Lezione 2

Economia del mercato mobiliare

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Ripassiamo insieme

CLASSROOM TEST
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i) Money market instruments have a lower maturity than

capital market instruments (ii) The dividend yield is the main
variable of interest for an investor who wants to buy treasury
bills

A. (i) is true; (ii) is false

B. (i) is false; (ii) is true
C. Both are true
D. Both are false
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An individual who goes long in a future position _________

A. Commits to purchasing the underlying commodity at contract maturity

B. Commits to delivering the underlying commodity at contract maturity
C. Has the right to deliver the underlying commodity at maturity
D. Has the right to purchase the underlying commodity at maturity
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________ are companies other than banks and financial

intermediaries authorized to carry out investment services and
activities

A. Investment firms - Sim

B. Asset management companies
C. Brokers
C. Financial promoters
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A firm that specializes in arranging financing for companies is

called a(n):

A. marketing firm
B. investment dealer.
C. private broker.
D. floor broker.
E. investment banking firm
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Hi-Tek Shoes is a private firm that has decided to issue shares

of stock to the general public. This stock issue will be referred
to as an
A. initial trial issue.

B. public service offering.

C. open-end sale.

D. initial public offering

E. break-out issue.
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The process of purchasing newly issued shares from the issuer

and reselling those shares to the general public is called:

A. brokering
B. underwriting.
C. capitalizing.
D. deploying
E. securitizing
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(i) Investment managers of mutual funds aim to obtain extra

return with respect to a benchmark (ii) ETFs are an example of
passively managed portfolios

A. i) is true, (ii) is false

B. (i) is false, (ii) is true
C. Both are false
D. Both are true
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Which one of the following sentences about the buy and the
sell side is false?

A. The sell side is composed by financial intermediaries

B. The buy side is composed by agents who buy negotiation services
C. Hedgers are units that sell negotiation services in order to reduce risk
D. Investors/unit in surplus buy negotiation services with the final aim to
transfer purchasing power over time
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A special FOCUS on

BUY ON MARGIN & SHORT SALES

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Buying on margin:

A. Is the opposite of short-selling

B. Is a way to reduce risk associated to a decrease in the stock price
C. Involves collateral
D. All of the above are correct
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Two Types of Brokerage Accounts

• A Cash account is a brokerage account in which securities are paid for in full.

• A Margin account is a brokerage account in which, subject to limits,

securities can be bought and sold short on credit.

(more on selling short later)

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A Cash Account
(a) Open the account

(b) Deposit $10,000

(c) Buy 100 Shares

of Stock at $80 per share

(d) Pay Commission,

say $50

(e) Cash Account has:

$1,950 in Cash
$8,000 in Stock
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Margin Accounts, I.

• In a margin purchase, the portion of the value of an investment that is not

borrowed is called the margin.

• Of course, the portion that is borrowed incurs an interest charge.

– This interest is based on the broker’s call money rate.
– The call money rate is the rate brokers pay to borrow money to lend to
customers in their margin accounts.

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Example: Margin Accounts,

The Balance Sheet

• You buy 100 Walgreens Boots Alliance (WBA) shares at $80 per
share.

• You put up $5,000 and borrow the rest.

• Amount borrowed = $8,000 − $5,000 = $3,000

• Margin = $5,000 / $8,000 = 62.5%

Liabilities and
Assets Account Equity
100 Shares, WBA $ 8,000 Margin Loan $ 3,000
Account Equity $ 5,000
Total $ 8,000 Total $ 8,000

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Margin Accounts, II.

• In a margin purchase, the minimum margin that must be supplied is called

the initial margin.

• The maintenance margin is the margin amount that must be present at all
times in a margin account.

• When the margin drops below the maintenance margin, the broker can
demand more funds. This is known as a margin call.
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Example: The Workings of

a Margin Account, I.
• Your margin account requires:
• an initial margin of 50%, and
• a maintenance margin of 30%

• A Share in Vandelay Industries (VAIN) is selling for $50.

• You have $20,000, and you want to buy as much VAIN as you can.

• You may buy up to $20,000 / 0.50 = $40,000 worth of VAIN, or 800

shares. Liabilities and
Assets Account Equity
800 Shares of VAIN @ $ 40,000 Margin Loan $ 20,000
$50/share
Account Equity $ 20,000
Total $ 40,000 Total $ 40,000

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Example: The Workings of

a Margin Account, II.
• After your purchase, shares of VAIN fall to $35 from initial $50
• Your Equity falls by $15 per share, a loss of $12,000
(leaving you with $8,000).
• Your Margin Loan is still $20,000.

• New margin = $8,000 / $28,000 = 28.6% < 30%

• You are subject to a margin call: You need to put up more money.
Liabilities and
Assets Account Equity
800 Shares of VAIN @ $ 28,000 Margin Loan $ 20,000
$35/share
Account Equity $ 8,000
Total $ 28,000 Total $ 28,000
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Time to exercise: the Effects of Margin on returns

• You have $30,000 in a margin account; 60% initial margin
required.
• You can buy $50,000 of stock with this account (why?).
• Your borrowing rate from your broker is 6.00%.
• Suppose you buy 1,000 shares of Verizon (VZ), for $50/share.
• Assume no dividends, and that your borrowing rate is still 6.00%.
What is your return if:

– In one year, VZ is selling for $60 per share?

– In one year, VZ stock is selling for $60 per share, but you did not
borrow money from your broker?

– Suppose Verizon is selling for $40 per share instead of $60 per share.
What is your return in this case?
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Example: The Effects of Margin, II.

• VZ is selling for $60 per share.

• Your investment is worth $60,000.

• You owe 6% on the $20,000 you borrowed: $1,200.
• If you pay off the loan and interest, your account balance is:
$60,000 − $21,200 = $38,800.
• You started with $30,000.

• Your return is $8,800 / $30,000 = 29.33%.

• Suppose Verizon stock was selling for $40 per share instead of $60 per share? What is your
return?

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Example: The Effects of Margin, III.

• Verizon stock is selling for $60 per share, but you did not borrow from your broker.

• You started with $30,000, which means you were able to buy $30,000 / $50 = 600 shares.

• Your investment is now worth $36,000.

• Therefore, your return is $6,000 / $30,000 = 20.00%.

• Suppose Verizon is selling for $40 per share instead of $60 per share. What is your return in
this case?
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Example: How Low Can it Go?

• You buy 300 shares of Coca-Cola (KO) at $55 per share.

– Total cost: $16,500

– You have only $9,900—so you must borrow $6,600.

• Your initial margin is: $9,900/$16,500 = 60%.

• Suppose your maintenance margin is 40%. At what

price will you receive a margin call?

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Example: How Low Can it Go? (Answer)

• The margin call occurs when the price of Coca-Cola hits
$36.67. How so?

Maintenance Margin Level =

(Number of Shares ´ P ) - Amount Borrowed
*

Number of Shares ´ P *

Solving for the critical stock price, P * , results in

Amount Borrowed
P =
* Number of Shares
1 - Maintenance Margin Level

So here,

$6,600
P* = 300 = 22 = $36.67.
1 - 0.40 0.60
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Short selling:

A. Can be risky since losses are theoretically unlimited

B. is profitable when I expect a future rise in the price of a stock
C. Is a way to reduce risk since it is similar to a future contract
D. None of the above are correct
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Short Sales, I.

• Short Sale is a sale in which the seller does not actually own
the security that is sold.

Borrow Sell the Buy Return

shares shares shares the
from in the in the borrowed
someone market market shares

Today In the Future

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Short Sales, II.

• An investor with a long position benefits from price increases.

– Easy to understand
– Example: You buy today at $34, and sell later at $57, you profit!
– Buy low, sell high

• An investor with a short position benefits from price decreases.

– Also easy to understand
– Example: You sell today at $83, and buy later at $27, you profit.
– Sell high, buy low
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Example: Short Sales, I.

• You short 100 shares of AT&T (T) at $30 per share.

• 50% initial margin (here you deposit $1,500) and a 40% maintenance margin on
short sales.

• The market value of stock borrowed that is sold short is: $30 × $100 = $3,000.

• $3,000 is a liability: You are obligated to buy AT&T shares later at the market value.

Liabilities and
Assets Account Equity

Sale Proceeds $ 3,000 Short Position $ 3,000

Initial Margin Deposit $ 1,500 Account Equity $ 1,500

Total $ 4,500 Total $ 4,500

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Example: Short Sales, II.

• AT&T stock price falls to $20 per share.

• Sold at $30, value today is $20, so you are "ahead" by $10 per share, or
$1,000. The market value of the shares is $2,000.

• Your liability is now $2,000.

• Also, new margin: $2,500 / $2,000 = 125%

Liabilities and
Assets Account Equity

Sale Proceeds $ 3,000 Short Position $ 2,000

Initial Margin Deposit $ 1,500 Account Equity $ 2,500

Total $ 4,500 Total $ 4,500

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Example: Short Sales, III.

• AT&T stock price rises to $40 per share.
• You sold short at $30, stock price is now $40, you are "behind" by $10
per share, or $1,000. (“He who sells what isn’t his’n, must buy it back—
or go to prison.”)
• The market value of the shares is $4,000. The short position liability is
$4,000.
• Also: new margin = $500 / $4,000 = 12.5% < 40%. Therefore, you are
subject to a margin call.
Liabilities and
Assets Account Equity
Sale Proceeds $ 3,000 Short Position $ 4,000

Initial Margin Deposit $ 1,500 Account Equity $ 500

Total $ 4,500 Total $ 4,500

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More on Short Sales

• Short interest is the amount of common stock held in short positions.

• In practice, short selling is quite common and a substantial volume of stock sales
are initiated by short sellers.

• Note that with a short position, you may lose more than your total investment, as
there is no theoretical limit to how high the stock price may rise.

• Short sellers face constraints.

– From government intervention (i.e., the SEC, CONSOB)
– Also, there might not be enough shares available to borrow to short sell.
– Constraints reduce liquidity, increase volatility, and lead to inefficient pricing.
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Actual Short Positions for Tesla (TSLA)

(found at: www.Nasdaq.com)
Dove si negozia
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LA SECURITIES INDUSTRY

4 CHI NEGOZIA E PERCHE’:

! buy e sell side
4 COSA SI NEGOZIA:
! Strumenti finanziari
4 DOVE E COME SI NEGOZIA
4 le condizioni di funzionamento e le forme organizzative (la microstruttura del
mercato)
4 I CRITERI DI SCELTA DEGLI STRUMENTI FINANZIARI
! rischio
! rendimento
4 LE LOGICHE DI PORTAFOGLIO
! Portfolio selection
! CAPM
! Le strategie di gestione
! La valutazione delle performance
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Le trading venues (sedi di negoziazione)

• Mercati regolamentati
• Sistemi multilaterali di negoziazione (multilateral trading
facilities- MTF)
• Sistemi organizzati di negoziazione (organized trading
facilities- OTF)

un caso a parte: gli internalizzatori sistematici

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Mercato regolamentato
Sistema multilaterale amministrato e/o gestito dal gestore del mercato,
che consente o facilita l’incontro – al suo interno e in base alle sue regole
non discrezionali – di interessi multipli di acquisto e di vendita di terzi di
strumenti finanziari, in modo da dar luogo a contratti relativi a strumenti
finanziari ammessi alla negoziazione conformemente alle sue regole e/o ai
suoi sistemi.

Ne consegue che si tratta di un mercato autorizzato (dall’autorità di vigilanza), che

deve essere multilaterale e caratterizzato da regole e sistemi di negoziazione non
discrezionali, che deve dar luogo a contratti giuridicamente vincolanti, che deve avere
per oggetto lo scambio di strumenti finanziari ammessi alle negoziazioni (il listino)
secondo modalità appositamentedefinite e che deve funzionare regolarmente
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Sistema multilaterale di negoziazione

Sistema multilaterale di scambio gestito da un’impresa di investimento
o da un gestore del mercato che consente l’incontro – al suo interno e in
base a regole non discrezionali – di interessi multipli di acquisto e di
vendita di terzi relativi a strumenti finanziari, finalizzati alla realizzazione
di un contratto.

Dunque, si tratta di un sistema in cui tutti gli operatori interessati allo scambio di
strumenti finanziari possono agire nel rispetto delle regole definite dagli organizzatori
del mercato in modo certo e non modificabile discrezionalmente, così da portare alla
conclusione di un contratto: infatti, devono essere assolutamente vincolanti gli
impegni assunti dai partecipanti agli scambi sia in termini di quantità scambiate
sia in termini di prezzo.
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Sistemi organizzati di negoziazione

Sistemi di negoziazione di tipo multilaterale che consentono l’incontro al
loro interno di proposte di acquisto o di vendita di strumenti finanziari con
lo scopo di concludere contratti di compravendita

Discrezionalità del gestore: al momento dell’inserimento dell’ordine (può collocare o

ritirare) ; al momento della conclusione dell’ordine (può non abbinarlo con ordini di
segno contrario)
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DIFFERENZE tra MR, MTF e OTF

i MR e gli MTF sono caratterizzati da norme non
discrezionali per l’esecuzione delle operazioni, il gestore
REGOLE di un OTF può effettuare l’esecuzione degli ordini su base
discrezionale (decidere se accettare o meno la
negoziazione)

mentre per gli MTF e i MR si fa riferimento agli strumenti

Strumenti oggetto di finanziari in genere, la definizione di OTF è limitata ad
alcuni strumenti finanziari (non-equity): “obbligazioni,
negoziazione strumenti finanziari strutturati, quote di emissione e
strumenti derivati”

un MR può essere gestito solo da un soggetto a ciò

natura del gestore deputato (il gestore del mercato), mentre gli MTF e gli
della sede di OTF possono essere gestiti da imprese di investimento
autorizzate alla prestazione del relativo servizio/attività (in
negoziazione Italia, SIM e banche), oltreché da una società
che sia già gestore di un MR, condizionatamente all’esito
positivo di una “previa verifica” da parte della Consob del
rispetto di specifici requisiti
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Internalizzatori sistematici
Piattaforme di negoziazione gestite da intermediari abilitati, che
compensano al loro interno gli ordini di acquisto e di vendita ricevuti

A questi intermediari– nel rispetto di requisiti di trasparenza assimilabili a quelli

previsti nell’ambito dell’operatività sui mercati regolamentati – viene riconosciuta la
possibilità di « internalizzare » gli ordini di compravendita della clientela, eseguendoli
in contropartita diretta senza indirizzarli verso gli altri mercati in cui tali strumenti
finanziari sono negoziati (e in special modo verso i mercati regolamentati).
Le autorità di vigilanza impongono precisi obblighi per quanto riguarda i requisiti e le
caratteristiche degli intermediari stessi nonché la pubblicizzazione dei prezzi,
l’esecuzione degli ordini di compravendita e le modalità di accesso alle negoziazioni
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Fonte: Consob
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How Securities Are Traded: Types of Markets

Direct Search Markets

• Buyers and sellers locate one another on their

own

Brokered Markets

• Third-party assistance in locating buyer or seller

Dealer Markets (quote driven)

• Third party acts as intermediate buyer/seller

Auction Markets (order driven)

• Brokers and dealers trade in one location

• Trading is more or less continuous
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Auction Markets Dealer Markets

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The Secondary Market for Common Stock

Secondary stock markets match buyers with sellers.

Trading occurs on either an organized stock exchange or a trading

network.

Important concepts:

• The bid price:

• The price dealers pay investors.
• The price investors receive from dealers.

• The ask price:

• The price dealers receive from investors.
• The price investors pay dealers.

• The difference between the bid and ask prices is called the bid-ask spread, or simply, the spread.

• Dealers attempt to “buy low and sell high” when moving shares into and out of their inventory.
 Orders execution methods in order-driven markets

Customers

Salesperson / DMA SA
Prop traders /
Portfolio managers / (Direct Market (Sponsored HFT Firms
Market Makers /
Brokers / ... Access) Access)

Co-Location

Market
(Trading Venue)

DEA: Direct Electronic Access: DMA & SA

DMA: Clients send orders through the broker’s order routing system, but have no direct connection to the market
SA: Sponsored Clients use broker’s Id; direct connection (e.g. HFT clients with ultra-low latency connections)
HFT: an algorithmic trading technique charcterized by: a) infrastructure intended to minimize network and other types of latencies; b) system-
determination of order initiation, generation, routing or execution without human intervention; and c) high message intraday rates
Market Microstructure Concepts

The Continuous Trading

During continuous trading, orders are entered in the trading book and matched
by the system according to price-time priorities and trading parameters

Trades execution is subject to the validation of trading parameters

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Stock Market Order Types


Types of Orders: Market and Limit Orders
Market orders:
• You specify ticker and quantity
• Immediate execution at best
available price
• Market buy will be executed at
lowest ask.
• Market sell will be executed at
highest bid.
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Limit orders:
• You specify ticker, quantity, and
price
• The order will be executed only if
trade can be made at the limit
price or better.
• Limit Buy can only be executed
at limit price or lower.
• Limit Sell can only be executed
at limit price or higher.
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Types of Orders: Stop Orders

Stop Orders are intended to prevent something bad from happening
(like losing a lot of money).

Sell Stop (or stop loss) Buy Stop

• Use this order when you have a long position
and want to protect yourself from a price
decline.
• The Stop price will be below the current price
of the stock.
• The Stop price is the trigger or activation
point.
• If the stop price is reached or passed (the
price goes lower), the order becomes a
market order to be executed at the best
available price (which may be higher or
lower than stop price).
• Risk: price suddenly plummets and your
position is liquidated at a large loss.
• Use this order when you have a short position
and want to protect yourself if the stock price
rises.
• The Stop price will be above the current price
of the stock.
• The Stop is the trigger or activation point.
• If the stop price is reached or passed (goes
higher), the order becomes a market order
to be executed at the best available price
(which may be higher or lower than stop
price).
• Risk: price suddenly rockets and you buy at
a higher price than your buy stop.

Types of Orders: Stop Limit Orders
Sell Stop Limit
• Use when you have a long
position and want to protect
yourself from a price decline.
• The Stop price will be below
the current price of the stock.
• The Stop price is the
trigger or activation point.
• The limit says you will not
accept a selling price
below the limit.
• Risk: The price plummets
and you might not get out.
Intended to prevent som ething bad from happening
(But, in an active m arket, the lim it can hurt you)
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Buy Stop Limit
• Use when you have a short
position and want to protect
yourself if the stock price
rises.
• The Stop price will be above
the current price of the stock.
• The Stop price is the
trigger or activation point.
• The Limit says you will not
accept a purchase price
above the limit.
• Risk: The price rockets and
you might not get out.
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Stop Orders versus Stop Limit Orders

Stop orders guarantee execution (if
the stock reaches or moves past your
stop price), but not the price.

Stop limit orders guarantee price, but

not execution.
• Stop and limit prices do not have to be the
same.
• You could use a stop of $45 with a limit of $44.