Question

What type of order provides immediacy? With respect to a real-world case, explain whether financial intermediaries may play any role in a market with an electronic order book. [350-600 words]

Answer 1

1

Market immediacy is the ability or the speed with which transactions can be executed promptly at the prevailing price. The speed of execution of trade is influenced by market structure which facilitates the demand and supply of immediacy.

A limit order and dealer market provides immediacy by bring buyers and sellers togther for the limit order size. For this the market specialist maintians a limit order book. A limit order book is a record of unexecuted limit orders maintained by the security specialist who works at the exchange. When a limit order for a security is entered, it is kept on record by the security specialist. As buy and sell limit orders for the security are given, the specialist keeps a record of all of these orders in the order book and executes them at or better than the given limit price when there is available pricing and inventory to do so.

Against this, in call options, no trader gets immediacy unless by chance because all market participants are required to either wait or trade ahead of their desired time.

For dealer and limit order, market provide immediacy to all market participants at the same price, whether it is desired or not. However the prevailing circumstance for a limit order, market permits investors to demand or supply immediacy as per their preference.

One of such example of limit order market in Africa is the Nairobi Securities Exchange (NSE) in Kenya. The NSE is fundamentally structured as a dealer and limit order market that is purely order driven characterized by market order, limit order and stop orders. Consequently, the liquidity in NSE is by and large a function of the demand of this immediacy precipitated by arrivals of buyers and sellers.

2

A financial intermediary is an institution or individual that serves as a middleman among diverse parties in order to facilitate financial transactions. Common types include commercial banks, investment banks, stockbrokers, pooled investment funds, and stock exchanges

Financial intermediaries move funds from parties with excess capital to parties needing funds. The process creates efficient markets and lowers the cost of conducting business.

In today's global economy, security analysts are assuming a risky role.

Security analysis examines and evaluates individual securities to estimate the results of investing in them. In making judgment about valuation of securities the analyst must seek out reliable information. This information can come from financial statements, discussions with company executives, clients, and suppliers. The discipline requires detailed analysis and diligence.

There are several barriers to the development of the security analysis profession in emerging markets. Lack of timely and reliable information is of utmost importance.

Information is available late or has been manipulated then the security analyst cannot do the valuation. If it is too costly to obtain the information then that becomes another hurdle. There is also a lack of expertise available to do this research and analysis.

Example - Dot Com Bubble Burst

The relevance of intermediaries in the securities market was brought to the forefront by the “dot-com bubble” in the U.S. In 1999, several Internet consulting companies (which were around two years old) went public on NASDAQ, claiming that they would bring in their information technology and web expertise to traditional “old economy” companies and lead to a new era of the Internet. The pumping of funds into these companies by venture capitalists raised the market expectations, and the share prices of these Internet companies inflated tremendously. However, these valuations proved to be unsustainable as the share prices of these companies dropped sharply in April 2000. Eventually, these led to the “bubble burst”,having far- reaching implications on the U.S. economy as a whole.

The dot-com bubble illustrates the flipside of the not-so-well-founded but ambitious manoeuvres of intermediaries