International Financial Market Institutions: An Overview

Table of Contents

International Financial Market Institutions

Following are some of the world’s major stock exchanges.

New York Stock Exchange

The New York Stock Exchange (NYSE) was originally formed under the Buttonwood tree in the year 1972. It has a very colorful and long history. It started with 24 New York City stock brokers and merchants signing the Buttonwood agreement. This agreement set in motion the NYSE’s unwavering commitment to investors and issuers.

In the initial days, NYSE brokers used to trade outdoors in the streets – this was the reason for popularly being known as the “Curb” market or “Kerb Market”. The brokers and investors traded shares of companies in emerging industries and new investment opportunities.

In the beginning there were five securities traded with the first listed company as Bank of New York. It provided a robust market for entrepreneurial growth companies and helped a large segment of corporations to grow and prosper. The first Constitution for the NYSE was established in the year 1817. It was then experiencing a sustained rise in the trading volume (tripled between 1896 and 1899).

In 1896, the Wall Street Journal began publishing the Dow Jones Industrial Average with a starting value of 40.74. The Dow was initially comprised of twelve stocks and became an overall indication of the NYSE’s daily performance. The NYSE got first incorporated on February 18, 1971 as the New York Stock Exchange Inc – a not-for-profit corporation. NYSE was firmly established as one of America’s eminent financial institutions and became a public entity in 2005 – formerly run as private organization – following the acquisition of electronic trading exchange Archipelago.

It was then later incorporated as NYSE Group Inc., a for-profit corporation, on March 7, 2006. NYSE Group, Inc. (NYSE:NYX) operates two securities exchanges: the New York Stock Exchange (the “NYSE”) and NYSE Arca (formerly known as the Archipelago Exchange, or ArcaEx, and the Pacific Exchange).

NYSE Group is a leading provider of securities listing, trading and market data products and services. The NYSE is the world’s largest and most liquid cash equities exchange. It provides a reliable, orderly, liquid and efficient marketplace where investors buy and sell listed companies’ common stock and other securities. The New York Stock Exchange is the most investor-friendly market in the world. The Exchange is dedicated to protecting the interests of all investors, large and small. NYSE brings together investors and issuers, trades securities and fuels economic growth. It is now considered as the largest equity-based exchange in the world based on the total market capitalization of listed securities.

Tokyo Stock Exchange

The period of industrialization in Japan during the mid to late nineteenth century had created a need for its own exchange. This gave rise to the creation of the exchange in the year 1878. The exchange was established through the “Stock Exchange Ordinance”, which was enacted in May 1878. Based on this ordinance, the “Tokyo Stock Exchange Co., Ltd.” was established on May 15, 1878. Trading began on June 1, 1878.

In response to World War-II, there was a reorganization of the Japanese stock markets in 1943. Eleven stock exchanges in Japan, including the Tokyo Stock Exchange, were combined to form the Japan Securities Exchange, which was partially run by the Government. Between August 10, 1945 and April 1, 1949 officially trading on the exchange was suspended due to the war. After several post-war reorganization, the TSE emerged as the largest of the five stock exchanges including the Sapporo Securities Exchange, Osaka Securities Exchange, Nagoya Stock Exchange and Fukuoka Stock Exchange in addition to the Tokyo Stock Exchange.

In 1969, the Tokyo Stock Exchange developed the Tokyo Stock Price Index (TOPIX). This index is calculated with all first Section Japanese common stock and gave an overall indication of how well the stock market is performing. The stock exchange has calculated the TOPIX every minute since 1987.

The Tokyo Stock Exchange closed its trading floor in 1999 to replace it with a fully electronic system. This move was made as many world exchange were beginning to go electronic and it was seen as a way to improve the efficiency and increase competitiveness of the Tokyo Stock Exchange. The Tokyo Stock Exchange uses an electronic, continuous auction system of trading. This means that brokers place orders online and when a buy and sell price match, the trade is automatically executed. Deals are made directly between buyer and seller, rather than through a market maker. The TSE uses price controls so that the price of a stock cannot rise or fall below a certain point throughout the day. These controls are used to prevent dramatic swings in prices that may lead to market uncertainty or stock crashes. If a major swing in price occurs, the exchange can stop trading on that stock for a specified period of time. Stock listed on the TSE are assigned to one of three markets: the First Section, Second Section, or Mothers (market of the high-growth and emerging stocks). The highest listing criteria must be met for the First Section and all newly listed stocks begin on the Second Section, with less strict requirements. Stocks for high growth, emerging companies are listed on the Mothers market.

As of August, 2008, there are around 2377 companies listed on the Tokyo Stock Exchange with a total market capitalization of USD 3.80 trillion.

NASDAQ

The abbreviation of National Association of Securities Dealers Automations Quotations in NASDAQ. It was developed in 1971 as the first electronic stock exchange in the world. It was created as a means to increase the trading of Over-the-Counter stocks, those that were unable to meet requirements for larger exchanges. On the first trading day, February 8, 1971 about 2,500 OTC stocks were traded on the NASDAQ stock exchange.

The division between the NASDAQ National Market and the NASDAQ Small-Cap Market developed from 1982 to 1986, as the larger companies separated themselves from the smaller ones. It was in the 1990’s that the NASDAQ began to be seen as a competitor of the NYSE, and in 1994 the NASDAQ beat the NYSE in annual shares traded. In 1998, the NASDAQ merged with the American Stock Exchange, which mostly traded options and derivatives, creating the NASDAQ-AMEX Market Group. The combined company still operates as two separate exchanges, but is better able to compete with the NYSE.

It has listing of 3300 companies and has a greater trading volume than any other U.S. exchange, making approximately 1.8 billion trades per day. The NYSE is still considered the biggest exchange because its market capitalization far exceeds that of the NASDAQ. The NASDAQ trades shares in a variety of companies, but is well known for being a high-tech exchange, trading may new, high growth, and volatile stocks. This is partially due to the fact that the listing fees on the NASDAQ are significantly lower than those for the NYSE.

The NASDAQ, as an electronic exchange, has no physical trading floor, but makes all its trades through a computer and telecommunications system. The exchange is a dealers’ market, meaning brokers buy and sell stocks through a market maker rather than from each other. A market maker deals in a particular stock and holds a certain number of stocks on his own books so that when a broker wants to purchase shares, he can purchase them directly from the market maker. Since there is no trading floor where the NASDAQ operates, the stock exchange built the NASDAQ Market Site in New York’s Times Square to create a physical presence.

London Stock Exchange

The London Stock Exchange is one of the oldest in the World. It began in 1698, when a man named John Castaing began publishing lists of stock prices called ‘The Course of the Exchange and Other Things’. London’s stock dealers were at this time making trades in the streets and in coffee houses. In 1761, 150 of these stockbrokers started a club for buying and selling shares in a dealing room on Sweeting’s Alley, which eventually became known as The Stock Exchange. It became an official, regulated exchange in 1801.

The London Stock Exchange was closed for five months during World War I and again for six days during World War II. In 1973, all the regional exchanges in England and Ireland merged with the London Stock Exchange.

Presently, there are around 3000 companies listed on the exchange and is the most international of all exchanges with 350 of the companies from 50 different companies. The London Stock Exchange is comprised of two different stock markets: the Main Market and the Alternative Investment Market (AIM). The Main Market is solely for established companies with high performance, and the listing requirements are strict. Approximately, 1800 of the LSE’s company listings trade on the Main Market, and the total market capitalization is over 3500 billion. The Alternative Investment Market on the other hand trades small-caps, or new enterprises with high growth potential. Over 1060 companies list on this market, with a total capitalization of 37 billion.

The LSE is completely electronic, but different shares are traded on different systems. Highly liquid shares are traded using the SETS automated system on an order driven basis. This means that when a buy and sell price match, an order is automatically executed. For securities that trade less regularly, the London Stock Exchange has implemented the SEAQ system, where market makers keep the shares liquid. These market are required to hold shares of a specific company and set the bid and ask prices, ensuring that there is always a market for the stock.

Hong Kong Stock Exchange

Hong Kong Stock Exchange history dates back to 1866. But the first formal stock market, the Association of Stockbrokers in Hong Kong, was established only in 1891. It was renamed the Hong Kong Stock Exchange in 1914. A second exchange was incorporated in 1921 – the Hong Kong Stockbrokers’ Association. The two exchanges merged to form the Hong Kong Stock Exchange in 1947.

The rapid growth of the Hong Kong economy led to the establishment of three other exchanges in the late 1960s and early 1970s. Prompted by the 1973 market crash and the need to strengthen market surveillance, the Hong Kong government set up a working committee in 1977 to consider the unification of the four stock exchanges. As a result, the unified exchange – the Stock Exchange of Hong Kong (SEHK) – was incorporated of 7th July, 1980. The four exchanges ceased trading after the close of business on 27th March, 1986. This was a pivotal point in Hong Kong Stock Exchange history as this merger allowed the market to grow and compete on an international scale.

After the October Crash in 1987, SEHK underwent a complete reform, including the establishment of a more widely representative Council and a strong, professional executive management team, to safeguard the interests of all participants and to operate and develop the market effectively.

In 1973, the Exchange launched the Automatic Order Matching and Executive System (AMS) that was replaced by the third generation system (AMS/3) in October, 2000. The new system enabled the exchange participants to trade from their offices. In 1999, the HSKE opened the Growth Enterprises Market (GEM) that made the access to the capital market easier for riskier businesses.

After a year, the Growth Enterprises Index (GEI) was launched. Finally, the Stock Exchange of Hong Kong together with Hong Kong Futures Exchange Ltd. established in 1976 and Hong Kong Securities Clearing Company Ltd. incorporated in 1989 merged to form a unified company Hong Kong Exchanges and Clearing Limited (HKEx) in 2000. Shares of the HKEx were listed on the Stock Exchange of Hong Kong.

With its total securities market capitalization of HK$ 8260.3 billion (US$ 1063.9 trillion), the HKSE ranks 8th place by market capitalization in the world. The HKSE has more than 4000 stocks listed on the exchange. The Hang Seng Index is widely followed as a barometer of the East and South East Asian economies.

Shanghai Stock Exchange (SSE)

Shanghai Stock Exchange is the first exchange in mainland China established in the year 1904. However it was closed as result of the communist takeover in 1949 and was re-established in 1990. It has been operational since December 19, 1990.

It is a membership institution directly governed by the China Securities Regulatory Commission (CSRC). After several years’ operation, the SSE has become the most preeminent stock market in Mainland China in terms of number of listed companies, number of shares listed, total market value, tradable market value, securities turnover in value, stock turnover in value and the T-bond turnover in value. The exchange has a total of eight hundred and seventy-eight listed companies.

The main indices used on the exchange are:

SSE 50 Index.
SSE 180 Index.
SSE Composite Index.
SHSE-SZSE 300 Index.

The Shanghai Stock Exchanged is administered by the China Securities Regulatory Commission and works as a non-profit institution. The exchange lists two different kinds of stocks: A and B shares. The difference between the two stocks is the currency that are traded in. The A shares is traded in the local Renminbi Yuan currency, whereas the B shares are traded in US Dollars. Traditionally A shares were only traded within the country, but now both A and B shares may be traded world wide. The majority of the stocks listed on the exchange are A shares. There are eight hundred twenty-four A shares and fifty-four B shares listed on the market.

SSE is fully committed to the goal of State-owned industrial enterprises reform and developing Shanghai into an international financial center with great confidence.

Singapore Stock Exchange (SGX)

The Singapore Stock Exchange established in Singapore in December 1, 1999 was the result of the merger of two financial institutions – the Stock Exchange of Singapore and the Singapore International Monetary Exchange. The Singapore International Monetary Exchange was a futures exchange that was established in 1984. The Stock Exchange of Singapore, on the other hand, traded in stocks. By 1998, the Stock Exchange of Singapore had a market capitalization of S$263 billion and 307 listed companies. The Singapore Stock Exchange is Asia’s first demutualized and integrated securities and derivatives exchange. It was also the first publicly held exchange in the Asia Pacific. On 23rd November 2000, the Singapore Stock Exchange was the first exchange to be listed through the public offer and the private placement.

The following are the indices used in the Singapore Stock Exchange:

MSCI Singapore Free Index
Strait Times Index

The products offered by the Singapore Stock Exchange are traded through the electronic screen based system. The products include Equities, Warrants, Bonds, Debentures and Loan Stocks, Exchange Traded Funds, Real Estate Investment Trusts, Business Trusts, Infrastructure Funds and Depository Receipts.

The derivatives products include short-term and long-term interest rate futures and options on futures, Equity Index futures and options on futures, Single Stock Futures and Structured Warrants.

The Singapore Stock Exchange is the first stock exchange in Asia that trades in equity index futures. The company listings under the Singapore Stock Exchange is divided in the following:

Singapore Stock Exchange Mainboard: The companies that are listed under this head have to fulfill certain criteria relating to market capitalization, pre-tax profits and operating track records.
Singapore Stock Exchange SESDAQ: This is listing of new companies which do not have to fulfill any quantitative requirement. On application the companies listed on the SESDAQ can be transferred to the former category provided they fulfill the criteria of this list.

SGX also hosts trading in futures on S&P CNX NIFTY – the stock index of the NSE. This is popularly known as the SGX NIFTY. Since the SGX opens earlier than the Indian stock markets, traders can track the movement of the SGX NIFTY to identify investor sentiment before the markets in India opens. This is critical for understanding the positions taken by Foreign Institutional Investors and other entities in SGX NIFTY.

Growing Interlinkages Between Global Financial Markets And Indian Financial Markets

There have been growing interlinkages between different markets across the world. In India, this is all the more pronounced, after the liberalization of Indian economy in 1990’s. The movement of stock indices in China, Hong Kong, Singapore, Australia, Europe and USA has significant impact on the investor sentiment in India. It is not unusual to observe a high correlation between different equity markets across the globe.

Before a trader commences trading on Indian stock markets, he analyzes the volatility of the East and South East Asian markets. The trader also analyzes the movement of Dow Jones Industrial Average on the previous business day – this is because the DJIA is long open after the Indian markets are closed on the previous business day. The investor interest in Indian markets is predominantly also due to investments by Foreign Institutional Investors (FII).

Thus, it is critical for a trader in Indian financial markets to closely observe the trend prevailing in international markets.

Securities Exchange Board Of India (SEBI)
Bombay Stock Exchange Of India Limited (BSE)
National Stock Exchange Of India (NSE)
Intermediaries Involved In Settlement And Banking Institutions
Intermediaries Involved In Trading And Investment