Question

a case study with research

San Pico is a rapidly growing Latin American developing country. The country is blessed with miles of scenic beaches that have attracted tourists by the thousands in recent years to new resort hotels financed by joint ventures of San Pico businessmen and moneymen from the Middle East, Japan, and the United States. Additionally, San Pico has good natural harbors that are conducive for receiving imported merchandise from abroad and exporting merchandise produced in San Pico and other surrounding countries that lack access to the sea. Because of these advantages, many new businesses are being started in San Pico.

Presently, stock is traded in a cramped building in La Cobijio, the nation’s capital. Admittedly, the San Pico Stock Exchange system is rather archaic. Twice a day an official of the exchange will call out the name of each of the 43 companies whose stock trades on the exchange. Brokers wanting to buy or sell shares for their clients then attempt to make a trade with one another. This crowd trading system has worked well for over one hundred years, but the government desires to replace it with a new modern system that will allow greater and more frequent opportunities for trading in each company, and will allow for trading the shares of the many new start-up companies that are expected to trade in the secondary market. Additionally, the government administration is rapidly privatizing many state-owned businesses in an attempt to foster their efficiency, obtain foreign exchange from the sale, and convert the country to a more capitalist economy. The government believes that it could conduct this privatization faster and perhaps at more attractive prices if it had a modern stock exchange facility where the shares of the newly privatized companies will eventually trade.

You are an expert in the operation of secondary stock markets and have been retained as a consultant to the San Pico Stock Exchange to offer your expertise in modernizing the stock market.

Should they implement a modernized floor (outcry) and automated trading system such as the New York Stock Exchange? Provide an explanation as to how this would be feasible or not.

Would a system such as the NASDAQ be more beneficial considering the size of the country? Explain.

Explain the significant role played by the new exchange in facilitating capital market activity.

Explain why in its present state the exchange may or may not promote requisite liquidity and its significance.

Briefly discuss a regulatory framework needed to assure market integrity.

Discuss potential listing requirements.

How would the exchange serve as a barometer of economic activity?

Answer 1

1. Ultimately, all exchanges the world over will move to a computerized system of trading like NASDAQ and away from the outcry method of trading. When modernizing the San Pico stock exchange, it is wiser to shift to a computerized system of trading like NASDAQ as it offers many advantages such as lower cost.

2. The NASDAQ computerized system of trading is more modern trading system than the open outcry system of the NYSE. A system like NASDAQ offers many advantages like:

a. It offers lower requirements for listing; this would make it easier for the start-ups and state owned business that would get privatized in San Pico and who would want to trade in the San Pico exchange. This would increase the number of companies to invest in too.

b. It has a lower listing fees compared to the NYSE. This would enable more companies to register in the stock exchange.

3. Role played by the exchange for promoting capital market activity:

a. The exchange would provide more liquidity and efficiency in the capital market.

b. Such a system provides more transparency, which would encourage more investment in the capital market.

c. It would lead to increased trading as such a system has extended trading hours.

4. The present system of crowd trading does not provide sufficient liquidity, since firstly, the numbers of stocks traded are quite low. Secondly, under the current system, an official calls out the names of 43 companies trading on the exchange twice a day. This limits the trading activity in the exchange.

5. Potential listing requirements:

a. To have a minimum number of publicly traded shares upon listing.

b. Must earn a certain amount of profit in a few years before the listing.

c. The company requiring the listing must follow the corporate governance of the exchange.

d. The company should have a dividend paying track record for a certain number of years.

e. The issue size must be of a minimum specified amount.

7. When the economy is undergoing a prosperous time, the stock price and trading activity increases. There are more IPOs and bond issues. But when an economy is in recession, the stock prices and trading activity decline. It therefore gives an indication of the pulse of the economy. Therefore, stock exchanges serve as a barometer for the economy.

I hope that was helpful :)