Key challenges in equity markets
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?
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