WEEK 6

1. WEEK 6 SECONDARY MARKETS

2. Fuctions of the Secondary Markets • It provides information about the value of the security. • It provides liquidity to the investors. • It provides information to the investors about the assets fair values. • It brings together many interested parties and so can reduce the cost of searching likely buyers and sellers of the asset. • By accomadating many trades they keep the cost of transactions low. By this way they ancourage investors to purchase assets.

3. Trading Locations • Secondary market exist throughout the world. • In US, many shares are traded on major national and regional stock exchanges. Additional significant trading in stocks take place on OTC markets. Some bonds are traded on exchanges however most bonds are trade on OTC markets. • Londan International Stock Exchange is an OTC market. Assets that are traded in this market include stocks of domestic and international firms, bonds and options.

4. Germany has 8 stock exchanges, the most important of which is Frankfurt Stock Exchange. • Paris Bource is the France’s main secondary market for stocks, bonds and some derivative instruments. • Japan has 8 exchanges, the largest is Tokyo Stock Exchange and the second largest is Osaka Stock Exchange.

5. Market Structures • Many secondary markets are continuous markets: prices are determined continuesly throughout the trading day as buyers and sellers submit orders. • A contrasting market structure is the call market, in which orders are batced or grouped together for simultaneous execution at the same price. The market maker can hold an auction for a stock.

6. Perfect Markets • In perfect market, the nr. of buyers and sellers is sufficiently large and all participants are small enough relative to the market, so that no one can influence the prices. • In perfect market transaction costs and taxes (frictions) do not effect the prices and investor’s behavior.

7. SECONDARY MARKET TRADING MECHANISM Types of Orders • Market Order: It is an order to buy or sell the security at the best price available. When this order reaches to the trading floor, its execution is sure and immediate. • Limit Orders: These are the orders to buy or sell a security at a specified price or better. To avoid the danger of the market order which is the adverse unexpected price changes between the time investor places the order and the time the order is executed, an investor can place the limit order. A buy limit order indicates that the security may be purchased only at the designed price or lower. A sell limit order indicates that the security may be sold only at the designed price or higher.

8. For exp. You want to buy stock A at $42 and do not want to pay more than this amount, you places a limit order at $42. Or you want to sell stock B aat $65 and do not want to sell less than this amount, you places a limit order at $65. There is no guarantee it will be executed at all. • Stop Order: The order is not to be executed until the market moves to a designed price, at which time it becomes a market order. A stop order to buy specifies that the order is not to be executed until the market rises to a designated price. A stop order to sell specifies that the order is not to be executed until the market price falls below a designated price. For exp. You are uncertain about buying the stock of A at its curent price of $42 but want to be sure that if the price moves up you do not pay more than $45. If you places a stop order to buy at $45, the order becomes a market order when the price reaches $45. If you want to assure that you will not sell stock B at less than $60, you can place a stop order to sell at $60. - Security prices sometimes exhibit abrupt price changes, so the direction of a change in a security’s price may be temporary. - Once a designated price is reached, the stop order becomes a market order and is subject to the uncertainity of the execution price.

9. Stop-limit Orders: Combination of stop order and limit orders to buy or sell at a specified price or better only after a given stop price has reached. • In contrast to the stop order, which becomes a market order if the stop is reached, the stop limit order becomes a limit order if the stop is reached. • Buy stock A “$42 stop, $45 limit”, If the market price reached $42, the broker enters a limit order to be executed at $45 or better (lower) price.

10. Role of Brokers and Dealers Brokers • It is an entitiy or “agent” that acts on the behalf of others. • They do not “take any position” and risk. • They receive commission.

11. Dealers • They act as market makers and have their own portfolios. • They take position and risk of fluctuations on security prices in their inventory. • The bid-asked spread is their profit.

12. Market Efficieny • Operational Efficiency: In this market investors can obtain transaction services as cheap as possible. • Pricing Efficiency: It refers to a market where prices at all times fully reflect all available information that is relevant to the valuation of securities.

13. E. Fama classified the pricing effciency of a market into three forms: weak, semi-strong and strong. • Weak form efficiency: the price of the security reflects the part price and trading history of the security. • Semi-strong form efficieny: In addition to the historical price, the price of the security fully reflects all publicly available information. • Strong form efficieny: the price reflects all information that is available and unavailable publicly.

14. SECURITY EXCHANGES IN TURKEY • ISTANBUL STOCK EXCHANGE (ISE) • ISTANBUL GOLD EXCHANGE (IGE) • TURKISH DERIVATIVES EXCHANGE

15. Stock Exchanges • Stock exchanges provide liquidity for C.S. • Provide institutionalization of the firm by creating social responsibility. • Increase the credibility of the issuing firms in the MMs. • Provide globalization of the firm by selling their stocks in foreign markets or selling them to foreign investors in domestic markets. • Provide reputation to the firms • Provide tax advantage.

16. NYSE with 2600 fırms traded controlling app. 80% of the value of all orgized transactions in USA. • In Turkey ISE was established in the late of 1985 and started its operations on January 3, 1986 with a few firms. Now, about 350 fırms are traded on ISE.

17. ISE • ISE was established as a privately budgeted, self-regulated, semi-public legal entity. • It is governed by the executive council composed of 7 members.

18. ISE • One of them is the chairman and chief executive officer appointed by the Turkish government for a term of 4 years. (M. İbrahim TURHAN) • 3 of members of the council are also appointed by the Turkish government and the other 3 of them are selected among the exchange members.

19. ISE • Exchange members are the banks and brokerage houses that are autorized by the CMB. • Investment and development banks • Commercial banks • Brokerage houses

20. ISE ISE markets are organized under four main categories: • Equity Market • Emerging Companies Market • Debt Securities Market • Foreign Securities Market 

21. ISE EQUITY MARKET • ISE Equity Market where publicly-held companies from various sectors are traded offers a liquid, transparent and safe investment floor for local and foreign investors. • Equity and rights coupons of companies from various sectors, exchange traded funds and warrants are traded on ISE Equity Market.  • Trades are executed automatically on the Equity Market as per "Multiple Price - Continuous Auction" principle based on price and time priority rule via the electronic trading system.

22. ISE EQUITY MARKET cont. • Trades are executed in two trading sessions as the morning and afternoon sessions. An “Opening Session” based on the Single Price System is organized at the beginning of both sessions. • ISE members collect orders electronically from investors and transmit them to ISE over the remote network using ExAPI messaging interface (ExAPI). In addition, member representatives are able to enter buyers’ and sellers’ orders to the Electronic Trading System via trading terminals located in ISE and Member head offices.

23. ISE EQUITY MARKET cont. Equity Market transactions are conducted on the following markets: • National Market • Collective Products Market • Fund Market • Second National Market • Watch List Companies Market • Primary Market • Wholesale Market • Free Trade Platform (FTP)

24. ISE EQUITY MARKETS cont. • National Market: Companies that satisfy ISE listing requirements are traded on National Market.

25. ISE EQUITY MARKETS cont. • Collective Products Market: Equities of the investment trusts, real estate investment trusts, venture capital investment trusts; exchange traded funds participation certificates and intermediary institutions' warrants are traded on the Collective Products Market.

26. ISE EQUITY MARKETS cont. • Fund Market: ETFs and type A mutual fund participation certificates which the Executive Council of the Exchange finds eligible for trading are traded on the Fund Market.

27. ISE EQUITY MARKETS cont. • Second National Market: Small and medium sized enterprises, companies which are temporarily or permanently delisted from National Market, and companies that fail to satisfy the applicable listing and trading requirements for National Market are traded on Second National Market. 

28. ISE EQUITY MARKETS cont. • Watchlist Companies Market: When companies are subject to monitoring and examination as a result of the occurrence of certain conditions, the equities of such companies can be traded on Watchlist Companies Market of ISE under continuous surveillance, supervision and monitoring conditions, taking also measures to inform investors in a continuously and timely manner.

29. ISE EQUITY MARKETS cont. • Primary Market: It is the market where issuers and savers meet directly.  • Wholesale Market: It allows that equity trades above a certain amount with or without pre-determined buyers are executed in an organized market on the Exchange in a reliable and transparent environment.

30. ISE EQUITY MARKETS cont. • Free Trade Platform (FTP) A new Free Trade Platform (FTP) has been established for trading of the equities (publicly held companies those shares are not traded in ISE are to be determined by the Capital Markets Board (CMB). • FTP equities shall be traded on Single Price Method in which stock prices will be determined four times a day. • Accordingly; investors who want to sell such equities must keep these equities and investors who want to buy these equities must keep adequate cash in their accounts as of the settlement date. • FTP equities shall not be subject to margin trading and short selling. • Companies traded on the FTP will not be classified into A, B, C groups. 

31. ORDER TYPES • Normal OrdersNormal orders which are given in terms of a  trading unit are comprised of one full lot without decimals (1 piece or 1 TRY nominal) or its multiples.  Normal Orders may be divided into four groups.  • However, there is a price limit in all types. 

32. Normal Orders • 1. Limit Order: Price and quantity are entered with the order.  If the trade is not executed in part or in whole at the moment it is entered, the unexecuted part is written among pending (passive) orders of the equity as per price and time priority ranking.

33. Normal Orders Cont. • 2. Immediate or Cancel Orders: It is the type of order in which price and amount are specified, but which is automatically cancelled by the system if all or part of the order is not executed immediately after it has been transmitted to the system and which requires that any portion not unexecuted immediately is not recorded as pending in the order book.

34. Normal Orders Cont. • 3. Special Limit Orders: It is the type of order where order amount is entered as "nil-0" and conveyed to the system only by quoting a price.  • It is entered to match all orders up to the specified price starting from better price levels if any.  • If there is no order which may be processed at the moment it is entered, it is not recorded as pending, and is automatically cancelled by the system at that instant.

35. Normal Orders Cont. • 4. Special Limit Value Orders (SLVO): It is a type of a special limit order with a certain value limitation.  • Amount is entered as “nil-0”.  “Price” is entered.  Maximum trading value is written as "TRY" on the order. The system takes into account the entered limit price level, and enables to execute the trade starting from the best priced orders, providing it is not in excess of the certain value. If the value entered is matched before the specified price level is achieved, the system will not permit further trades. This type of order is not recorded as pending, i.e. is matched if there is any counter-order at the moment it is entered, otherwise, it is automatically cancelled by the system.

36. ORDER TYPES • Special Orders These are orders which exceed the equity quantity determined by the Executive Council of the Exchange on an equity basis and executed with the approval of an ISE official when matched with another special order, and are treated as an indivisible whole. Orders which are in excess of an quantity determined separately by the Exchange for each equity can be given as Special Orders.  • The amount of special orders may be up to 10% of the paid-in capital. Special orders entered in the system may be cancelled any time before they are matched.  Special order transactions are not registered, but are taken into account in calculating traded value and traded volume. When a special order is entered in the system, changed, matched, or cancelled, it is notified to all member representatives with an information message.

37. Validity Periods of Orders • Day Order: It is the type of order which can be pending in the system only until the end of the session in which it was given. It will be cancelled if it is not traded by the end of the session. The system shall deem all orders as day orders unless otherwise specified. 

38. Validity Periods of Orders cont. • Instant Order: This condition relating to the order means that all or part of the order is executed immediately after it is brought to the system, and any portion remaining is cancelled without being recorded as pending. Therefore, this type of order is the type of order that is valid only at the moment it is brought to the system.  ICO, SLO and SLVO type orders can be referred to as instant orders.

39. Validity Periods of Orders cont. • Good Till Date Order: It enables the order to be kept in the system for matching until a certain date. In the current application, the maximum validity period of the order is limited to the business day in which the order is entered.  A good till date order entered in the first session will also be valid in the second session.   However, if it cannot be matched in the second session, it will be cancelled at the end of the day.  A good till date order to be given in the second session will be valid throughout the second session, and will be cancelled at the end of the day.

40. PRICE MARGINS • “Base Price” is the price which constitutes a base for determining the upper and the lower price limits of an equity between which an equity can be traded during a session. The “Base Price” is calculated by rounding the "Weighted Average Price” of the previous session to the nearest price tick. • "Price Tick" is the least price variation that may occur once at a time for each equity. • The lowest and the highest prices which may be offered for an equity within the session constitute the "Price Margin/Price Range" of that equity.  The price margin is automatically calculated  by the System to be 10% above and below the base price in every session.  The upper limit is determined by rounding to the appropriate upper price tick whereas the lower limit is determined by rounding to the lower price tick.  In the rights issue coupon market, the price margin is 25%.

41. EQUITY MARKET LOT SIZES • For the companies listed on the ISE, the standard trading unit or the standard "lot" size is a nominal equity value of TRY 1.   For rights coupons, one lot represents a rights coupon worth TRY 1.   • “Maximum lot amount” which may be entered for an equity at any one time is re-determined every month for each equity to be 250, 500, 1.000, 2.500, 5.000, 10.000, 25.000, 50.000, 75.000 or 100.000 lots.  For orders in excess of the maximum lot amount, order types "Immediate or Cancel", "Special Limit" and "Limit Value" orders should be used, but the size of these order types cannot exceed TRY 1.5 million.

42. OFF-EXCHANGE ODD LOT TRADES • Off-exchange odd lot trades are executed off-Exchange at amounts less than 1 lot which is the trading unit of the Exchange, and are also called odd-lot trades. 

43. MARGIN TRADING, SHORT SELLING AND STOCK BORROWING - LENDING • “List of Securities Subject to Margin Trading and Short Selling” has been formed to cover all stocks and ETFs traded on ISE markets except the Watchlist Companies Market. Therefore, stocks and ETFs traded on ISE National, Collective Products and Second National Markets may be subject to margin trading and short selling transactions. • However, with regard to the principles of application of the decision of the CMB dated 23.07.2010 governing classification of the stocks traded on the markets of the İMKB under groups, A, B, and C;B and C group stocks cannot be involved in margin trading and short selling.

44. TRADING HOURS of the ISE EQUITY MARKET • Equity Market (National Market, Collective Products Market, Second National Market, Watchlist Companies Market, Free Trade Platform) and Emerging Companies Market • First Session: 09:30-12:30 • Opening Session09:30-09:50 • Second Session14:00-17:40 • Opening Session14:00-14:15 • Closing Session 17:-30-17:38

45. TRADING HOURS of the ISE EQUITY MARKET cont. • Wholesale Market, Official Auction Transactions and Primary Market : 10:30-12:00 •  Rights Coupon Market Relevant Market's Trading Hours. Rights coupons are not traded in the opening and closing auctions 

46. EQUITY MARKET SETTLEMENT PRINCIPLES Settlement of securities traded is realized by the ISE Settlement and Custody Bank Inc. (Takasbank), which is the sole and exclusive central depository in Turkey. General settlement principles are as follows: • Settlement day is T+2, i.e. the second business day following the transaction. • Multilateral netting system is applied. • Payments are cleared by same day funds. • The principle of Delivery Versus Payment applies.

47. MARKET MAKER AND SINGLE PRICE • Continuous Auction with Market Maker Method: • The continuous auction with market maker method is applied to the securities listed on the Collective Products Market (CPM).  Exchange traded funds, intermediary institution warrants and equities of mutual funds with a publicly offered market capitalization value below 10 million TL are required to be traded via the continuous auction with market maker method. • In the absence of a market maker, these securies are traded by applying the Single Price Method.

48. ISE INDICES • ISE 100 • ISE 50 • ISE 30 • ISE 10 Banks • ISE Dividend • ISE Corporate Governance • ISE IPO • ISE All Shares • ISE National • Ise Industrials • City Indices

49. EMERGING COMPANIES MARKET • The securities of companies that do not fulfill the listing requirements of the Exchange, but promise a development and growth potential can be traded on the Emerging Companies Market. • “Continuous Auction with Market Maker” method is used for trading. While “Single Price” method is used for the trading boards without a market maker. Cash and security settlement of trades are completed by the İMKB Settlement and Custody Bank (Takasbank).

50. DEBT SECURITIES MARKET • The Debt Securities Market is the only organized market for both fixed income securities trading and repo-reverse repo transactions.  • Trading is conducted electronically in the Debt Securities Market via the automated multiple price-continuous auction system.  • Settlement and custody operations are realized by the İMKB Settlement and Custody Bank Inc. (Takasbank), a separate and independent institution founded by the İMKB and its members. The principle of delivery versus payment is applied in settlement and thus the default risk in principal is eliminated.