Exchanges and Securitizer

Exchanges:

Provides a place where traders can meet to arrange trades, e.g. NYSE-Euronext, Eurex, Tokyo stock exchange etc.  Exchange floor is where a broker and dealer negotiate. Exchanges arrange trades for traders based on orders that broker and dealer submit to them. Such exchanges essentially act as broker. Most use an electronic order matching system to arrange the trades.

Regulates operation separates exchanges to broker. Most of exchanges regulate their member’s behavior when trading on or off an exchange.

·         Regulate the issuers that list their security of the exchanges. These regulations require timely financial disclosure which is the information to value the securities in the market.

·         Derive their regulatory authority from their national or regional government, or through the voluntary agreement of their member and issuers to subject themselves to the exchange regulation. In most country government regulators oversee the exchange rule and regulatory operation. Most counties also impose financial disclosure standards on public issuers.

·         Alternative trading system ATSs functions same as exchange, but do not exercise regulatory authority over subscriber, except with respect to the conduct trading in their trading system, any electronics. Other operating innovative trading system based information on the customer and their preference. Many ATSs known as dark pools because they do not display that their clients send to them.

Securities:

·         Once the financial product which improves liquidity. Financial intermediary securitize mortgages, car loan, credit card receivables, bank loan, airplanes leases etc. These securities are called asset-backed securities.

·         Mortgages backed securities: banks lend money to homeowners and they pool mortgages and sell shares of the pools as mortgages pass-through security.  Indirect investment in mortgages with less risk than individual mortgages. Interest and principal payment go through investor after deducting servicing cost. Its investors have the same cash flow and risks as pool mortgages do. In Mortgages backed securities have the advantage that default losses early repayment for a diversified portfolio of mortgages than individual mortgages. Banks facilitate investor with efficient service mortgages and having the benefits of diversification and economies of scale in loan service.

·         Securitization: process of buying asset, placing them in a pool, then selling securities that represent ownership of the pool.

·         Securities are easier to price and sell when investors need to raise cash, which raise liquidity in the market and homeowner will get benefit too through higher mortgage prices at lower interest rate.

·         Pass through securities take place on mortgages, banks account. The bank buys mortgages and sell pass through securities whose value depend upon mortgage pool. The mortgages appear on the bank accounts as asset and mortgages-backed securities appear as liabilities.

·         Special purpose vehicles: corporation or trust that buys assets and sell securities. They protect interest better than financial intermediary which can go bankrupt.

·         Tranches: different class of securities in which different rights of cash flow from the asset pools. Possibility of more predictable cash flow from investment. Rights of cash flow depend upon seniority which means that junior tranches bear disproportionate share of the risk

·         Investment companies also create pass-through security based on investment pools.