An overview

Of

Secondary market

Mechanism

By

Muhammed Mortuza Alam

Manage Your Money

I = c + s + i

I = Income

c = Consumption

s = Savings

i = Investment

Overview of Financial Markets

• Two types of financial markets • Money markets• Capital markets

• Primary market • Secondary market

Definition Financial Market: A market for a financial instrument, in which buyers and sellers find each other and create or exchange financial assets. Sometimes these are organized in a particular place and/or institution.

Financial Market

Money market

Capital market

Primary market

Secondary market

Commercial banks

Firms raise capital

Investors trade securities issued in primary market

debt equity

Public Private placement

Short term instruments

Stock exchange

Credit unions

Insurance cos

Secondary Market infrastructure• Stock exchange • Member houses• Clearing and settlement• CDBL• Education and training• Investors Protection Fund

• 0.50% of listing fee of CSE (to be paid quarterly)

• 0.50 Paisa from Members turnover of every 10 lac tk (to be paid quarterly)

• Investors’ Information

Instruments

• Equities • MF• Debenture• Bonds • Derivatives

Most popular investing instruments

Stocks and shares

Bonus issues

Rights issues

Corporate Government

A few questions • Ever wondered how the capital markets work• Who sets the rules• What does the stock exchange do• What is the role of the stock broker• How to become a registered broker

Regulation & Supervision

The Regulator

• Foremost authority presiding over the capital markets

• With mission to promote and maintain Fair, efficient , secure and transparent market and to facilitate the orderly development of the stock exchange

Listing requirements

There are specific requirements for allowing a public company to list its securities on the Stock Exchange these are set out in the legislation

Types of Listing• Duel Listing

• Public Ltd co

• Paid-up capital at least Tk. 10 mil

• No of subscribers at least 250

• Direct Listing

• Paid-up capital 100 mil

• Commercial Operation – 5 years

• At least 3 years profit with steady growth

• Regular AGM

Role and Functions of a stock exchange

Established for the purpose of assisting, regulating and controlling business of buying, selling and dealing in securities

Role and Functions of a stock exchange cont’d

• Provides a market for the trading of securities to individuals and organizations seeking to invest their saving or excess funds through the purchase of securities

Role and Functions of a stock exchange cont’d

Provides a physical location for buying and selling securities that have been listed for trading on that exchange

Role and Functions of a stock exchange cont’d

Establishes rules for fair trading practices and regulates the trading activities of its members according to those rules

Role and Functions of

a stock exchange cont’d

The exchange itself does not buy or sell the securities, nor does it set prices for them

Fair

The exchange assures that no investor will have an undue advantage over other market participants

Efficient market

This means that orders are executed and transactions are settled in the fastest possible way

Transparency

Investor make informed and intelligent decision about the particular stock based on information

Transparency cont’d

Listed companies must disclose information in timely, complete and accurate manner to the Exchange and the public on a regular basis

Transparency cont’d

Required information include stock price, corporate conditions and developments dividend, mergers and joint ventures, and management changes etc

Doing business

People who buy or sell stock on an exchange do so through a broker

Doing business cont’d

The broker takes your order to the floor of the exchange looks for a broker representing someone wanting to buy/sell

• If a mutually agreeable price is found the trade is made

Price

At any point in time, the price of previously issued stock is determined by the flow of supply and demand

Desirable Characteristics of a stock market

Liquidity

Ability to sell an asset quickly at a fairly known price Low transactions costs

Desirable Characteristics of a stock market cont’d

• Availability of information Market efficiency

• Prices react quickly to new information

• Small price fluctuations

• Narrow price spread

• Cost effectiveness

Financing the exchange

• Transaction fees paid by members for each order executed

• Fees paid by firms when their securities are originally listed

• Annual fees by firms • Entrance fees from new members • sale of historic trading and market

information

TRADING SYSTME OF SECURITIESINTRODUCTION

The securities market of Bangladesh is regulated by the

Securities and Exchange Commission (SEC) under the

Ministry of Finance. Bangladesh has two Stock

Exchanges, Dhaka Stock Exchange (DSE), established in

1954 and Chittagong Stock Exchange (CSE), established

in 1995. The trading system of both the exchanges is

automated. CSE implemented the automated trading

system in June 1998 and DSE in August 1998. Before this

time the trading was conducted in manual mode cry-out

system.

CSE TRADING SYSTEM

CSE has trading facilities with global network capabilities. ?At present trading is going on from Dhaka, Chittagong, Sylhet and Cox’s Bazar simultaneously which has brought the mobility of shares and transparency in the capital market. In January 2005, CSE has plan to start trading from Barisal and in February 2005 from Rajshahi. In near future CSE has plan to expand its network to khulna and other cities also.

INTERNET TRADING SERVICES (ITS)

CSE has started Internet Trading in May 2004 to enable the remote investors to have trading facilities from their offices.residences. The Internet Trading Service (ITS)is going on and the users of this module are increasing.

CSE has also established an Over - The - Counter

(OTC) market with a specific mandate to service

small & medium innovative and high growth

enterprises, in raising resources efficiently through

the capital market. De-listed companies are also

eligible to be traded on OTC. The trading system

of OTC is automated.

OVER- THE - COUNTER

Khulna

Broker inSylhet

CSE Trade Engine Brokers

in Ctg

SylhetRajshahi

Chittagong

Dhaka Brokers in Dhaka

CSE TRADING SYSTEM

ASSOCIATED RULESCSE provides the above trading services under the following rules and regulations:

• Chittagong Stock Exchange Trading Regulations, 1998

• Chittagong Stock Exchange (Member’s Margin)

Regulations, 2000

• Chittagong Stock Exchange (Internet Based trading

Services) Regulations, 2002

• The Securities and Exchange Commission (Over - The -

Counter) Rules,2002

SALIENT FEATURES OF CSE TRADING REGULATIONS, 1998

ELIGIBILITY OF TRADING

• A member is eligible to trade in CSE, when-

• It becomes the member of CSE Clearing House

• It obtains dealership/ brokerage license from SEC

• It is not otherwise barred by CSE or SEC

TRADING SCHEDULE Pre-Opening Session : 09:40–9:55 Opening Session : 09:55–10:00 Cont. Trading Session : 10:00 – 14:15 Closing Session : 14:15 – 14:20 CP-Trading Session : 14:20 – 14:30 Post Closing Session : 14:30 – 15:15 Odd Lot Trading Session : 10:00 – 14:05

However, The CEO in Committee may extend, curtail or change the trading hours, including the session timings if the situation warrants so and such changes will be intimated to the members.

ORDER TYPES

Limit Order Good Till Cancelled (GTC) Good For Day (GFD) Good Till Date (GTD)

Market Order Full Fill of Kill (FOK) Partial Fill Rest Kill (PFRK) Partial Fill Rest Convert (PFRC) Minimum Fill

Drip Feed Order (Multiple Limit Orders) Stop Loss Order Match at Closing Price Order Odd Lot Order Bulk Lot Order Big Lot Order Foreign Investor’s Order Spot Order Auction Order

Odd Lot, Bulk Lot, Big Lot, Spot, Auction and Foreign Investor’s Orders will not be considered for BBO formation and calculation of Closing, Average, High, Low, Last Traded prices, quantities and indexes for the securities.

ORDER VALIDATION

The member shall give the following information for order entry:

Order Type Security Code Buy/Sell Indicator Quantity Price Client Code GTC,GTD,GFD (except Odd Lot, Spot, Close Price and Auction orders) Market Order protection, FOK, PFRK, PFRC, Minimum Fill, if market order Total Quantity & Replenish Quantity, if Drip Feed Order

TICK PRICE

All prices entered into the system shall be a multiple of tick price for that security. The following tick prices are available in CSE trading system:

Face Value of Tk 1.00 : 0.01 Face Value of Tk 10.00 : 0.10 Face Value of Tk 100.00: 0.25 Face Value of Tk 1000.00 : 0.50

ORDER ACCEPTANCE

An order that passes the validation checks will be accepted by the Exchange system with a unique order ID and particular time stamp and will be forwarded to the execution system. Modified orders will be time stamped again.

AMEND ORDER

The price, quantity, retention & client ID of an order can be changed prior to execution, or for any unexecuted portion of an order.

CANCELLATION OF ORDERS

Orders can be cancelled at any point of time prior to execution. All orders shall be automatically deleted from the system once their time condition has expired.

ORDER MATCHING

The system matches orders with existing opposite of orders which have the best price. Waiting orders are matching in the following sequence:

i) Best Priceii) Within Price, by time priority

An order may match partially with another order resulting in multiple trades.

SUSPENSION OF TRADING

The CEO in Committee of CSE has the authority to

suspend or activate trading of specific securities,

trading by specific members with intimation to SEC.

PRICE LIMIT REGULATION

The system automatically enforces the price limit

regulation. The following upward and downward price

limits over the previous day’s closing price are

applicable for trading:

Open price and Close price Calculation

For “A”, “B”, “G” and “N” and “Z” Category

Companies

(a) Up to Tk 200 :20% but not exceeding Tk 35

(b) Tk 201 to Tk 500 :17.5% but not exceeding Tk75

(c) Tk 501 to Tk 1000:15% but not exceeding Tk 125

(d) Tk 1001 to Tk 2000:12.5% but not exceeding Tk200

(e) Tk 2001 to Tk 5000:10% but not exceeding Tk375

(f) Tk5001 and above:7.5% but not exceeding Tk 600

DISSEMINATION OF THE MARKET INFORMATION AND

DISCLOSURE

Listed companies send their price sensitive

information and disclosures to exchange

immediately upon their recommendations/

decisions.

The exchange disseminates those immediately

after receiving from the companies through trading

network and web sites.

SALIENT FEATURES OF CSE (MEMBER’S MARGIN) REGULATIONS,

2000

Every member is allowed to trade (buy and/or

sell) in CSE up to Tk 1 crore without depositing margin. Member shall deposit the member’s margin with

CSE Clearing House on the additional trade exposure

exceeding above 1 crore at the following rates:

(a) Above Tk 1 crore but not exceeding Tk 2 crore : 20%

(b) Above Tk 2 crore but not exceeding Tk 3 crore : 30%

(c) Above Tk 3 crore but not exceeding Tk 5 crore : 50%

(d) Above Tk 5 crore : 100%

The following are considered as member’s margin:

a) Irrevocable & without recourse to the Drawer Bank/ Insurance Guaranteeb) Govt. Securitiesc) FDR issued by the scheduled bankd) Savings Certificates issued by the Govt. of Bangladeshe) Life Insurance Policy at surrender valuef) DD/PO issued by the scheduled bankg) Securities listed with CSE (valued at 70% of the lowest market price prevailed in the exchange in the previous week)

h) Cash

Instruments mentioned in above from (a) to (g) shall be endorsed in favor of CSE 90% of the value of the instruments mentioned in above (a) to (g) shall be considered as the value of the member’s margin.

Investors Rights – to the Broker

Right of an Investors against a Broker

1. To place order personally,through telephone,fax or e-mail.

2. To have priority to place buy /sell order “at best”or “limit order“ over his/her broker’s own order.

3. To be informed about non- execution of trade within 10 days of giving orders.

4. To get shares transferred from the company

5. To complain to company, to the Stock Exchange,SEC

Investors Rights – to the Broker

Rights of the Client after Execution of Trade:To get confirmation note from the broker To receive money/share from the broker on due

time The client will reserve the right to get Tk.500/=

for each day for each default Interest shall also be payable to a client for

delayed payment at the rate of 1.5% per month

To receive all Transactions related records and documents

Investors Rights – to the Issuers

Right of Registered Shareholders / Members to the Company

1. To get share certificate on own name 2. To sale/transfer otherwise 3. To get notice of general meetings 4. To attend the meeting and to vote 5. To get annual reports 6. To get dividend, interest 7. To elect directors 8. To be elected as a director 9. To get Rights Shares when issued 10.To get shares split 11.To complain to the Company, Stock Exchange,SEC

if the above rights are infringed.

Investors Rights – to the Issuers

Right of Shareholders whether registered or not to the Company

1. To choose a broker of a Stock Exchange

2. To buy a share of the company listed with the Stock Exchange

3. To sell the share through Stock Exchange

4. To get shares transferred from the company

5. To complain to company, to the Stock Exchange,SEC if any right is infringed.

Lodging a Complaint by the Investor against a Member

As per Regulation 45 of the General Rules and Regulations of CSE a customer may lodge a complaint with the Exchange against default of a Member within a period of 60 (sixty) days from the date when such default arose.

The Defaulters' Committee of CSE shall hear the complaint of the customers and may declare a Member as a defaulter if the Committee finds that the Member is unable to fulfill its engagements or fails to meet an obligation to its customer. A member who has been declared a defaulter by the Defaulters' committee shall at once cease to be a member of the Exchange.