Question 2a
An electronic trading platform (ETP) is a is a subsystem of the electronic trading system which is a facility that offers the following services; routing orders, i.e. from computer to computer, executing orders through a process known as click and trade, credit risk management through the central counterparty trading, settling trade in an automated platform and disseminating both pre-trade and post-trade information (Gemloc, 2013).
ETP are electronic trading systems that offer matching engines by paring buyers and sellers where a computer ranks orders based on their price levels and the timing of the various inputs that facilitate trading among several parties. They are self-regulate entities established for trading purposes. Once an order is matched, it will then require manual intervention in the form of a click and trade or cross-matching or automatic can be used. In the two cases, ETP needs market regulation that detail individual who can access the platform, the nature of the instruments that can be traded and the applicable rules and supervision of the market. In some instances, an ETP is referred to as a multilateral trading facility (Gemloc, 2013; Saunders & Cornett, 2011 ).
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In an electronic trading platform, brokers interested in trading in the exchange access the trading books of the stock market. The books provide a detailed limit order, prices, and limits as well as the volume of the order. The broker will then fee the limit buy order for the book and the exchange computer will complete the order in case there is a matching sell order. In the vent that there is no matching order, it will remain in the system of the exchange (Gemloc, 2013).
If an investor desire to buy stock from the market, they will conduct a broker to place a market order. The broker, in this case, will try to find the best price. The exchange designates market markers for each stock. The markers provide bid-ask quotes if needed. The broker will be in contact with the markers to establish the best-asked quote thus executing the order by quoting the lowest asked price (Gemloc, 2013).
An ETP has the potential of enhancing the trading volumes through its capability to reduce cost and the trading risks. The click and trade reduce transaction costs and benefits from the economies of scale. One trader can monitor several markets at the same time using the automated market price calculations. Settlement Costs can further be reduced if it is combined with straight-through processing. It has the capability to reduce the marginal costs for additional trading volumes while at the same instance reducing the trading risks. Similarly, it has the capabilities to make the market more transparent by indicating the market prices. It avails a cheaper communication network that enhances the transfer of information while enhancing market wide integration of information (Gemloc, 2013; Saunders & Cornett, 2011 ).
ETP multi-dealer and cross-matching models have a central effect increasing the liquidity thus stimulating the use of more ETP hence strengthen the centralization trend. It, therefore, attracts more players in the market by enhancing information symmetry and availability. ETP also enhances the efficiency of the PDs and their obligation to market mark while appraising the quality of the trading activities in the market. They, therefore, enhance the liquidity of the market ( Saunders & Cornett, 2011) .
ETPs allow the trading of standard instruments and small tickets yet have the low adaptability to the volatility of the market. The dealers also have a cost that they have to amortize. It also incurs connectivity costs for linking the ETP and the databases thus trading volumes determine whether it is cost effective or not. Similarly, market matching has a cost element whereas transparency leads to increased vulnerability and narrower spreads (Gemloc, 2013).
In the open outcry system, trade takes place on the floor where a specialist is appointed for each stock traded in the exchange. The specialists act as a market marker and are responsible for creating an active market for the stock. The specialist has a limit book which is a register that carries the information about the stock. The stockholder or potential investor will have to involve a broker who will access the exchange (Saunders & Cornett, 2011).
Open outcry trading has many flaws that the electronic transfer platform tried to eliminate. Most of the trading in this style is done manually making it time-consuming and more involving. ETP, on the other hand, has many advantages in that it contributes to greater efficiency leading to improved liquidity and tighter bid or ask request and there is also ease of market access for the stock which makes the platform fairer . It has also improved the prices of the stock and eliminates any hidden costs that are difficult to eliminate hurdles that make other platforms inefficient (Gemloc, 2013; Saunders & Cornett, 2011 ).
Question 2b
Peter has a portfolio of Singapore blue chips and foresees a bearish market that will affect the stock values in future. He needs to use different hedging strategies to hedge his portfolio on Singapore just in case the inevitable happens. Using the different strategies ensures that the portfolio is safe and does not lead to additional risks which affect the value of the portfolio. Hedging strategies are the approaches that are used to offset any risks. Some of the techniques available to international business include lending or borrowing in different currencies, engaging on forward and futures contracts, option, swaps, owning assets and liabilities with other third parties (Saunders & Cornett, 2011).
A blue-chip investor can use short and long hedges to reduce cases of downside and upside risks. In a short hedge, a short position is assumed on a future contract. It is appropriate where the asset is to be sold in the future or where a speculator would like to price to fall in the future. Long hedges involve long positions in futures contracts and appropriate is the asset is to be bought in the future or for speculation where the price of the contract is expected to increase. Cross hedging is another strategy where an asset to be hedged does not have a close replica in the futures or options market. Another strategy is the covered call where the investor maintains a long position in an asset and sells call options on the same asset as they attempt to generate increased income. It is applicable where an investor has a neutral perspective of the asset thus holding the asset for a long period yet they have a short position to generate income (Saunders & Cornett, 2011).
Some of the hedging strategies might not be straightforward in that there are possibilities that the hedged asset might not be the same as the stock carrying the future contract. Similarly, the hedger is not aware of the time the stock will be bought. The futures also must be closed before they are delivered (Saunders & Cornett, 2011).
Question 3
The financial industry has experienced an upsurge in the development of new technologies that broadly operate under the term FINTECH. According to Gulamhuseinwala, Bull & Lewis (2015), FINTECH are firms using innovative business models and modern technology to enhance, enable and disrupt financial services. Substantial amounts are spent by companies to establish their operations, win customers and scale up their activities. Promising FINTECH companies have strong customer specific propositions having identified the weaknesses of the traditional financial service companies thus opting to serve seamless and intuitive user experiences. The traditional banks and other financial service companies have watched as the FINTECHs innovate and bring substantial disruptions in the industry (Gulamhuseinwala, Bull & Lewis, 2015).
Some of the traditional financial institutions have opted to engage the FINTECH through incubator programs, partnership, and acquisition. Such institutions are trying to understand the threat level and obtain answers to some of the questions affecting their operations. The financial industry is trying to understand the number of consumers who are using FINTECH, their profiles, and the reasons for using FINTECH. They are tried to identify the level of traction that the disruption has. Some of the broad categories covered by FINTECH include; savings and investment, borrowing and insurance, money transfers and payments (Hung & Luo, 2016).
Nonbank money transfers are becoming extremely popular among the digitally active consumers and are turning out to be the mainstream product. Innovation in the financial services has been fuelled by investments in technology and government support for innovation and a decline in the costs of technology. Online financial services have opened a new platform where users now have new ways of raising debt and equity, manage investment and obtain affordable insurance and make payments. Many financial technology start-ups compete with the traditional banking for consumer attention. The low cost of technology and the availability of capital has supported the star-ups (Gulamhuseinwala, Bull & Lewis, 2015; Hung & Luo, 2016).
The FINTECHs have also benefited from Government support as it tries to encourage competition and innovation in the industry. Even though the impact of government support is difficult to quantify, it sets the standards in the broader business environment and helps in the use of regulations in the industry. It has led to the growth of FINTECH which can focus on a niche market or serve the general public by offering alternative products in a unique way that gives them an upper hand in the industry (Gulamhuseinwala, Bull & Lewis, 2015).
Money transfers and payment have higher adoption rates and are entry level FINTECH products that allow the consumers to test their offerings using simple transactions that involve less risk and commitment. Payment services are also an integral part of the adoption of many popular e-commerce sites that eliminate friction and improve the conversion rate at the different stages especially during purchase (Gulamhuseinwala, Bull & Lewis, 2015; Hung & Luo, 2016).
FINTECH is gaining traction due to the ease of setting up an account, attractive rates and feeds, access to different products and services and availability of better online functionalities and experiences. The FINTECH construct and deliver their proposition to the consumer which is embedded in nonfinancial service use. It also uses simple and intuitive customer visuals and journey that includes ease of boarding. It employs simple product constructs which can be customized yet with limited variability where there are no penalties or commitments involved (Gulamhuseinwala, Bull & Lewis, 2015).
The use of the design principles for building their services from the ground up has enabled FINTECH to understand its customers and develop appealing product sets. The traditional players, however, are constrained by product silos, pricing structures and rigid product suites and the use of legacy core IT systems. The online products of the traditional institutions have cumbersome user interfaces and likely to involve complex and manual processes (Gulamhuseinwala, Bull & Lewis, 2015).
Financial institutions have recognized the need to replicate FINTECH to reduce the impact of such disruptions. Some of the financial institutions are using the design principles employed by the FINTECH where they use techniques like customer experience labs and rapid prototyping to innovate new products and services. Such strategies are enabling the traditional financial institutions to create intuitive products. Similarly, the financial industry is experiencing a sudden increase in partnerships as the traditional players try to get to their destination (Gulamhuseinwala, Bull & Lewis, 2015; Hung & Luo, 2016).
Financial institutions are adopting modern technology and using different platforms to deliver their services to their clients. They have realized that FINTECH has opened a new arena where they can create value and established new competitive advantages to counter the move of their competitors. Their ability to incorporate similar products like those offered by the FINTECH has opened a new battleground for a share of the current market share. Rather than perceiving the changes as disruption, they have adopted them to enhance their service delivery while countering the moves by the FINTECH that threatens to take a sizeable market share (Gulamhuseinwala, Bull & Lewis, 2015).
Traditional financial institutions need to be flexible in their operations to capitalize on the changing consumer needs. As the market changes due to advances in technology and availability of new products and channels, financial institutions should also change to capitalize on the emerging opportunities and reduce on their potential threats that are likely to drive them out of the market. They should heavily invest in information technologies and consider cost reduction strategies as an avenue to maintain their current market share. They should use their strong brand names and customer base to sell customized products that are not only affordable but delivered in an efficient manner using different avenues (Hung & Luo, 2016).
Different banks, for instance, have adopted modern technologies that allow remote access to financial products using internet-connected devices. Similarly, they have incorporated apps that can be downloaded and installed to mobile devices allowing customers to manage their accounts at any place and conduct several transactions using mobile applications. Such advances are in response to the emergence of FINTECH which has proved to be a threat to the traditional way of the financial industry. The use of technology has greatly been adopted by the young generation and banks are forced to develop strategies that will ensure that such a customer base that prefers access to financial services remotely is in place if they are to maintain them (Hung & Luo, 2016).
References
Gemloc. (2013). Electronic Trading Platforms in Government Securities Markets . World Bank Group . Retrieved 4 March 2018, from http://siteresources.worldbank.org/FINANCIALSECTOR/Resources/ETP_Background_Note.pdf
Gulamhuseinwala, I., Bull, T., & Lewis. (2015). FinTech is gaining traction and young, high-income users are the early adopters . The Journal of Financial Perspectives: FinTech . Retrieved 4 March 2018, from HTTP://www.ey.com/Publication/vwLUAssets/ey-the-journal-of-financial-perspectives-fintech-winter-2015/$FILE/ey-the-journal-of-financial-perspectives-fintech-winter-2015.pdf
Hung, J., & Luo, B. (2016). FinTech in Taiwan: a case study of a Bank’s strategic planning for an investment in a FinTech company. Financial Innovation , 2 (1). http://dx.doi.org/10.1186/s40854-016-0037-6
Saunders, A., & Cornett, M. (2011). Financial markets and institutions (6th ed.). New Delhi: Tata McGraw Hill.
