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Brokers Awareness program (5)

Brokers Awareness program (5). Dr. Mounther Barakat Securities and Commodities Authority. برنامج توعية الوسطاء اللقاء الخامس. د. منذر بركات العمري هيئة الاوراق المالية والسلع. Margin Trading الاتجار بالهامش. Margin is the amount you put up to trade without paying the full balance.

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Brokers Awareness program (5)

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  1. Brokers Awareness program(5) Dr. Mounther Barakat Securities and Commodities Authority

  2. برنامج توعية الوسطاء اللقاء الخامس د. منذر بركات العمري هيئة الاوراق المالية والسلع

  3. Margin Tradingالاتجار بالهامش • Margin is the amount you put up to trade without paying the full balance. • Initial margin (IM) is the value of your equity in the margin trade. • Maintenance margin (MM) is the minimum equity you need to maintain at all time. • Margin call (MC) is the amount that you need to put up to bring your equity back to the initial margin.

  4. Margin Tradingالاتجار بالهامش • XYZ is now selling at DHS10. You have DHS5000 and would like to purchase 1000 shares. Your broker is willing to extend you a loan at the call money rate+2% for processing and other costs. Maintenance margin is 37.5%. • Calculate your profits and losses in the case of 10% price move in both directions. • Calculate the minimum price before getting a margin call.

  5. Margin Tradingالاتجار بالهامش Price @ DHS10

  6. Margin Tradingالاتجار بالهامش Price up by 10% @ DHS11

  7. Margin Tradingالاتجار بالهامش • Return with and without use of margins. • Without margin: R=(11000-10000)/10000=10%. • With margin: R=(6000-5000)/5000=20%. • Your margin is 6000/11000=54.54%

  8. Margin Tradingالاتجار بالهامش Price down by 10% @ DHS9

  9. Margin Tradingالاتجار بالهامش • Return with and without use of margins. • Without margin: R= (9000-10000)/10000= -10%. • With margin: R= (4000- 5000)/ 5000= -20%. • Your margin is 4000/9000=44.44%

  10. Margin Tradingالاتجار بالهامش • The minimum price before hitting the first margin call is: P=(IM*P0)/(1-MM) • In our example: P=(.5*10)/(1-.375)=8

  11. Margin Tradingالاتجار بالهامش Price @ DHS11 which the margin call price.

  12. Margin Tradingالاتجار بالهامش • Return with and without use of margins. • Without margin: R= (8000-10000)/10000= -20%. • With margin: R= (3000- 5000)/ 5000= -40%. • Your margin is 3000/8000=37.5%

  13. Margin Tradingالاتجار بالهامش • Need to add cash to the account to go back to 50% or as agreed with the broker. • Margin call calculations: cash = P*N*IM-Eq Cash= 8*1000*0.5-3000 = 1000

  14. Margin Tradingالاتجار بالهامش Your margin now is: M=Eq/Inv. = 4000/8000= 50% back to IM.

  15. Margin Tradingالاتجار بالهامش • See XLS file for further training

  16. Short Selling and Marginsالهامش والبيع على المكشوف • Margin is the amount of cash you put up as a security against the increase in your liability due to short selling. • Initial margin (IM) is the value of your cash balance against the short sold position (liability). • Maintenance margin (MM) is the minimum equity you need to maintain at all time. • Margin call (MC) is the amount that you need to put up to bring your equity back to the initial margin.

  17. Short Selling and Marginsالهامش والبيع على المكشوف • XYZ is now selling at DHS10. You would like to short 1000 shares. Your broker requires a 50% cash margin paid up front. Maintenance margin is 37.5%. • Calculate your profits and losses in the case of 5% price move in both directions. • Calculate the minimum price before getting a margin call.

  18. Short Selling and Marginsالهامش والبيع على المكشوف Price @ DHS10

  19. Short Selling and Marginsالهامش والبيع على المكشوف Price up by 5% @ DHS10.50

  20. Short Selling and Marginsالهامش والبيع على المكشوف • Return with and without use of short selling. • Without short selling: R=(10500-10000)/10000=5%. • With short selling: R=(4500-5000)/5000=-10%. • Your margin is: 4500/10500=42.86%

  21. Short Selling and Marginsالهامش والبيع على المكشوف Price down by 5% @ DHS9.5

  22. Short Selling and Marginsالهامش والبيع على المكشوف • Return with and without use of short selling. • Without short selling: R=(9500-10000)/10000=-5%. • With short selling: R=(5500-5000)/5000=10%. • Your margin is 5500/9500=57.89%

  23. Short Selling and Marginsالهامش والبيع على المكشوف • The minimum price before hitting the first margin call is: P=P0*(1+IM)/(1+MM) • In our example: P=10*(1+.5)/(1+.375)=10.909

  24. Short Selling and Marginsالهامش والبيع على المكشوف Price @ DHS10.909

  25. Short Selling and Marginsالهامش والبيع على المكشوف • Return with and without use of short selling. • Without short selling: R=(10909-10000)/10000=9.09%. • With short selling: R=(4091-5000)/5000=-18.18%. • Your margin is 5500/9500=37.5%

  26. Short Selling and Marginsالهامش والبيع على المكشوف Price @ DHS12

  27. Short Selling and Marginsالهامش والبيع على المكشوف • The position now is 12000 and the equity is 3000. • The drop in equity is equal to the difference between the initial position and the current position value. • That makes our margin below the 37.5% maintenance margin. • Cash is needed to go back to the initial margin.

  28. Short Selling and Marginsالهامش والبيع على المكشوف • Need to add cash to the account to go back to 50% or as agreed with the broker. • The drop in equity is equal to: Current position – initial position 12000-10000 = 2000 • The value of current equity is equal to the initial equity – the drop 5000-2000 = 3000 • The margin now is equal to Current equity/current position 3000/12000= 25% • This less than the 37.5% maintenance margin. To go back to the initial margin, we need to add cash to answer the margin call.

  29. Short Selling and Marginsالهامش والبيع على المكشوف • To go back to the initial margin of 50% we need to make equity equal to half the current liability position: IM*P1*N= 0.5*12*1000 = 6000 • Margin call calculations: Margin call amount = Current Equity requirement-Current equity 6000-3000 = 3000

  30. Short Selling and Marginsالهامش والبيع على المكشوف • See XLS file for further training

  31. Advanced Margin Calculationsحسابات هامش اكثر تعقيدا • Margin Accounts can become very complex especially if there are multiple diverse transactions. • An example would be to calculate the margin requirements for buying a stock on margin and short selling another. • Or, you may want to add to that some other securities purchased without the use of margin. • Or, add to all of the above margin calculations for futures contracts and options premiums. • Will revisit later on.

  32. Segregation of Clients Accountsفصل الحسابات • Client Money is separated from brokers money. • Brokers can no longer use one client money (free of charge) to lend to other clients for stock purchases. • Benefits: • Lower risk. • Enhance the availability of cash for clients withdrawals.

  33. Segregation of Clients Accountsفصل الحسابات • Where does the cash go? To banks. • Why then move the cash from brokers to banks? Two reasons: • Banks enjoy higher liquidity and greater readiness to answer cash demand. • Bank capital is structured to have a component that accounts for these deposits, brokers do not.

  34. Segregation of Clients Accountsفصل الحسابات • What are the problems with brokers practice of using clients cash to finance other clients stock purchases? • Risk of illiquidity • Strains on leveraged brokers accounts • No brokers capital rules to protect loans made to clients using other clients money • Brokers are not allowed to make such loans by legal definition of brokering • There are no regulations for margin trading in place.

  35. Segregation of Clients Accountsفصل الحسابات • What are the problems of account segregation? - Lower liquidity for trading. • Well this liquidity is not allowed in the first place and markets should have never used this extra liquidity.

  36. Segregation of Clients Accountsفصل الحسابات • If brokers are so concerned about this lack of liquidity and they think it is not healthy to stay without it – then why not bear the cost of borrowing from banks to create this claimed extra liquidity? • In no way does the SCA condone or encourage brokers to do so, not until the regulations that deal with that are ready. • These regulations are being worked on and will be ready very soon.

  37. Segregation of Clients Accountsفصل الحسابات • So, to avoid this lack of liquidity, why didn’t SCA delay account segregation until after it had such regulations in place? • Well, SCA never allowed lending by brokers and such lending should not be happening.

  38. Segregation of Clients Accountsفصل الحسابات • What is the difference between the current informal lending and the lending under SCA regulations?

  39. Segregation of Clients Accountsفصل الحسابات • Under the regulations things will be: • Organized • Safe • Fair • And controllable

  40. Market Makingصانع السوق • Evidence shows that two of the main problems that emerging markets face are: • Capital supply shortage and • low liquidity • Market making is thought to be a good tool to remedy these problems.

  41. Market Makingصانع السوق • The tools other than market making that are used to by emerging markets to remedy the above problems are: • market segmentation (trading hours, main and parallel markets), • different trading phases (continuous and auction trading), • introduction of special incentives for submission of limit orders (hidden reserve orders, standing orders, etc).

  42. Market Makingصانع السوق • The implementation of the market making system contributes the following: • promotes liquidity, • lowers transaction costs, • reduces volatility and • improves daily turnover of the listed securities

  43. Market Makingصانع السوق • Four types of market making systems which are applied in modern stock markets: • The quote-driven market making system, • The centralized market making system in an order-driven market – electronic • The centralized market making system in an order-driven market – Floor • The noncentralized market making system in an order-driven market.

  44. Market Makingصانع السوق

  45. Market Makingصانع السوق Market making (dealer) system in a quote-driven, electronic market • public investors generally cannot trade directly among themselves. • In order for buyers (sellers) to execute an order they have to contact a market maker (dealer) who uses his/her own inventory in the transaction. • There is more than one market maker per company who announces on a continuous basis quotes to buy and sell a number of shares at a particular price. • Dealers compete among themselves for more competitive bid and/or ask prices that will attract the order flow from public • Certain exchanges prohibit the use of market makers for their high liquidity stocks. In LSE, the 100 stocks that belong to the SETS system are traded electronically. • Stock markets that apply this system are the NASDAQ and the London Stock Exchange (LSE).

  46. Market Makingصانع السوق Centralized market making system in an order-driven, floor-based market • All potential buyers or sellers can directly trade among themselves • Requires the use of a single market maker that has monopolistic information on both the market orders and the limit order book. • There exist a floor, which is a physical location where market makers reside and interact with orders that come electronically to their terminal and with orders that come from floor brokers. • Market makers are required to announce quotes on a continuous basis that reflect both the limit order book interest and floor brokers intentions • As a result, market makers only provide the necessary liquidity from their own account when there is a lack of either a buy or a sell interest. • Typically this scenario occurs when there is a temporary disparity between supply and demand that asks for the market maker’s intervention in order to come up with an equilibrium price. • Floor-based markets where a centralized market making system is applied are the NYSE and the eight stock markets in Germany (Deutsche Börse).

  47. Market Makingصانع السوق • Centralized market making system in an order-driven electronic market • Same as the floor-based market with a single market maker in the centralized dual role of matching buyers and sellers and providing the necessary liquidity when needed. • The only major difference is that in an order driven market there is neither a floor nor floor brokers to interact with the limit order book for providing extra liquidity. • Such a system was applied in the Amsterdam Stock Exchange (prior to its inclusion in Euronext).

  48. Market Makingصانع السوق • Non-Centralized market making system in an order-driven electronic market. • There can be more than one per company • required to announce limit orders to buy and sell on a continuous basis • They do not possess any monopolistic information on the incoming orders or the limit order book. • They compete with investors for order flow. • This system is applied in Euronext, in the Italian Stock Exchange (ISE) and in the Athens Stock Exchange (ASE), among others.

  49. Market Makingصانع السوق

  50. Market Makingصانع السوق

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