Last week, one of my connections raised a question - what are the key challenges in the equity markets - in a forum we share with each other.

I was trying to provide an answer to the questions from what I have experienced so for in my life. I realized the answer would very much depend on the type of user. The user could be an investor (who looks for long term returns) or a trader (who looks for a short term gain). I also realized that technology solution providers (IT companies) could even face lot more challenges than our investor or trader.

To be honest, I should admit, when I started to note down the points that occurred to me, I realized the enormous challenges the equity markets offer to the investor, trader and to our technology companies.

I decided to share these challenges with every one through this blog so that they can get guided in their respective roles as a trader, investor, and a technology solution provider.

Types of equity

Normally, we come across the following types of equity.

Common stock / Equity shares

Preferred stock

Convertible preferred stock

Warrants

Private Equity

The challenges posed by these different types will differ

Types of products

Next, the following types of markets are available in the equity space.

Spot markets

Forward markets

Derivative products

These markets throw open totally different challenges.

Types of trading

The following trading types have their specific features and naturally the resulting challenges would be different.

Block

Basket

Programme

Shorts

Pricing and pricing environment

Capturing factors affecting equity prices and obtaining share price information on real time basis is the real challenge in the equity markets all over the world.

Risk management

Every market has risks to manage and in our equity markets, monitoring beta will be a crucial challenge. And designing appropriate risk measures would be an uphill task.

Market behaviour

Watching equity markets from the side lines would be comfortable and easier one as we would not have any stake and hence movements in the markets would not in any way affect us. For the players investors and the traders would be impacted by any movement and they would be studying the following virtually on a real time basis.

Advance-Decline Line, Ratio and Net Difference

Upside-Downside Volume Line, Ratio and Net Difference

Advance-Decline / Upside-Downside Index

High-Low Differential Ratio and Index

Bottom Indicator

Cycles

Large Block Index

Short Term Trading Index

Trend Indicator

Volatility Index (VIX)

Put/Call Ratio

Call/Put Ratio

Put/Volume Ratio

Call/Volume Ratio

Calendar Spread

Short Sales Statistics

Sentiment Indicators

Naturally our technology solution providing IT companies will have to understand first these critical features and then proceed to calculate, capture and present in a very efficient manner.

Clearing and settlement

Entering into a trade in equity markets may be easier when compared to the subsequent actions/reactions. Clearing and settlement is the one area which ensures that the trade dealt with is delivered flawlessly. The IT companies pain areas lie mostly in these parts.

Legal framework

Trade confirmation

Settlement cycles

Central counter parties (CCP)

Securities lending

Central securities depositories (CSD)

Delivery versus payment (DVP)

Timing of settlement finality

CSD risk controls to address participants failures to settle

Cash settlement assets

Operational reliability

Protection of customer securities

Governance

Access

Efficiency

Communication procedures and standards

Transparency

Regulation and oversight

Risks in cross-border links

Others

There are other areas which pose equally major challenges to every one in the equity markets. They are

Index composition

Inclusion in an index

Capturing corporate actions on real time

Listing in multiple exchanges

Complex operations of exchange houses

Issues and operations of depository receipts

Emerging markets challenges

Market research and business intelligence

External dilemma

Well. One should not get bewildered by these challenges. S/he should accept them and conquer them. The real joy lies in mastering and mitigating these challenges.

Are we willing?