Global Capital Markets Exam #1 (Rutgers - Weaver)
"You Might Prefer These Preferreds: A New Breed Comes with Tax Advantages"
- "Tax Advantage Cumulative Preferred Stock" gets more money from capital gains which is taxed at a lower rate (tax bill is increased for other class) - Traditional Closed End Fund gets capital gains tax and ordinary tax
Assessment Dividend
- "reverse dividend" - You send company money, common in oil exploration and mining stock - Force them to pay or sell their shares to collect difference
"LYONs and TIGRs and ELKS! Oh, My!"
- 'WACronyms' for a wide variety of random letter abbreviations for stocks - Utilizing human 'fluency' to find familiarity with words rather than clunky names - People believed harder to pronounce additives were riskier than easier to pronounce ones - Stock tickers with easier names often do better than clunkier ones based on name alone
Public Securities Association (PSA)
- CF in/out are all estimates, prefer people paying off slowly - Should expect some early payments for lowers rates, moving or selling, etc - Payment model acknowledges prepayment could change over the course of the obligation - Standardization assumes people start paying off mortgages right away (.2% a month, 6% in 30 months) ex: 185% PSA means you assume people will pay off principal 85% faster than standard model (.3% per month vs .2%)
HFT during Flash Crash
- Can walk away if they don't like what they see while NYSE Specialists and NASDAQ Market Makers could not
Puttable Bonds (France)
- Cannot be called, but individual bondholders can put it back to company - Often issued by public utilities because lower return since less risk
"The SEC Today Charged Texas-Based Financial Services Firm Life Partners Holdings"
- Charged for failing to disclose risk on underestimating the life expectancy - Life expectancy was tied to the revenues and profit margins - Used an unqualified medical doctor to assign life expectancies to the policies - Prematurely recognized revenues from life settlements by using the signing date rather than when received the policy payout
"Bundled Loans Soar in China as Rules Ease"
- China eased rules that created a booming securitization market and increases in asset-backed bonds - Can help banks to vacate existing loans they're holding - Allowed asset securitization expansion to boost credit and economic growth - Bankings are selling mortgages and then buying more from other banks - Unclear on what happens during bankruptcies as government owns the land the house sits on
"China Snubs Xiaomi with Pushback Against Dual-Class Shares"
- China's two main stock exchanges said investors on mainland can't use trading link with Hong Kong to buy into companies with supervoting shares - Hurt smartphone maker Xiaomi and was done to protect investors from unfamiliar instrutments
Clearing & Settling
- Clearing: overnight; do both parties agree? - Settlement: currently t+2 in the US, stock and cash change hands
Mortgage Bond
- Collateral is some or all of the property of the company - Trustee is given deed to applicable property - After acquire clause: all property acquired with proceeds of bond issue become collateral of bond issue upon purchase
Callable
- Company can call in the stock, pay par and dividends, and collect back stock - Company may want to call and reissue at a lower rate of divided (not good for pref holders) - May have penalty if called within certain time frame
Investors want to be compensated for the cost of trading
- Corporate bonds pay higher coupons than municipal bonds because the coupon is taxable - Lower Spread: Lower cost for Investors - Lowers Investor Costs: Lower cost of capital for companies - Lower Cost of Capital: Higher NPVs - More projects are accepted, economy grows
Call Premium
- Corporation will not call the bond for the first 5 years - When they call them, may have decreasing call premium penalty that pays smaller % of penalty each year
Super DOT
- Could handle up to 30,000 stares to route orders - Not an electronic execution system, just delivery
"From Norway , Covered Bonds for U.S. Investor"
- Covered bonds are similar to RMBS but require issuers to have collateral on the books - New bond consisted of prime mortgages that paid nearly half the debt and not default in 2 years - Covered bonds haven't launched in US, esp because lack of clarity on disposal if bank failure
DOT
- Designated Order Turnaround System - Electronic delivery system used to route orders to save time on the floor, up to 100 shares - Routed from members home offices directly to specialists posts
Refunding Bonds
- Designed specifically to roll over debt - Rollover so paid out senior and junior bondholders become senior
Zero Coupon Bond
- Does not make periodic interest payments - Interest is kept in the bond, so paying below par at purchase - Putting off tax payments for the length of the bond (gov losing tax income) US Solution: Tax law changed to pay tax on interest when interest is earned Japan Solution: illegal for Japanese citizens to buy foreign zero coupon bonds
Convertible Bond (Germany)
- Domestic companies in Germany do not issue convertible - Only if sold by companies in other countries (commonly Japan)
"Restaurants Like This Debt Flavor"
- Dominos sold large value of bonds tied to revenue streams, including franchisees, IP and licensing - Very stable CF tied to franchise payments - "Whole Business Securitization" helps companies get bonds cheaply and may have trouble getting investment grade bonds - Dominos favors this approach to save millions in borrowing costs - Have to iron out details of what debt occurs with hypothetical bankruptcy - "esoteric asset-based securities" unusual assets creating bonds
Trustee
- Ensure the owners, countersigns bond to ensure authentic (commercial bank) - Verify performance of cooperation on behalf of the owners (covenants) - Need for a trustee: represents all the bondholders rather than the individual bondholders - Power of legal and financial resources that an individual doesn't have
"Ether Flash Crash June 23, 2017"
- Ethereum briefly crashed from $319 to $0.10 in seconds - With technology can come failure
Non-Callable Bond (Germany)
- Even if a bond is profitable to call, it won't be called - Typically lower interest rate, so reputation associated with not calling is worth more
All or None (AON)
- Execute all at once at the same price or do nothing - Want order with specific price/quantity filled, wait for full order
"SEC May Ticket Speeding Traders - High- Frequency Firms Face Fees on Canceled Transactions"
- Fees on HFT could hurt market liquidity, but was a consideration after the Flash Crash - Cancel orders represent 95-98% of orders submitted by high speed traders, which can strain the stock market
Bonds
- Finite instruments - if they aren't paid, they can force you into bankruptcy (priority claimant)
"Engineering Around New Bond Rule"
- Firms now required to retain 5% of the securities (skin in the game) - Move to have majority-owned affiliates hold the 5% is allowed, meaning even less to responsible to issuers - JP should've had loans themselves but had affiliate they own own 51% (so only like 2.5% holding); cold be even smaller because majority share not explicit
"Wall Street's Latest Housing Play: Packaging Rent Payments for Sale"
- Firms want to engineer deals backed by the rental payments of residents living in previously foreclosed homes - Risk is renters could move out if market encourages them to buy own home over rent
Co-Location
- For NYSE, no computer/trading on floor but on machines in NJ - 1st person that gets the trade gets it, so want to improve the speed of trading - Time to get trade from office to matching engine and put server as close to it as possible - *Pay to have server in same room as matching engine* - Everyone in room has same length of cable
Stock Dividend
- For every share of stock you own, you get X new shares - What you give when there's nothing to give - Doubles the shares and halves the price
Competitive Bid (Yield Auction)
- For principal amount per $5M, no one bid can exceed 35% of offering - Not accept bid unless money is transferred first - If accepted bid, keep money, if not money is returned - Rank bids from lowest yield to highest yield, accept low yield bids until all of the spots are full - Entire issue gets yield of the last accepted bid - Competitive gets not accepted because above yield rate get returned
High Frequency Trading Firms
- Generate more than a million trades in a single day - Represent more than 50 percent of equity market volume - Generate 90 or more orders for each executed trade (the other 89+ are cancelled); call back to send out other trades if not a quick bite
Residual Class (Pay Throughs/CMOs)
- Gets whats leftover of money coming in and out - Tranches get paid semiannually but people can pay at any time - Residual class gets all the risk (not administrators)
Pass Through
- Getting claim directly to cash flows coming in based on payments coming in
Sponsored Access
- Give order to broker, process for errors & send to exchange; broker gives pin number to allow you to send directly to exchange yourself
"Home Rentals Lose Some Mojo"
- Homeownership rising means rental income is dropping, including 'American Homes 4 Rent' which buys houses not to sell but to rent out
Outstanding Shares
- How many shares are being traded in the marketplace - Can be less than issued if company buys back (treasury stock)
"On Your Mark, Get Set"
- Huge spending by firms in technology and infrastructure to improving trading speeds - Looking for high speed opportunities in investments beyond stocks (currencies, commodities, options, other derivatives) - Even includes laying wires between major US cities to improve speeds - Not just fiber optics, but also microwaves & laser beams (microwaves/lasers limited by line of sight)
"Trade Tactics: Slow vs Speed"
- IEX Trading Group slows down all orders fractionally to prevent fleet-footed trading firms from racing aheads of orders from large institutions to drive up prices - First dark pool to be owned by investment firms as opposed to broker-dealers - Competitor LeveL ATS thinks faster is better and has one of the fastest matching speeds for buyers and sellers
Mortgages before Great depression
- Were usually 5 year balloon mortgages - Every 5 years have to reset mortgage, done to protect banks from interest rate volatility - In 1930s, 25% of homes foreclosed on - Used the housing market to get out of the GD, because if people can buy houses, gives jobs to building who then buy normal purchases
$2 Brokers
- Will help out companies if they get too busy to handle trades - Hire to represent customer for one trade (like seasonal help) - Name because used to get $2 for every trade executed
"Family Blames AIG In Bet on Mom's Life"
- Women's death rules accidental, but high suspicious and family wants a life insurance policy that a local man had taken out on her - Insurance companies may not question a claim until after death (don't investigate before hand), but challenge afterwards - Family angry towards speculative 'scheme' to buy big policies on older people
Dark Pool
- You can't see the ask and bid info, so the price is unknown - Keep hidden the number of shares you want to buy and sell
S&Ls
- You could deposit money in a savings account and borrow loans - Higher rate I savings or lower rates on loans than banks (no stockholders to pay) - Only banks could have checking accounts
Sweep Order
- You want to buy every share of stock for a fixed price or less - Doesn't specify quantity, less common than other order types - Should be confident price will increase to that price
"Deutsche Bank Goes Live with Sponsored Access on NASDAQ OMX Nordic"
- low latency (very fast, small delay) sponsored access in Nordic - US banned in Oct 2010, Deutsche Bank in Nordic allowed starting in Nov 2010 (disagreement over solutions)
Master Notes
90 maturity
Mortgaged Backed Bonds
Collateral is bundle of mortgages, same amount til maturity in interest
Collateral Trust Bond
Collateral secured by bonds of subsidiaries
"IBM 2006 vs 2011"
Comparison of Trading for IBM for the first 30 minutes of trading - Trades: 770 v 2220 - Shares per trade: 725 v 252 - Volume (000s): 558.25 v 559.44 Summary: nearly identical volume, but many more trades with less shares/trade Comparison of the Number of Quotes for IBM for the first 30 minutes of trading - Quote Size: 7.86 v 2.77 - Quotes/Trades: 6.23 v 34.53 - Quotes (000s): 4.8 v 76.66 - # of Quotes @ second: 2.66 v 42.59 Summary: quote (order put out) dramatically changed with HFT
Convertible
Covered into common stock at a certain rate for life of share - You would convert if the conversion value of the common stock was greater than the market value of the preferred stock (ex market value $100, converts 5:1, don't convert if common stock less than $20/share)
New York Agreement
Trustee receives equipment from manufacturer and sells it to company for chattel bonds
Bourses
Tulip market in Holland in 1600s, owner's name became synonymous with market in general
Stock Tickers
Turning dashes into numbers to spread info about stock exchange - One person would read off each trade as it came through the ticker and the other recorded info on the trades/prices
Debentures (Fannie Mae)
Unsecured debt, minimum of $10,000, some could be adjusted to stock
Floating Rate Bond
Variable interest rate (less common in US)
Participation Bonds (France)
Variable rate bonds but have a floor and a ceiling
Street Name (Common Stock)
You buy the stock and broker has them in their name, you get a letter of confirmation for ease of getting rid of
If you bought @ the ask and immediately sold @ the bid
You'd immediately lose the spread amount - You would have to wait for the bid price to go up by the spread amount to breakeven
Japan Bonds
- 1991 Japan was second largest economy in the world (after US) - 31% of US firms issued domestic debt, but only 2.2% of Japanese firms issued domestic debt - After WWII Japan needed foreigners to support companies - Convinced people save investment by 1) only allowing big companies to issue debt and 2) companies issuing debt needed to buy guarantee from commercial bank - Bank charged for guarantee at high rate by making it cheaper to loan from bank directly, which destroyed the chance of having a domestic bond market - Law repealed so now domestic bond market has grown
Broker-Dealer
- A company that will operate as a broker or a dealer - Broker: Executes orders (acting *agency*) - Dealer: Byers and sells on own account (*principal*) - Internalizing: Executes on same price as lit exchange but immediate, not sent out to exchange
Class Y - Planned Amortization Class (Pay Throughs/CMOs)
- A sinking fund so principal payments are certain as well - You have most certainty of all classes, which is at the expense of others - Never wants money coming in to be less than going out
Registered
- After corporate bearer bonds outlawed in the 60s, looks similar to stocks - Didn't have physical coupon because company knew who owned them so company would mail check on coupon basis
May 6 Flash Crash
- At 2:40 on May 6th, the broad market indexes dropped more than 5 percent in five minutes, only to rebound almost entirely in the next 90 seconds - The move was not uniform across stocks; some saw 60% price moves that saw 1000s of cancelled trades - Caused in part by stop-loss orders; sponsored access, HFT
"Does High Speed Trading Hurt the Small Investor?"
- Average HFT profit is 10 cents/100 shares traded (very scalable/profitable) - Trades can be executed in fractions of seconds across platforms, spreads becoming tighter - Retail investors should try to stay away from short term trading because it's hard to go against HFT - Regulators need to become electronic to match the investors - Stresses on the system can be caused by HFT - No negative impact on markets' volatility by HFT - Care about the longer core (?), because a double in price in 5 years is more meaningful than paying $0.25 extra a share
"Trading Firm IPO Fizzles in Seconds"
- BATS IPO had a glitch causing price to drop to fractions of a second and halting trading - Ended up cancelling the IPO due to the software bug - BATS system effected many of the traded stocks but greatly hurt the IPO specifically
Junk Bonds
- BB and below rated bonds need higher rate to incentivize investors - Not necessarily in default, better term is "non-investment grade"
Prime Bonds
- BBB and above rating bonds are considered typical investment grade
Profit Participation (Germany)
- Based upon your ability to pay - If you can pay you do, if not you cannot sue - Pay up to 2% more than bonds, last in line for bankruptcy DG Bank of 2011 is ex of PPC
Prime Mortgage
- Best credit rating - PITI (principal, interest, taxes & insurance) lesss than 28% of income
Cash Dividends
- BoD announces a dividend to be issued to stockholders of records as of a certain date - Declaration Date: when dividend is announced - Record Date: list of current stockholders to receive - Payment Date - when dividend is received
Securitization
- Bonds and mortgages brokers do not keep mortgages, immediately sell to aggregator for securitization - Principal payments over minimum are bad for people in the pool because paid off faster (paying off early means less interest payments) - Sometimes won't let you refinance to lower rates because losing on interest revenue -
Indexed Bonds (Germany)
- Bonds are illegal if pegged to inflation - Either interest, principal or both can be indexed - Can be indexed to DAX (stock market index); only principal is indexed
Chattel Bonds
- Bonds linked to PP&E to prevent losing whole company - Ex: United is holding company, each plane is incorporated so if you get hurt on a flight, you sue the plane
"Bankers Hope For a Reprise of Bowie Bonds"
- Bonds that gave a piece of future earnings by David Bowie through revenue streams from album sales - With online music sales, interest in similar bonds for other artists
Short Sales
- Borrowing stock and selling it - Hope borrowed stock goes down so when you have to buy back stock to return, you make a profit
Current Regional Exchanges
- Boston: NASDAQ OMX BX, Inc - Chicago: Bought by ICE (NYSE parent) - Philadelphia: NASDAW OMX PHLX, INc. less regional exchanges than there used to be
Notes and Bonds
- Both interest bearing with finite maturity - Notes have a maturity of 1 to 10 years - Bonds have maturity greater than 10 years - Purchased through yield auction and also through strips
Fannie Mae (Federal National Mortgage Association)
- Bought federally guaranteed loans (FHA, VA, FFHA) and sold them in secondary market - Bought loan from S&L or bank - Increased velocity of money, which helped the economy
NYSE History
- Brokers would meet daily to buy sell stock representing wealthy clients - Would announce price and reduce/raise until same number of people wanted to buy or sell - Buttonwood Agreement to trade amongst selves to found NYSE - 34 initial stocks on the exchange - After Civil War, more companies needed stocks so NYSE became continuously traded vs fixed time market
"Wall Street Pursues Profit in Bundles of Life Insurance"
- Buying life settlements: life insurance policies ill and elderly sell for cash and then bundling and securitizing these policies - When the policyholders die, bonds will pay out, and return is based on how long the policyholder lives (if they live long, could have poor or negative return) - Policyholders often lapse on their payments in hard times, company doesn't have to pay out; investors will continue to pay premiums so policies don't expire - May help policyholders get money earlier when they may really need it - Could run into fraud problems if people are healthy or not or who has legal claim to the policy - Diversify diseases in the bond in case cure plummets value of the bond - Death has no correlation to rise and fall of stocks
Preemptive Right
- If a company issues more stock, existing stockholders have the right to maintain % owned - Mattered more before huge companies, where most have very small fractional % Right offers existing company more shares (ability but not requirement) by certain date at certain price - Tend to expire after 2-3 weeks - Sell to you at discount to incentives (maybe 5% discount than current market) - Can also sell your right - Normally 40% exercise, 57% sell right, ~2.5% let expire worthless - Stand-By Underwriting: Investment bankers agree to buy whatever current stockholders don't exercise (the 2.5%)
Bearer (Bond)
- If you hold the bond, you own it (name doesn't appear) - Bond had physical coupons that were exchanged at the bank for value - IRS not a fan because hard to track gains
Stop-Loss Order
- If you think its going up, but worried it might go down - If many people sell at once, price crashes down, vicious downward spiral - ex: bought at 35, now 42; stop-loss: sell 100 XYZ at 41 stop (if price goes down, sell right away)
Market Order
- Immediacy is most important, best price right now, only quantity is specified - If booker doesn't fulfill right away and misses price, may have to pay you difference
"UK to Pay off Its World War I Debt"
- In December 2014 Britain paid off the rest of its WWI debt - The loan was a perpetual bond with no maturity date and 3.5% interest - Paid off since current low rates allow cheaper refinancing
Current US Stock Auctions
- Intercontinental: NYSE, AMEX, ARCA [founded in 2001, 2012 became big enough to buy NYSE, focused on futures] - CBOE: BATS, Direct Edge
Eurobond
- Issued by company in a place other than the home country but denominated in the home country's currency - IBM issuing bond in UK but in USD
Foreign Bond
- Issued in country other than home country but in that country's currency - IBM issuing a bond in UK in pounds
Warrants
- Issued with a bond could be sold separately - "Pot sweetener" with bonds to get a lower rate - Different from right because right you get a discount - Difference with convertible bonds is you lose bond if you convert but with warrant they're separate and excising doesn't lose bond (no value difference, just personal preference)
"Goldman, JP Morgan Lead New Funding Round for Members Exchange"
- JP and Goldman agreed to back a low-cost stock exchange that is challenging NYSE and Nasdaq - Many firms dislike the fees from NYSE, Nasdaq and CBOE, who claim their fees are reasonable - MEMX, the new exchange, name resonates to previous member-owned exchanges
"Loss Swamps Trading Firm: Knight Capital Searched for Partner as Tab for Computer Glitch Hits $440 Million"
- Knights Capital Group lost $440 M as a result from software installed that entered millions of faulty trades in losing positions - In about 45 minutes, this loss had occurred and would've been worse if not halted then - Went bankrupt as a result of this failure - Computer program did not read the confirmation of the read, so it continued to send out orders thinking they weren't going through
Order Driven
- Like a farmers market -> farmers who grow tomatoes and bring them to market to sell to consumers (producers to sellers) -> want someone to meet your pricing - "Natural buyers and sellers" meet to buy/sell
Quote Driven
- Like a grocery store -> buys tomatoes from farmers and sell to consumers when they want them (intermediary)
"How Hide Not Slide Orders Work"
- Locked market created if one market has a bid price that equals another market's ask price (if that would occur, order slides to another price) - HFT orders can 'hide' to get in line in front of orders that slid and are coming back for the original price - Hide not slide in queue but not executed until unlocked, which gives HFT advantage
"New Stock Exchange to Take Long-Term View"
- Long-Term Stock Exchange would increase shares' voting power the longer investors hold the stock (tenure voting) - Skeptics think it allowed founders/certain investors to maintain control over other shareholders
Short Term Notes
- Maturity up to 365 days - Short term paper: 360 days because >360 days have to file with SEC (commercial paper)
Authorized Shares
- Max amount of shares allowed to issue - Must have 2/3 vote of shareholders to agree to change AoI to increase - Companies typically make it much larger than ever expected to see
Noncompetitive Bid (Yield Auction)
- Max of $5M, gov agrees to fill all noncompetitive bids - You don't submit a yield, you'd agree to accept whatever is decided - You have to send in $10,000 and they return the difference of the cost - All noncompetitive bids are accepted (all tendered = accepted) - Once rate is known, difference is returned
Stop Orders
- Memo that becomes a market order if stop price is met or exceeded - Kept hidden by specialist - Also known as stop loss to help you from losing money ex: only want to do the trade at 41 or less; if you only put in a limit order, it would sell immediately, stop order waits until the trigger occurs, so you can get out before stock falls too far (dump stock and walk away) - If stop orders will cause excess volatility, they may cancel the stop orders
T-Bills
- Minimum of $1000 and in $1000 increments, sold book entry only - You only get a receipt you bought one, not physical - Don't have to go to a broker, can buy them from the government (treasury direct) - Sold to the public suing a yield auction [you offer to pay based on interest you'd want], do not pay periodic interest (0 coupon bond) - Maturity of up to 52 weeks (1 year)
"As Market Heats Up Trading Slips Into Shadows"
- More trading is taking place on private platforms in the dark instead of on NYSE and other established markets - Some other countries have established more regulations against dark pools [Canada Rule - if NY has a bid of 35, need to be better than lit, which dropped internalization dramatically] - Some investors are distrustful of big exchanges with HFT and tech issues, as well as cheaper especially during calmer times with less volatility - If there's less activities on exchanges, there will be less competition and worse prices
Immediate or Cancel (IOC)
- Want any portion of the order at your price and cancel the rest - Get what you can at that price and cancel whats left
United Kingdom Bonds
- Most important market in UK is government market (less trusting of corporations) - UK gov convertible bonds converted into other government bonds that are longer term (less risk so lower return) - Index-linked where principal and interest are indexed to RPI (retail price index) [only offered to UK pension plans, now open to foreigners] - Perpetual bonds that never matured - Foreign issues 'bulldog market', former UK commonwealth countries - Domestic corporates: similar to US
NYSE Mutual Organization
- Mutual company does not have stockholders - If premiums coming in>money going out, policyholders get profit (some car insurance companies)
"NYSE Nasdaq Fight CBOE's Auction Plan"
- NYSE and Nasdaq fighting CBOE from siphoning trading activity from closing auctions - With CBOE proposal, traders can execute 'market-on-close' to buy or sell shares at the end of day price and instead of sending them to NYSE or Nasdaq, send to CBOE - CBOE wants to help traders save money after NYSE and Nasdaq hiked fees
"Two Minutes that Shook NASDAQ"
- Nasdaq failed to connect with NYSE Arca for two minutes during trading that created a 3 hour halt - After the connection re-established created capacity overload - Prices were incorrect, and 'crossed', so the ask appeared lower than the bid - When problem was fixed, resuming trading created the fear of overwhelming all of the systems
"How a NASDAQ Loophole Fueled One Stock's Rise of 3,750%"
- Nasdaq rules required a company to have at least 1M publicly held shares, but some can be restricted from trading - Phunware software company soared with only 144K shares available to trade - Restricted shares can include employee shares or early investors who must hold for a time before selling - Went public through a shell company already on Nasdaq (special purpose acquisition companies/blank check companies)
"National" Stock Exchanges in 2000
- New York Stock Exchange (NYSE) - American Stock Exchange (AMEX) - National Association of Security Dealers Automated Quotation System (NASDAQ) These trade over 80% of the stocks listed there
Not Held
- Not going to hold broker responsible if they miss the market (won't pay you the difference) - Try to get better price but unsuccessful, complete autonomy as a broker
No Documentation Mortgage
- Numbers weren't double checked to confirm - Mortgage brokers only got paid if mortgage went through, so incentive to make sure that it does (changed #s to make mortgage fit, Countrywide Mortgage was worst) - ex: if PITI was 35%, artificially inflate income to be under 35% - Broker had incentive to lie on mortgage because mortgage immediately sold after issuing - Normal mortgages required 20% deposit, so if value of house goes down, comes from that first (bank covers 80%, only starts to lose if drops more than 20% in value) - Home appraisers are used to prove house is worth more than amount of mortgage, appraisers don't give selling value, but worth at least value, they should be independent, but some are generous with value
Exchanges today
- Over 20 National Exchanges - Trading is split among different venues (over 30 dark pools, more than 200 internalizing broker-dealers)
Bond Indenture
- Parties to a contract are the bond issuer, bond holder and trustee Features - Promises to pay principal and interest - May prevent company from selling property - May agree to make sinking fund payments (company also makes periodic principal payments) - May limited common stock dividend increase payments
German Bonds
- Pay interest annually - Bullet Bonds are traditional bonds
Securitization (overview)
- Pooling and purchasing assets (particularly CF producing) - Ex: instead of 1 $400,000 mortgage, 1000 mortgages together buying pieces - Smaller required down payment and much more diversifications, doesn't hurt if 1 of 1000 mortgages defaults - Commercial loans, auto leases, student loans, CC receipts can all be pooled - Anything with cash flow streams can be securitized
Property Dividend
- Preferred stock or common stock of another company - Used to spin off other companies
Primes and Scores
- Primes: voting rights and dividends benefit - Scores: price appreciation benefit - These can be sold separately and may exchange share of stock for one of these units
Senior Bonds
- Priority over junior bonds - Names disguise the real priority of the bond (senior & junior not in the name) - If people know its a junior bond, they'll want a higher rate
Functions of Exchanges
- Provide Liquidity: if you want to buy a stock, you can go to that exchange - Price Determination: you put all the interested buyers/sellers in one place and find the best price to accommodate - New Issue Assistance: helps make offering first stock easier - Attract Liquidity: come up with rules that make people want to exchange there
Margin
- Putting money down and the rest loaned to short the stock - Used to be able to borrow $80 on $100 stock, now more upfront from borrower to protect from risk - Now can only borrow up to 50% of the value of stock
Common Stock
- Residual Ownership (gets what is leftover after everyone else is paid off) - Par Value: amount in excess is moved to RE and paid out in dividends; cannot be transferred and is permanent - Dividends can be cash, stock, property, or assessments
"The Stock-Market Price Can Be Wrong. Very Wrong"
- Royal Imtech had a rights offering to stockholders to buy another 131 shares at .01 euros a piece - During offering period, stock closed as high as .1 euro per share, so investors paid 9x more on the market (violates law of one price) - When 3Com spun off Palm inc, you could get 1.5 Shares of Palm with a 3Com share, or buy them individually for more on the market
"Blockchain Makes Inroads Into the Stock Market's $1 Trillion Plumbing System"
- SEC greenlit a project that uses blockchain to settle stock trades to allow faster and cheaper process - Goal would be to settle trades at end of day or sooner, rather than the current t+2 - t+2 creates risk firms could fail before the trades settle - SEC only approved 140 actively traded, least volatile stocks for the project, up to 1% of daily trading volume
Depository Trust and Clearing Corporation
Responsibility for clearing and settling of all stocks, bonds, and options in the US
Issued Shares
Shares sold/released to the public
"SEC Rejects Controversial 'Speed Bump' Proposal"
- SEC rejected implementing a speed bump, or split-second trading delay on the market - Speed bumps force traders to wait fractional seconds before orders are executed to curb ultrafast strategies that get orders executed instantaneously - IEX was allowed a speed bump in 2016 when it became an exchange, but Cboe's applied to only market orders but IEX's applied to every order - Critics thought it unfairly benefitted Cboe's market makers against other firms
Money Markets
- Savings and Checking Accounts - CDs - Currencies - Mortgages - Car Loans - Commercial Banking (think Bank of America)
Pay-Throughs
- Securities are collateralized debt obligations of issues - Assets remain on originator's balance sheet - Payment of principal and interest passed through to investors - CMO: collateralized mortgage obligation - Multiple classes of security holders, some classes have more certainty with payments
Assets Backed Bonds
- Securities are collateralized debt obligations of issues - Assets remain on originator's balance sheet - Payments of principal and interest are passed through to investors - Common with car loans (overcollateralized, add more loans to keep value of loans to be above the bonds)
Pass-Throughs
- Security represents ownership in an asset pool - Assets removed from originator's balance sheet - Payments of principal and interest passed through to investors - Everyone is treated the same; get portion of what comes in based on what you own
Switch Order
- Selling one stock and buying another (together) - Use proceeds of one stock to purchase another
"Fantasy Football, Stock Market Edition"
- Selling stock linked to future income of professional athletes - Fantex started with football players but wants to expand to other sports and entertainment - Law now allows the modestly wealthy to play angel investor - Could be fraud because how do you know if you have claim to the revenue (put revenue in someone else's name; injures or other issues could hurt future income)
Limit Order
- Set a max price on stock you want to buy or minimum price on stock you want to sell, quantity is also specified
Federal Home Loan Bank
- Set up to give advances to S&Ls (til 1980s) - NOW account: negotiated order of withdrawal (basically a checking account) - Made banks become more competitive with rates because judge allowed NOWs
"Justice Department, Federalists and State Partners Secure Record $7 Billion Global Settlement with Citigroup"
- Settlement to resolve claims against residential mortgaged-backed securities (RMBS) and admit they made misrepresentations about the loans - Mortgages were known to have material defects, even knowing they could likely default
Fill or Kill (FOK)
- Similar to AON but if can't be filled immediately, cancel order - Full quantity/price or cancel
Fractional Point Discretion
- Similar to not held, but have some limited - Willing to accept number amount worst price
"Big Investor Group to Push for End to Dual-Class Shares"
- Some money managers push against dual-class stocks that may limit the ability for the majority of shareholders to enact change - They want one-share, one-vote standards
Specialists
- Specialized in the training of a specific group of stocks (aka 'market makers') - NYSE no longer uses specialists, but used for small stocks elsewhere globally
Capital Markets
- Stocks, Bonds, and Derivatives - Investment Banking (think Goldman Sachs)
How to Prevent Flash Crashes from Happening Again
- Stop Orders at Wild Prices: Ban 'stub' quotes (done); enact circuit breakers (done) - Inexperienced traders trading large trades: Ban sponsored access (done) - HFTs walking away: Require affirmative obligations (not yet)
Solutions
- Stub Quote: quote very far away from current market - Circuit Breakers: floor and ceiling on how much prices can move; trading stops for 15 min if it hits that range to absorb info - Affirmative Obligation: required to maintain orderly market (Specialists required to sell if everyone is buying, vice versa)
"Ultrafast Trading Costs Stock Investors Nearly $5 Billion A Year Study Says"
- Study shows HFT cost $5B by having investors pay slightly out-of-date prices - "latency arbitrage" by taking advantage of market moving information quicker than others - Some officials push for taxes that curb high speed trading or implementing speed bumps - Latency arbitrage makes it less likely to post competitive prices since they can be picked off quickly
"A Czar of Overseas Day Trading is Banned from US Brokerage Industry"
- Trader whose firm was responsible for up to 3% of US stock volume at peak, was banned for rapid-fire manipulation - Accused of 'laying', which rigs stock prices with fake orders which creates false impression of change in supply or demand
Bonds with Warrants (Germany)
- Traditional bond with option attached - Option gives you the right to buy stock on or before certain date at certain price
Sinking Funds
- Trustee could either invest/hold principal or retire (pay off) some of the bonds - About 12-15% of bonds having sinking funds
Philadelphia Plan
- Trustee has ownership of equipment and leases it to railroad - Stronger legal hold; Certificates of Beneficial Interest (CBI) are issued
"BOOMTOWN The Ubiquitous Ticket Gives You A Warm Glow, But No Real Information"
- Truthfully, no one uses the ticker - Purpose of ticker is to indicate business/financial discussions
Window Bonds (France)
- Unique to France, up to 4 windows of time that only during that time can companies call in bonds - Not only companies call in to reissue at lower rates but individuals can get their principal back and reinvest at higher rates
Preferred Stock
- Usually don't have general voting rights but special ones - Dedicated representation on BOD (only voted by preferred) - Right to veto or accept issuance of bondholders - Right to yes or no any mergers - Frequently owned by institutions due to not being taxed - May be 'ranked' junior to preferred
Cushion Bond
A call protected bond with a relatively high yield
Periodic Auction
Auction collects orders from people and determines what price will allow the greatest number of orders to occur (happens daily/weekly)
Strips
Breaks up in interest and principal amounts, money goes to those separate classes
Price Disparity
Buyer and seller disagree on the price
Time Disparity
Buyer and seller want transactions at different points in time
Participate but do not Initiate (PNI)
Similar to not held but supposed to avoid volatility by trading enough to move the price
Continuous Auction
Every time an order comes in see immediately if someone on the other side
Convertible Bond
Exchangeable for common stock
Classified Stock
Grandfathered stock; expiation in the US but more common in other countries (Ex: Ford has two classes, one is owned by the Ford family/foundation; while B class is only 2.5% of total stock, it holds 40% of the votes)
Margin Call
Have to replace losses in margin account if price drops
Peg Orders
Have you order/quote contingent on the market ex: 'midpoint' peg between the current ask and bid
Bid
Highest price someone willing to buy
Exchangeable Debenture
Hybrid bond that can be converted into shares of another company (usually subsidiary)
Indexed Bonds (France)
Indexed to a Napoleon gold coin
Premium Bonds (France)
Indexed to per kilometer railway fare (nationalized railway with far on distance)
Auction Order
Instead of immediately sending market order to buy, hold for 15 sec to see if price adjusts to give buyer better price
Federal Farm Credit Bank
Lend money to farmers at lower rate
Ask
Lowest Price asking to sell for stock
Day Order
Order is cancelled if not executed by 4 when market closes
Good til Canceled (GTC)
Order remains open until you cancel it
Cancellation
Orders can be canceled before they're executed and sometimes after if both parties agree
Cumulative
Owed dividends before common stockholders are issued on dividends
Dual Currency (Germany)
Principal and interest are in different currencies