[일배우기] Financial assets and market

Terms in financial assets and market

 

1. Financial Assets

@ Underlying assets

Equity: called stocks or shares, refers investment in ownership of a company.

Fixed income: composed of principal and interests. Fixed income does not provide ownership

Foreign exchange: means currency trading. Counterparties exchange between different currencies.

Money: usually refers short terms securities such as treasury bills, commercial paper and certificates of deposits (CD).

Commodities: various physical products such as metals, minerals and corps.

 

@ Single position vs index

Single position: trading in an asset

Trading an index. Index tracks the market performance. Example: KOSPI index, MSCI..

 

@Cash vs derivatives

Cash: called spot market. the trade date and settlement date is near. When buying a stock in Korea exchange, settlement date is t+2.

Derivatives: derivatives is a composition of underlying assets. It includes forwards, futures, options and swap.

 

@Margin trading

A practice investing securities with borrowed money. The money lender could have collateral with the securities bought, while the investor could have larger positions and higher return with the margin. Margin trading leverages profit and loss.

 

@Security lending and borrowing

While holding securities, the investor could have extra profit with lending the securities. It costs interest to the borrower. It can be a fixed or open term.

 

@Position;

Long position: an investor acquires a security. If the security price increases, the investor earns a profit.

Short position: an investor sells a security. If the security price decreases, the investor earns a profit. Usually works with security lending.

 

2. Market 

@ Trading sites.

exchange: such as Korea Exchange, New York Stock Exchange. an official place to exchange securities. It reduces counterparty risk. Trades under the exchange is under certain regulation.
Alternative trading venue: Alternative trading system.
Over-the-Counter(OTC) trades: through private networks. 

clearing entities: clearing house(청산소)
Securities Depository: safekeep securities and facilitate settlements
Custodians – banks handling trade settlements on behalf of clients.

 

@ Front-Middle-Back offices.
Front, middle, and back office are segrigated by functions. It is also important in terms of risk control. Not a single person can carry the entire transation in the trade lifecycle.

Front office:  order entry. client-focused. generating revenue. called sales.

Middle office: direct support for the front office for clients onboarding and trade confirmation.

Back office(Operations): trade clearing and settlement.

There are also a number of other units not included front/middle/back. for example. legal and compliance, audit, IT, and risk management.

 

@Trading automation: High touch vs low touch

Practically, high touch trade refers trades via sales desk. Sometimes it is called 'voice' as the clients call the sales desk to order. Also called cash desk. Low touch broadly refers trades via electronic method. Client side trading (clients directly trades via a broker's system) and program trading (using automated trading algorithm).

Theoretically high touch trading bears possibility to impact the market so the front desk should put significant engagement while low touch does not. low touch trading via electronic typically generates lower revenue for the financial institution. HFT is one of low touch trading for individual investors, who trades shares via web and mobile.

 

@Settlement Cycle

It is decided by the exchange or regulator except OTC trades. Most securities in Korea settle on T+2. Some bonds, options, futures could settle on T+1. Shortened settlement cycle exposes less counterparty risk.