Securities Markets and Market Participants
This domain tests how issuers raise capital, how securities then change hands, and who sits at each link in the chain from issuer to end investor. Questions typically probe primary-market issuance methods, the distinction between order-driven and quote-driven trading, the roles of market makers, brokers, custodians and registrars, and the clearing and settlement timetable.
Primary market issuance
- An IPO can be structured as an offer for sale, a placing, an intermediaries offer or a combination. Proceeds go to the company when new shares are issued, or to selling shareholders in an offer for sale of existing stock.
- A rights issue offers existing holders new shares pro rata at a discount; a vendor placing funds an acquisition; a prospectus is required for admission to a regulated market.
- Bookbuilding and underwriting set and support the price.
Secondary market structure
- Trading takes place on a regulated investment exchange (for example the LSE's SETS order book), on a multilateral trading facility or organised trading facility, or off-venue through systematic internalisers.
- In an order-driven market, bids and offers are matched by price and time priority. In a quote-driven market, market makers commit capital and quote two-way prices.
- A broker acts as agent for commission; a market maker acts as principal and earns the spread. Best execution obligations apply wherever the order is routed.
Clearing, settlement and custody
- A central counterparty novates trades and manages counterparty risk. UK equities settle in CREST on T+2, delivery versus payment.
- Custodians hold assets through nominees; the registrar maintains the register of members and pays dividends.
Worked example
A company has 1,000,000 shares trading at £4.00 and announces a 1-for-4 rights issue at £2.80. The theoretical ex-rights price is ((4 × £4.00) + (1 × £2.80)) ÷ 5 = £18.80 ÷ 5 = £3.76. The value of the right is £3.76 − £2.80 = £0.96 per new share, or £0.24 per existing share. The TERP always sits between the cum-rights price and the subscription price.
Traps that cost marks
- Money from a secondary-market sale goes to the seller, never to the issuer.
- UK equity settlement is T+2; the older T+3 figure is a distractor.
- A market maker is a principal quoting two-way prices; a broker is an agent.
- Once a stock goes ex-dividend, the buyer is not entitled to the declared dividend.