. On
the other side the stock exchange market is a competitive
one.
Mergers and Aggregation in EU
• Euronext was formed on September 22, 2000, as a result of a
merger of the Amsterdam and Brussels stock exchanges and
Paris Bourse. In June 2001 the Lisbon stock exchange
merged with Euronext.
• Norex was an alliance among the Nordic and Baltic

exchanges in Denmark, Estonia, Finland, Latvia, Lithuania,
Sweden (all owned and operated by OMX, the largest
integrated securities market in Northern Europe, Iceland and
Norway). This single Nordic exchange eventually became
part of NASDAQ OMX Group in 2008.
Mergers and aggregations in US
• On April 4, 2007 Euronext merged with NYSE to form
NYSE Euronext.
• On October 1, 2008 NYSE Euronext acquired The
American Stock exchange to form NYSE AMEX.
• On November 13, 2013 Intercontinental Exchange (ICE)
acquired NYSE Euronext for $ 11 billion. On March 20,
2014 ICE spun off Euronext in a $1,2 billion IPO.
§§§
• On February 27, 2008, Nasdaq acquired OMX to form
NASDAQ OMX and on July 24, 2008, NASDAQ OMX
acquired Philadelphia Stock exchange.
Mergers and aggregations in Italy
• In 2007 the London Stock Exchange acquired the Milan-
based Borsa Italiana for 1.6bn euro ($2bn) to form the London
Stock Exchange Group plc.
• The combination was intended to diversify the LSE's product
offering and customer base.
• The all-share deal diluted the stakes of existing LSE

shareholders, with Borsa Italiana shareholders receiving new
shares representing 28 per cent of the enlarged register.
BORSA ITALIANA and Euronext
• In 2018 The Irish Stock Exchange joins Euronext as Euronext Dublin.
• Euronext on 29 April 2021 completed its acquisition of Borsa Italiana from the
London Stock Exchange Group in a deal worth 4.4 billion euros.
• The move was first announced in October 2020 and received the greenlight from
European regulators in March 2021.
• The significantly scaled-up Group is now positioned as the leading venue in Europe
for listing and secondary markets for both debt and equity financing.
• Euronext increases its business diversification with new capabilities in fixed income
trading and clearing.
• Euronext’s data center will be based in Bergamo, Italy and should be operational as
of 2022.
• The migration has being planned in response to multiple factors, including the
acquisition of the Borsa Italiana Group, the dynamic created by Brexit and a strong
rationale to locate the Group’s core data centre in a country where Euronext operates
a large business.
Mergers and Aggregations (failed)
The £21bn merger between the London Stock Exchange and its German rival
Deutsche Börse has fallen apart after it was blocked by the European Commission
on the day that Britain served notice on its EU membership (2017).
• The EU competition regulator, said the deal between the London and Frankfurt
exchanges would create a “de facto monopoly in the crucial area of fixed income
instruments”.
• The commission’s opposition ends a deal that had been in the making for 13
months.
• LSE Group and Deutsche Börse had pledged to press ahead with the deal even
after Britain voted to leave the EU. This was the third failed attempt at a merger
between the two companies after previous setbacks in 2000 and 2005.
• The proposed tie-up had been criticized across Europe, including in France,
Belgium, Portugal and the Netherlands, which were concerned about the future
of their own exchanges. Critics in Frankfurt also questioned why the enlarged
company was going to be based in London given Deutsche Börse would have
held 54.4% of the shares in the group and Britain was leaving the EU.
Intercontinental Exchange (ICE)
• Nyse is operated by the electronic trading group Intercontinental
exchange which acquired it in 2013.
• Intercontinental Exchange (ICE) is an American company that

owns exchanges for financial and commodity markets, and operates
12 regulated exchanges and marketplaces. This includes ICE futures
exchanges in the United States, Canada and Europe, the Liffe futures
exchanges in Europe, the New York Stock Exchange, equity options
exchanges and OTC energy, credit and equity markets.
• ICE also owns and operates 6 central clearing houses: ICE Clear
U.S., ICE Clear Europe, ICE Clear Singapore, ICE Clear Credit, ICE
Clear Netherlands and ICE NGX.
• ICE has offices in Atlanta, New York, London, Chicago, Bedford,
Houston, Winnipeg, Amsterdam, Calgary, Washingto D.C., San
Francisco, Tel Aviv and Singapore.
Figure 3.7 Market Capitalization of World Stock Exchanges, 2019
3.7 Trading Costs
• Commission: Fee paid to broker for making transaction
• Spread: Cost of trading with dealer
• Bid: Price at which dealer will buy from you
• Ask: Price at which dealer will sell to you

Spread = Price Ask - Price Bid
• Combination: On some trades both are paid
• Stock trading fees have fallen dramatically in the last three

decades. Nowadays brokers try to establish relationship with
customers who pay for financial advice. Online brokers earn
more interest than they pay to customers on the fund kept in
brokerage account. And payment for order flow passing to HFTs.
Trading in International Equities
• Magnitude of international equity trading
• Cross-listing of shares
• Yankee stock offerings

• American Depository Receipts (ADRs)
Magnitude of International Equity Trading
• During the 1980s world capital markets began a trend toward greater
global integration.
• This trend was caused by diversification, reduced regulation,

improvements in computer and communications technology, and an
increased demand from MNCs for global issuance.
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Bourses become more than stock exchanges
• Diversification into clearing and other trading tools such as the
provision of data for fixed income or exchange-traded products
markets has helped widen income streams.
• This approach has helped protect bourses from unpredictable
revenues from trading. Data provision, in particular, is a higher-
margin product that many hedge funds and banks cannot do
without.
• For some, the name “stock exchange” now barely describes the
scope of their business.
Cross-Listing of Shares
• Cross-listing is the listing of a company's common shares on a different
exchange than its primary and original stock exchange.
• To be approved for cross-listing, the company must meet the same
requirements as any other listed member of the exchange with regard

to accounting policies.
• These requirements include the initial filing and ongoing filings with
regulators, a minimum number of shareholders, and minimum

capitalization.
Advantages of Cross-Listing
• It expands the investor base for a firm.
- Very important advantage for firms from emerging market
countries with limited capital markets.
• Establishes name recognition for the firm in new capital markets,
paving the way for new issues.
• May offer marketing advantages.
• Cross-listing into developed markets with strict securities
regulations and information discloser may signal investors that
improved corporate governance is forthcoming.
• May mitigate possibility of hostile takeovers.
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Fiat Chrysler Automobiles (FCA)
• Before the creation of Stellantis, FCA common shares were listed and could be
traded on either the NYSE in US Dollars or the MTA, managed by the Italian
Stock Exchange, in Euros.
• Shares traded on the NYSE are settled through The Depository Trust &
Clearing Corporation (“DTC”) in the US, while shares traded on MTA are
settled through Monte Titoli S.p.A. (“MT”) in Italy. Settlement of trades on
both the NYSE and MTA occurs two business days after trading (T+2).
• Common shares may be held through a broker/bank/financial intermediary

participant either in DTC or through the Italian clearing system. MT maintains
a participant account within DTC and shares traded on MTA will be held in
MT’s DTC account. This is intended to facilitate the transfer of shares among
settlement systems.
Fiat Chrysler Automobiles (FCA)
• Investors can request their broker/financial intermediary to move

the common shares between MT and a DTC participant and that
transfer can normally be carried out in 1 business day.
• As a result of the above, the system is designed to allow an

investor to trade at any time, in its discretion, on either the NYSE
or MTA regardless of where the investor’s shares are held prior
to the trade. The shares can be transferred, if needed, from one
settlement system to the other in time for regular settlement of
the trade.
Triple listing
• On 20 Dicember 2020 EU approved the merger between
Groupe PSA (Peugeot S.A.) and FCA.
• In 2021 (16 January) FCA merged with Groupe PSA creating a

new group Stellantis. Its shares are traded in Paris, Milan and
Nyse.
• Stellantis common shares are listed and can be traded on either

the NYSE in US Dollars or Euronext Milan and Euronext
Paris, both in Euros.
Yankee Stock Offerings
• Yankee Market refers to a marketplace where foreign companies issue
bonds and equities denominated in U.S. dollars and are sold to U.S.
investors. These issuances are primarily aimed at American investors
but attract international investors as well. Yankee bonds, for example,
are debt securities issued by foreign entities in the U.S. market.
• The primary purpose of issuing Yankee bonds and stocks is to get access
to U.S. investors and utilize the larger U.S. capital market for raising
funds at competitive interest rates, usually lower than their home
country’s interest rates.
• Investing in the Yankee Market allows American investors to diversify
their portfolios by investing in foreign firms and helps foreign firms
receive funds to support their operations and expansion.
American Depository Receipts
• Foreign stocks often trade on U.S. exchanges as ADRs.
• It is a receipt that represents the number of foreign shares that
are deposited at a U.S. bank.
• The bank serves as a transfer agent for the ADRs.
Advantages of ADRs
• There are many advantages to trading ADRs as opposed
to direct investment in the company’s shares:
• ADRs are denominated in U.S. dollars, trade on U.S.
exchanges, and can be bought through any broker.
• Dividends are paid in U.S. dollars.
• Most underlying stocks are bearer securities and the
ADRs are registered.
• ADR trades clear in 3 business days whereas settlement
practices for the underlying stock vary in foreign
countries.
Volvo ADR
• A good example of a firm that trades in the U.S. as an ADR is
Volvo AB, the Swedish car maker.
• Volvo trades in the U.S. on the NASDAQ under the ticker
VOLVY.
- The depository institution is JPMorgan ADR Group.
- The custodian is a Swedish firm, S E Banken Custody.
• Of course, Volvo also trades on the Stockholm Stock Exchange
under the ticker VOLVB.
Mechanics of Issuance & Cancellation of ADRs
ADR Investor
Place order
Delivery
Broker buys existing ADR Depository
U.S. Broker issues new Depository
ADR
NYSE
share deposit
confirmation
OTC Broker
Depository
receives
orders
of
shares for new
NASDAQ ADR
Foreign broker
Foreign Broker deposits shares
Custodian
Foreign broker buys shares
Foreign Exchange
Empirical Findings on Cross-Listings and ADRs
• An internationally diversified portfolio of ADRs outperforms both
a U.S. stock market and a world stock market benchmark on a
risk-adjusted basis.
• For most stocks, the home-market price and the ADR price is
within 20-85 basis points—thus limiting any arbitrage
opportunities.
Major National Stock Market Indexes
Italian indexes
• The FTSE Italia Series provides investors with a comprehensive
and complementary set of market-cap weighted indexes
measuring the performance of Italian companies listed on the
MTA and MIV markets of Borsa Italia.
• The indexes are designed for use as performance benchmarks
and are suitable for the creation of structured products, index-
tracking funds, exchange-traded funds and derivatives.
• FTSE MIB, FTSE Italia Mid Cap, FTSE Italia Small Cap, FTSE
Italia All-Share, FTSE Italia STAR ……
Special transactions in equity markets
• When purchasing securities, investors have easy access to a

source of debt financing called broker’s call loans. Taking
advantage of these loans is called «buying on margin».
• A bearish investor who wants to bet against a company can

enter a short sale which will profit from a decline in the
security’s price.
3.8 Buying on Margin
• Margin
• Securities purchased with money borrowed from broker
• Net worth of investor's account
• Initial Margin Requirement (IMR)

• Minimum set by Fed (Regulation T): 50%
• Minimum percent of initial investor equity
• 1 − IMR = Maximum percent investor can borrow
• Equity
• Position value – Borrowing + Additional cash
• Maintenance Margin Requirement (MMR)

• Minimum value before additional funds must be added
• Exchanges mandate minimum 25%
• Margin Call
• Notification from broker that you must put up additional
funds or have position liquidated
• If Equity / Market value £ MMR, then

margin call occurs
Market Value - Borrowed
£ MMR
Market Value
• Solve for market value
• A margin call will occur when:
Borrowed
Market Value £
1 - MMR
• Margin Trading: Initial Conditions
• X Corp: Stock price = $70
• 50%: Initial margin
• 40%: Maintenance margin
• 1000 shares purchased
Initial Position
Stock $70,000 Borrowed $35,000
Equity $35,000
• Stock price falls to $60 per share
• Position value – Borrowing + Additional cash
• Margin %: $25,000/$60,000 = 41.67%

New Position
Equity $25,000
• How far can price fall before margin call?

• Market value = $35,000/(1 – .40) = $58,333
• With 1,000 shares, stock price for margin

call is $58,333/1,000 = $58.33
• Margin % = $23,333/$58,333 = 40%
• To restore initial margin requirement, equity = ½
x $58,333 = $29,167
New Position
Equity $23,333
Table 3.1 Illustration of Buying Stock on Margin
3.9 Short Sales
• Sale of shares not owned by investor but borrowed through broker
Mechanics
• Borrow stock from broker; must post margin
• Broker sells stock, and deposits proceeds/margin in margin
account
• Covering or closing out position: Buy stock; broker returns title
to original party
3.9 Short Sales
• Required initial margin: Usually 50%
• More for low-priced stocks
• Liable for any cash flows

• Dividend on stock
• Zero tick, uptick rule

• Eliminated by SEC in July 2007
3.9 Short Sales: Example
• Sell 100 short shares of stock at $60 per
share
• $6,000 must be pledged to broker
• Pledge 50% margin, or $3,000
• Now there is $9,000 in margin account
• Short sale equity = Total margin account –

Market value
3.9 Short Sales: Example
• Example
• Maintenance margin for short sale of stock with

price > $16.75 is 30% market value:
.30 ´ $6, 000 = $1,800
• You have $1,200 excess margin
• What price for margin call?
3.9 Short Sales: Example, Margin Call
• Margin Call: Equity £ (.30 x Market value)
Equity = Total Margin account - Market Value

• When Market value = Total margin
account / (1 + MMR)
• Price for margin Market value = $9,000/(1
+ 0.30) = $6,923
• Margin call: PMargin Call =
$6, 293
= $69.23
100 shares
3.9 Short Sales: Example, Continued
• If the call occurs, then:
• Equity = $9,000 − $6,923 = $2,077 (30% of
Market Value)
• To restore 50% initial margin:

• ($6,923/2) − $2,077 = $1,384.50
Table 3.2 Cash Flows from Purchasing vs. Short-Selling
3.10 Regulation of Securities Markets
• Self-Regulation
• The Sarbanes-Oxley Act passed by Congress in 2002; it aims to

protect investors against corporate frauds, particularly accounting
frauds.
• It tightens penalties against executives who commit corporate fraud

and strengthen accounting disclosure requirements, ethical guidelines
for financial officers, guidelines for analysts that can have conflicts of
interest and increase the SEC’ authority.
• Created the Public Company Accounting Oversight Board
• Requires independent financial experts to serve on audit

committees
The Dodd-Frank Wall Street Reform and Consumer
Protection Act
• It is a massive piece of financial reform legislation that was passed in
2010, by the U.S. Congress in response to financial industry behavior
that led to the financial crisis of 2007-2008 (Obama administration).
• It sought to make the U.S. financial system safer for consumers and
taxpayers.
• The act contains numerous provisions, spelled out over 848 pages,
that were to be implemented over a period of several years.
• Critics of the law argue that the regulatory burdens it imposes could
make U.S. firms less competitive than their foreign counterparts.
• In 2018, Congress passed a new law that rolled back some of Dodd-
Frank’s restrictions. (Trump administration)
3.10 Regulation of Securities Markets
• Insider Trading
• Nonpublic knowledge about a corporation

possessed by officers, major owners, etc., with
privileged access to information
• SEC requires officers, directors, and major
stockholders to report all transaction in their
firm’s stock

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Investments Kapitel 3

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Chapter

Bodie, Kane, and Marcus

Privately Held Publicly Traded

• Publicly Traded Companies

• Publicly Traded Companies

• Initial Public Offerings

• Issuer and underwriter put on “road show”

• Purpose: Bookbuilding and pricing

• Post-initial sale returns average 10% or more

• SEC Rule 415

• Offered at any time within the next two years

• 24-hour notice: Any or all of preregistered

Why would a firm use Rule 415?

- the issuing firm

• Overall purpose: Facilitate low-cost

• Provide adequate liquidity

• Promotes price continuity

• Set and update prices of financial assets

• Reduce information costs associated with investing

• Direct Search Markets

• 1997: SEC drops minimum tick size from 1/8 to 1/16

• ATSs broadly fall into the following 2 categories:

- ECNs registered with the SEC

• Blocks: Transactions of at least 10,000 shares

• The trading landscape changed significantly under MiFID II (introduction of

No, Systematic Internalizers are counterparty, not a trading venue. Systematic

• As a result HFT is an issue of specific interest to scholars and regulators.

• This is an illustratrion of why technology is really a double-edged sword.

• On one-hand, there is reduced execution time and costs as well as a quick

• Now trading is automated electronic trading

• The result is 24-hour global markets

• Movement toward market consolidation

• Norex was an alliance among the Nordic and Baltic

• The combination was intended to diversify the LSE's product

offering and customer base.

• The all-share deal diluted the stakes of existing LSE

• Intercontinental Exchange (ICE) is an American company that

• Spread: Cost of trading with dealer

• Bid: Price at which dealer will buy from you

• Ask: Price at which dealer will sell to you

• Combination: On some trades both are paid

• Stock trading fees have fallen dramatically in the last three

• Yankee stock offerings

• This trend was caused by diversification, reduced regulation,

exchange than its primary and original stock exchange.

• To be approved for cross-listing, the company must meet the same

requirements as any other listed member of the exchange with regard

regulators, a minimum number of shareholders, and minimum

• Common shares may be held through a broker/bank/financial intermediary

• Investors can request their broker/financial intermediary to move

• As a result of the above, the system is designed to allow an

• In 2021 (16 January) FCA merged with Groupe PSA creating a

• Stellantis common shares are listed and can be traded on either

• When purchasing securities, investors have easy access to a

• A bearish investor who wants to bet against a company can

• Initial Margin Requirement (IMR)

• Maintenance Margin Requirement (MMR)

• If Equity / Market value £ MMR, then

• 50%: Initial margin

• 40%: Maintenance margin

• 1000 shares purchased

• Position value – Borrowing + Additional cash

• Margin %: $25,000/$60,000 = 41.67%

• How far can price fall before margin call?