Exchange and Index
Exchange: Definition
Role of Stock Exchanges
Major Stock Exchanges
Exchange: Definition
Role of Stock Exchanges
Major Stock Exchanges
Exchange: Definition
• An entity providing "trading" facilities for stock brokers and
traders, to trade stocks and other securities
• Securities traded on a stock exchange include:
1. Shares issued by companies
2. Unit trusts
3. Derivatives
4. Pooled investment products
5. Bonds
Exchange: Features
• Provides facilities for the issue and redemption of securities as
well as other financial instruments and capital events including
the payment of income and dividends
• Most important component of a stock market
• Supply and demand in stock markets affect the price of stocks
• The initial offering of stocks and bonds to investors is done in
the primary market and subsequent trading is done in the
secondary market
• Market participants : Intermediaries , Market Organisers,
Company and Investors
Clearing Firm
• Works with the exchanges to handle confirmation, delivery
and settlement of transactions
• Key role in ensuring that executed trades are settled within a
specified period of time and in an efficient manner (Also
called clearing corporation or clearing house.)
• Acts as third parties to all futures and options contracts - as a
buyer to every clearing member seller and a seller to every
clearing member buyer
Clearing Firm
• Each futures exchange has its own clearing house
• All members of an exchange are required to clear their trades
through the clearing house at the end of each trading session
• Deposit with the clearing house a sum of money (based on
clearinghouse margin requirements) sufficient to cover the
member's debit balance
• Responsible to all members for the fulfillment of the contracts
• Smaller investment firms do not have the capability to
execute stock trades, so they have to go through a Clearing
firm to conduct business for their clients
Clearing Members
• A subset of the exchange members usually must meet
financial and operating standards that exceed regulatory and
exchange minimums
• Serve as intermediaries in their provision of clearing services
to clients, which may include non-clearing exchange members
or individuals or firms that are not members of the exchange
• Non-clearing exchange members must arrange for a clearing
firm to assume financial responsibility for their trades and
those of any non-members of the exchange for whom they
execute trades
• Both the retail client and the non-clearing firm are clients
Money Settlement Procedures
• Key element in the clearing arrangements for exchange-
traded derivatives is a bank or a group of banks through which
money settlements are effected
• Two basic models can be identified:
Central Bank Model
Private Settlement Bank Model
Central Bank Model
• Money settlements between the clearing house and its
clearing members are effected in central bank funds
• Model requires the clearing house and its clearing members
to have access to central bank funds accounts
• Settlements can be effected only during the operating hours
of the central bank payment system
Private Settlement Bank Model
• Each clearing member is required to establish a banking
relationship with one of a group of commercial banks specified
by the clearing house
• Clearing house itself has an account at each of the settlement
banks
• Often extend intraday credit to clearing members
• Extends unsecured intraday credit to the clearing house by
allowing it to overdraw its account in anticipation of a
subsequent balancing transfer of funds from another
settlement bank
Private Settlement Bank Model
Private settlement banks may be used because:
(1) The clearing house or many of its members lack access to
central bank accounts
(2) Private settlement banks are willing to provide credit
(especially intraday credit) to clearing members or to the
clearing house in amounts or on terms that the central bank
is unwilling to provide
(3) The clearing house seeks to complete settlements with its
clearing members earlier in the day than is possible under
the operating hours and finality rules of the central bank
payment system
Exchange: Definition
Role of Stock Exchanges
Major Stock Exchanges
Major Stock Exchanges
• New York Stock Exchange(NYSE)
• Tokyo Stock Exchange
• NASDAQ
• London Stock Exchange
• Bombay Stock Exchange
• National Stock Exchange of India
Market Index: Definition
Benefits
Index Classification
Important Indices
Market Index: Definition
Benefits
Index Classification
Important Indices
Market Index: Definition
• An index is designed to measure price changes of an
overall market, such as the stock market or the bond market.
• Customized basket of securities that tracks a particular market
or segment
• Examples- S&P, Dow Jones, NIFTY, Sensex
Market Index: Definition
Benefits
Index Classification
Important Indices
Benefits
• Quick view on general condition of the market
• 70% of a stock price movement is tied to the total market
• How a specified portfolio of share prices are moving in order
to give an indication of market trends
Market Index: Definition
Benefits
Index Classification
Important Indices
Classification
Based on location
1. Global Stock Market Index
Includes companies without regard for where they are domiciled or traded
For eg - MSCI World and S&P Global 100
2. National Index
Represents the performance of the stock market of a given nation.
For eg - The American S&P 500, the Japanese Nikkei 225, and the
British FTSE 100
Market Index: Definition
Benefits
Index Classification
Important Indices
Examples : S&P CNX Nifty (Nifty)
• Owned and managed by India Index Services and Products Ltd.
• 50 stock index accounting for 21 sectors of the economy
• Maintained by the S&P Index Committee, a team of Standard
& Poor’s economists and index analysts
Examples : S&P CNX Nifty (Nifty)
• The total traded value for the last six months of all Nifty stocks
is approximately 52% of the traded value of all stocks on the
NSE
• Nifty stocks represent about 63% of the Free Float Market
Capitalization as on Dec 31, 2009
• Impact cost of the S&P CNX Nifty for a portfolio size of Rs.2
crore is 0.10%
• S&P CNX Nifty is professionally maintained and is ideal for
derivatives trading
Examples : S&P 500
• First published in 1957
• Includes 500 leading companies in leading industries of the
U.S. economy
• Captures 75% coverage of U.S. equities
S&P 500: Criteria For Index Additions
• US Company
Location of Company’s operations, Corporate Structure etc.
• Market Capitalization
Companies with market cap in excess of US$ 3.5 billion
• Public Float
At least 50% Public Float
• Financial Viability
Companies should have four consecutive quarters of positive
earnings
S&P 500: Criteria For Index Removal
• Companies that substantially violate one or more of the
criteria for index inclusion
• Companies involved in merger, acquisition, or significant
restructuring such that they no longer meet the inclusion
criteria
