To view the
printer friendly version Acrobat Reader is needed.
|
 |
TRADING GOVERNMENT SECURITIES IN THE SECONDARY MARKET
What happens when holders of securities want to sell before
the maturity date of their bonds and bills? They go to the
secondary market, where, with the assistance of intermediaries,
they can buy or sell securities that were previously bought
in the primary market. The secondary market is a resale market.
The secondary market is a very important element of the securities
market. Investors are more likely to purchase securities in
the primary market if they are confident that they can readily
convert these securities to cash whenever they wish to do
so. The existence of an organised secondary market can provide
this level of confidence to holders of securities.
Another benefit of an organised secondary market is that
it increases the investment opportunities. Persons who may
not have been able to acquire securities on the primary market
have additional opportunities to acquire those securities
on the secondary market. Of course besides the provision of
liquidity, an organised and efficient secondary market is
also important in pricing securities. An investor may be able
to sell his or her securities at a higher price that the price
at which it was purchased based on the value that investors
in the market have assigned to the particular security. The
appreciation in the price represents a gain for the investor.
In investment jargon this gain is known as a capital gain.
But for the secondary market to operate effectively, there
must be people willing to sell and others willing to buy,
as well as the market infrastructure that provides for the
meeting of buyers and sellers. Without an efficient and transparent
infrastructure that allows for discovery of price, how will
an investor in Grenada, for example, with securities to resell
know about an investor in Antigua willing to purchase those
securities at a price that satisfies both parties?
These features have been embodied in the design of the Eastern
Caribbean Securities Exchange Ltd, the ECSE, which is the
focal point for both primary and secondary trading within
the Eastern Caribbean Securities Market (ECSM). The electronic
trading platform allows brokers and broker dealers to connect
directly to the central trading system, and to see all the
current prices (buys and sells) for securities that have been
placed in the central trading system. Investors wishing to
buy or sell securities on the secondary market will instruct
their limited service broker or broker dealer to submit an
order on their behalf with a stated price requirement. A trade
is made when there is a match between the requirements of
the seller and buyer.
Trade orders are accepted on the Eastern Caribbean Securities
Exchange Ltd each weekday between the hours of 9:00 am to
2:00 pm. The auction is run at 2:30 pm.
In the secondary market, a competitive bidding process based
on a single price auction methodology drives the auction.
There is no guarantee that bidders will acquire the security.
It is really a case where the best price wins. All of the
bids are ranked and a best price is calculated from among
of them. All bidders whose prices are above or equal to this
best price will be awarded securities at the calculated best
price. But there is no guarantee that all bidders will acquire
the security they are interested in.
Purchasing government securities in the secondary market
is similar to the process applied to the primary market. Investors
must contract the services of an intermediary (either a limited
service broker or a broker dealer), and place their orders
to buy or sell at a specified price. Before placing the order
the intermediary should let the investor view a live display
of the trading system on the computer screens. The screen
will show the best available prices at that point in time
for each security submitted on behalf of investors to the
Exchange.
This information can provide a basis for deciding on the
price at which the investor's order should be placed. Because
orders are accepted up to 2:00 pm. the investor can modify
the initial instructions to the broker dealer up until this
cut-off time. As the day progresses and more orders are submitted
to the Exchange, the best price may also change. An investor
may decide to modify his or her order in an attempt to increase
the probability that the order placed will be at or above
the best price when the auction is run.
It is worth mentioning that each buying investor must first
transfer to his/her broker or broker dealer firm, monies amounting
to the full value of the proposed purchase. And each selling
investor must authorise the transfer of the required amount
of securities to his/her broker or broker dealer firms before
an order can be placed on the investor's behalf. This principle
ensures against any potential risk of default by either party.
The day following the auction, the Eastern Caribbean Securities
Exchange Ltd will announce to the public the final price of
the auction.
Settlement, which is the point at which the buyer receives
the ownership of the security, and the seller receives the
money for the securities sold, will occur on the day following
the auction.
Once settlement occurs, the intermediary will arrange, as
per instructions provided by the investor, for the registration
of ownership of the securities in the case of a buying investor
or the collection and security of the funds in the case of
a selling investor.
|
The Regional Government Securities Market