TOPIC 5

STOCK EXCHANGE AND THE

ORGANIZATION OF THE
OTC MARKET
1. Duties and functions of stock exchange
2. Organizational and legal basis of work and
controls the stock market
3. Over-the-counter (OTC) securities markets
4. Organization of the OTC securities market
1. Duties and functions of stock
exchange
Stock Exchange - is a special, institutionally
organized market, which treat specially selected
securities and transactions which commit
professional securities market participants.
Stock Exchange performs the following functions:
• Establishment of a permanent market securities.
• Determining the price of securities.
• Dissemination of information about securities,
their prices and conditions of treatment.
• Maintain professionalism of financial and trade
negotiators.
• Develop policies and procedures relating to the
functioning of the exchange.
• Indication of state of the economy and financial
markets.
Functional diagram of the interaction of institutions
and actors of the securities market
The organs of state control and
regulation of securities market

Institutes of the securities market

Board of
Directors of the
Exchange
Exchange

National Depository of capital Clearing bank

Professional securities market

Issuers Brokers,
brokerage
Other financial
Commercial banks houses and
intermediaries
investment
banks, unlisted

Investors

Entities Individuals
Objectives of the Exchange as an organizer of
securities trading can be formulated as follows:

1. First, the exchange rate should provide the definition of

securities under the impact of supply and demand and reliably
protect the course from the impact of those who try to
manipulate it, distorting the course to his advantage;
2. Secondly, between asking price and the price the buyer in the
ordinary case should not be a large gap (spread), otherwise the
process of bargaining is inhibited;
3. Thirdly, it must be supported by market liquidity, ie, shall be
maintained smooth and gradual change in the rate securities, the
formation of prices should prevent sudden sharp jumps.
Organizational and legal basis of
work and controls the stock market

Exchange - this is usually not commercial

structures, ie non-profit and therefore exempt
from corporate income tax. To cover the costs for
the organization of exchange trade exchange
charge with participating in the trading range of
payments:
• Commission of a deal struck on the trading
floor;
• Companies pay for the inclusion of their shares
in exchange list;
• Annual contributions of new members, etc.
 Authorities Stock Exchange
The general meeting of members of the
exchange is the supreme governing
body. Assembly members of the exchange is
usually convened mandatory once a year. If
necessary, there are also extraordinary general
meeting of members. Last convened Exchange
Committee (or the Exchange), the Audit
Commission or members of the exchange, having
not less than 10% of the vote.
 Stationary structure
1. The executive unit (regular unit)
2. Specialist units:
Commercial organizations, Exchange
Board Committees
3. OVER-THE-COUNTER (OTC)
SECURITIES MARKETS

 Under the OTC securities market mean the

mechanism of the conclusion of securities
transactions out of stock exchange.
 OTC securities market can be organized and
unorganized.
ADMISSION OF SECURITIES TO
QUOTATION

 As stock markets in OTC trading systems, there

is the procedure for admission of securities to
quotation and selection of bidders, although the
requirements for securities issuers and bidders
significantly softer than the stock exchanges.
 Trading takes place at certain hours (trading
session) in accordance with certain rules - rules
of trade.
 Transactions carried out by authorized officers of
the companies - bidders from computer terminals
of the offices (a remote trading access).
DIFFERENCES BETWEEN THE
EXCHANGE AND OTC SYSTEM
 In the exchange mechanism is expected that the
transaction is concluded between participants on
the principles of anonymity, and the exchange in
this case acts as a mediator and guarantor of
performance of the transaction.
 In OTC mechanism the trading system is not the
participant of transaction, and serves only as a
place where the fact of settlement of a
transaction between two participants is fixed
under certain rules, and the trading system acts
not as the participant, but as the independent
arbitrator at fulfillment of this transaction.
THE BASIC ORGANIZED COMPUTER
MARKETS OF OFF-EXCHANGE TRADE:

 Ukrainian electronic off-exchange First Securities

Trading System (PFTS, www.pfts.com);
 Electronic off-exchange Russian Trading System
(RTS, www.rts.ru), organized by the Professional
Association of Securities Market Participants;
 The Canadian system of off-exchange automatic trade
(COATS - Canadian Over-the-counter Automated
Trading System);
 System of automated quotation and dealing at the
Singapore stock exchange (SESDAQ - Singapore
Stock Exchange Dealing And Automated Quotation
System);
 Automated quotation system of the National
Association of Securities Dealers (NASDAQ)
EACH OF THE ABOVE-NAMED MARKETS (EACH
SEGMENT, SECTOR OTC MARKET) IS CHARACTERIZED
BY A CERTAIN SYSTEM PARAMETERS:

 traded on the market as financial instruments

(the terms of their release - the issue and
circulation);
 Structure of participants and their functions;

 Availability (absence) of a certain serving

infrastructure;
 A regulation mechanism of the OTC market;

 Rules of work with the given financial

instruments;
 Rules of realization of the bidding.
4. ORGANIZATION OF THE OTC
SECURITIES MARKET
 Trading in the OTC system (PFTS, RTS) is
carried out as follows. Bidders, through remote
terminals enter into a central site the offers on
purchase and sale of shares. The entered offers
are displayed on terminals of all bidders. If one of
the bidders wish, to make a transaction on the
proposed conditions, it contacts the trader, who
has exhibited the demand, by phone, and agrees
with it about the transaction.
 Payment for the shares and re-registration of
property rights committed by contractors of the
transaction itself, off-exchange trading system
(PFTS, RTS) in this respect does not grant now
any services.
ORGANIZATION OF THE OTC
SECURITIES MARKET (CONTINUATION)

 By members PFTS and RTS it is developed a

package of the standard documents regulating
trade through these trading systems (rules, the
standard contract of purchase and sale, a
responsibility measure etc.), are created the
bodies supervising and regulating activity of
participants - trading committee, disciplinary
committee (supervising observance of rules of
trade), arbitration tribunal (assorting matters in
dispute and conflict situations), etc.
THE KEY MOMENTS OF RULES OF TRADE IN
TRADING SYSTEMS:

 all offers (quotation) entered into system, are

"firm", i.e. obligatory for performance;
 minimum amount of the lot, exposed in the
system - 10 thousand U.S. dollars (minimum lot
size does not mean however that the deal will not
be made for a smaller amount. It should be noted
also that the RTS-2, the minimum lot size is 5
thousand dollars);
 THE KEY MOMENTS OF RULES OF TRADE IN
TRADING SYSTEMS (CONTINUATION):

 participants of trading system are divided into some

categories among which are allocated:
Members of trading system with a viewing mode (members of
trading system with the status of a viewing member trade in
accordance with general practice, however are deprived possibility
independently to exhibit quotations. For reception of the given
status it is necessary to execute minimal requirements on the
minimum restriction of an authorized and liquid net capital,
availability of the license of the professional market participant of
securities).
Members of trading system with a trading mode (difference from a
viewing mode consists in possibility independently to exhibit
quotations; however for reception of the trading status it is
necessary to observe more hard terms concerning the minimum
size of a liquid net capital and availability in staff of the company
of the professional traders who have passed corresponding
certification).