Quote stuffing

This article written by Akshit Gupta (ESSEC Business School, Master in Management, 2022) presents the concept of quote stuffing which is a type of market manipulation practice seen across financial markets.

Introduction

Quote Stuffing is the practice of entering huge number of buy or sell orders for a security within a short time frame (i.e. milliseconds or nanoseconds) and immediately cancelling them. For example, a company practicing quote stuffing can make more than 2000 transaction in a second to manipulate the market. It is one of the recent practices seen to be used by traders to manipulate the financial market. As the technology is improving and traders have quick access to the order books of the exchanges with the help of technology driven brokerage firms, the possibility for the use of quote stuffing is increasing as it is very easy to enter and cancel orders at a high frequency.

The mechanism

Under quote stuffing, the manipulator stuffs the order book of a security and distorts the bid-ask spread for that security by placing massive orders and increasing the quantities at the sell and buy sides of the order book for that security. The practice is used to deceive other traders by creating an artificial view about the market depth and liquidity for a security. The practice may be done by the manipulator to slow down the processing of data, cause high latency problems (a delay in the processing of orders at the exchange) and disrupt the exchange trading system.

Honest investors can make trades under the false impression of increased liquidity for a particular security. But as soon as the trades are executed, the false orders are cancelled using the algorithms and the liquidity disappears from the market for that security, harming the investor’s position by decreasing the liquidity in the market.

Structure in US financial markets

High frequency trading firms in USA have a direct access to the stock exchanges operating in a financial market and receive data flows from them directly. Whereas in the case of retail traders/investors, SIP (Securities Information Processors) receive data from stock exchanges and creates the NBBO (National Best Bid and Offer) which is then shown to these retail traders/investors.

(Securities information processors are organizations that help in collecting, processing, consolidating and disseminating all the bid/ask prices from traders and issuing real time quote or trade information to the market participants.)

(National Best Bid and Offer is the highest price on the bid side and lowest price on the ask side available for the traders of any security in the financial markets.)

The quote stuffing strategy can also work by creating a latency arbitrage trading opportunity for the High Frequency Trading firms which send false quotes to the exchanges and profits from the time delay that results when the SIP updates the order book for the retail traders by adding and deleting the orders created by the HFT firms.

Latency refers to the time delay between which an order is requested and responded to in a marketplace. Latency Arbitrage Trading refers to the use of low latency trading by HFT trading firms to shorten the request and response time in the financial market and earn profits by having the time advantage over high latency traders.

For example, a HFT firm practices quote stuffing on the stocks of Company A. Seeing an increased liquidity in the stocks of Company A, a trader enters a sell limit order for the stock of company A at $10 on NYSE. The exchange will send the data to the SIP feed (which will then create the NBBO and send it to the other traders in the market) and HFT firms simultaneously. The HFT firms will look for the best buy price across all exchanges. They find the stock of Company A available at an ask price of $9.95 on Nasdaq. The firm will immediately buy the share and sell it to the retail investor at $10, earning a $0.05 on the trade caused due to quote stuffing. The amount may seem insignificant but if the volume of such trades is taken into consideration, the HFT earns huge profits using quote stuffing.

Rules and Regulations

Considered a market manipulation practice, quote stuffing has been made illegal across many stock exchanges throughout the world. Many instances of potential quote stuffing have been observed in the financial markets but since complex algorithms are involved in such practices, it is very difficult to find evidence to prove the intent of the firms/individuals practicing it.

The Commodity Future Trading Commission (CFTC) has banned quote stuffing under Rule 575 implemented in May 2013. Although no official laws have been enacted by market regulators, quote stuffing is still a major issue in the financial markets. Also, many proposals to put a minimum time period between entering an order and cancelling it are in consideration, which will prevent HFT firms to cancel the orders immediately after the initial request.

Real life example

The Flash Crash of 2010 has been an infamous example of the repercussions of HFT and quote stuffing techniques used by the HFT firms. The practice of quote stuffing hampers the natural price discovery mechanism in the market. It also distorts the bid-ask spread and provides a false signal about the movement of the prices of a security. The regulatory bodies around the world are working hard towards protecting the interest of all the investors in the market and providing free, fair and equal access to them by keeping a check on such market manipulation.

Relevance to the SimTrade Certificate

The concept of quote stuffing relates to the SimTrade Certificate in the following ways:

About theory

• By taking the Exchange orders course, you will know more about the different type of orders that you can use to buy and sell assets in financial markets.
• By taking the Market information course, you will understand how information is incorporated into market prices and the associated concept of market efficiency.

About practice

• By launching the Sending an Order simulation, you will practice how financial markets really work and how to act in the market by sending orders.
• By launching the Efficient market simulation, you will practice how information is incorporated into market prices through the trading of market participants, and grasp the concept of market efficiency.

Related posts on the SimTrade blog

   ▶ Akshit GUPTA Market manipulation

   ▶ Akshit GUPTA Analysis of The Hummingbird Project movie

   ▶ Akshit GUPTA High frequency trading

About the author

Article written in January 2021 by Akshit GUPTA (ESSEC Business School, Grande Ecole Program – Master in Management, 2019-2022).

Insider trading

This article written by Akshit Gupta (ESSEC Business School, Master in Management, 2022) presents the concept of Insider Trading.

Definition

Inside information refers to non-public information about a listed company, that can significantly affect its stock price if made available in the public domain. Insider trading refers to “buying or selling a security, in breach of a fiduciary duty (the mutual relationship of trust, confidence and reliance that exists between the different parties) or other relationship of trust and confidence, on the basis of material, non-public information about the security” as defined by the Securities and Exchange Commission (SEC) in the United States of America. Insider trading can be legal or illegal depending on the time the information is used to execute the trades (or passed on to third party to execute trades). Illegal insider trading has severe repercussions for the person/group using or supplying such confidential information and carries penalties or imprisonments if found guilty. Different countries have several provisions in place to stop such acts from taking place that undermine the rights of honest investors by destroying market integrity.

The following are the examples of infamous acts of insider trading which gained a lot of traction from international public and media:

• Ivan Frederick Boesky (1987)
• Martha Stewart & ImClone (2001)
• Robert Foster Winans (1984)
• Raj Rajaratnam (2009)

Economic/moral effects of insider trading

From an economic point of view, in the short term, illegal insider trading improves the market efficiency in their strong form. In the strong form, stock prices reflect all the public and private information about the company. The use of inside information (a part of private information) by some investors leads to more efficient prices, which are important for all investors for their asset allocation.

From a moral point of view, insider trading is considered as unethical and unfair as it creates illicit profits for some investors who use their access to privileged information, and it deprives honest investors with the basic rights of fair participation and access to information that has the potential to significantly affect the stock prices for a publicly listed company. The people in possession of insider information make unfair gains or avoid losses by trading on such news. These trades break the flow of financial markets and may render honest investors unwilling to participate in further trades.

Rules to respect for the top management team

As per the rules defined under the Insider Trading Policy of 2013 by the SEC, no person on directorial, managerial or employee level should carry out any transaction on the basis of material non-public information that can significantly impact the stock prices for the listed company.

More specifically, according to the SEC guidelines, “Investment by the Company’s directors, officers or employees in Company securities is encouraged, so long as such persons do not purchase or sell such securities in violation of this Insider Trading Policy. In furtherance of the goals underlying the Company’s Insider Trading Policy, the Company’s directors, officers (those required to make filings under Section 16 of the Securities Exchange Act of 1934) and all employees at the Vice President level and above, as well as all employees in the accounting group are prohibited from buying or selling Company securities at all times, except during the period extending from the third (3rd) through the thirteenth (13th) business day following the release of the Company’s earnings for the immediately preceding fiscal period to the public (the “Trading Window Period”). The grant or exercise of stock options to purchase the Company’s stock is permitted outside Trading Window Periods.”

Trading in the securities of other entities is also prohibited for any director, manager or employee of a company, who’s future course of actions, information about which is still not available in the public domain, have the capability of affecting the value of the underlying entity. For example, this is the case before a merger or acquisition takes place.

Laws / Regulations for different Countries

Illegal Insider Trading comes with severe repercussions and the penalties/fines for such acts have been significantly increased globally over the course of time.

USA

In USA, illegal insider trading can be a civil and a criminal offense charging and individual or an entity depending on numerous factors involving the scale for the offense, intentional violation of the law etc.
As per the Securities Exchange Act of 1934, a person/entity can face criminal sanctions wherein, “The maximum prison sentence for an insider trading violation is now 20 years. The maximum criminal fine for individuals is now $5,000,000, and the maximum fine for non-natural persons (such as an entity whose securities are publicly traded) is now $25,000,000” and/or civil sanctions which involves, “Persons who violate insider trading laws may become subject to an injunction and may be forced to disgorge any profits gained or losses avoided. The civil penalty for a violator may be an amount up to three times the profit gained or loss avoided as a result of the insider trading violation” and “The Company faces a civil penalty not to exceed the greater of $1,000,000 or three times the profit gained or loss avoided as a result of the violation if the Company knew or recklessly disregarded the fact that the controlled person was likely to engage in the acts constituting the insider trading violation and failed to take appropriate steps to prevent the acts before they occurred.”

European Union (FRANCE)

European Union has issued several guidelines commonly known as directives for curbing illegal insider trading from distorting the smooth functioning of the global financial markets. The rules and regulations for insider trading are adapted by each country and requires a law to be passed by respective Parliament at their own discretion.
Insider trading regulations are mostly uniform throughout Europe and the rules have been transposed from the European Union’s Market Abuse Directive of 2003. In France, the laws against insider trading were first implement by means of an Ordinance passed by the French Government on 28th September 1967 making disclosure of insider trading compulsory for every listed company. However, the law was later scrapped off since it was limited in terms of its scope and companies still practiced illegal insider trading.

The French Monetary and Financial Code was passed in 2000 defining insider trading and regulations were made to state the penalties for such activities. The sanctions under the law are imposed by the Autorité des Marchés Financiers (AMF) which oversees the French financial markets. The law imposes a maximum imprisonment of 2 years and a fine amounting to €1,500,000, which could be increased to up to ten times the amount of profit. The French Laws has been progressing and several amendments have been implemented thereafter making the regulations even more stringent.

Movies related to insider trading

Wall Street (1987)

The movie shows the use of insider information by a famous investor named Gordon Gekko, related to BlueStar Airlines and how he capitalized on the private information to earn huge profits.

Trading Places (1983)

The movie shows the use of insider information related to ‘orange crop report’, given by United States Department of Agriculture, by Duke Brothers to capitalise on the gains in the commodities market.

Related posts

September 11
Examples of Insider Trading

Article written by Akshit GUPTA (ESSEC Business School, Master in Management, 2022)

Securities and Exchange Commission (SEC)

This article written by Akshit GUPTA (ESSEC Business School, Grande Ecole Program – Master in Management, 2021-2023) presents the structure and functioning of Securities and Exchange Commission (SEC).

Introduction

The Securities and Exchange Commission (SEC) is a federal agency responsible for overseeing and administering the financial market’s laws and regulations in United States of America. It was created in 1934 under the Securities Exchange Act as part of a response measure to revive the financial markets in the USA following the Great Depression that took place after the stock market crash of 1929. The SEC’s primary objective is to monitor and regulate the financial markets in the country by imposing rules, guidelines, liquidity controls and ensuring safety of the markets by means of issuing sanctions in case of non-compliance of rules or any malpractices. They have the responsibility to monitor all the participants in financial markets including investment management firms, publicly listed companies, brokerage houses, dealers and investment banks. It is the backbone of the financial system in the USA and maintains the integrity and transparency of the system and ensures investors’ interest is taken care of adequately.

Organizational structure

The headquarters for the Securities and Exchange Commission is based out the Washington DC and the commission is led by a chairperson, selected from a group of five commissioners who are directly appointed by the President of the United States and work under his/her jurisdiction. Each commissioner is appointed for a tenure of five years and can stay for additional 18 months until a replacement is found. The team also consists of several lawyers, accountants, economists, analysts and engineers, who keep a check on the different market players to ensure investors’ interest protection and compliance with different federal security laws. Each commissioner oversees a specific division of the commission:

• Market and Trading Regulations
• Investment Management
• Law enforcement
• Economic and Risk Analysis (including strategy and financial innovation)
• Corporate Finance

Administration of security laws

The SEC monitors and regulates the financial markets by adhering to 7 laws that are essential for the smooth functioning of the system,

The Securities Act of 1933

The law ensures protection of investor rights by guaranteeing them the equal access to all financial information and records and prevent fraudulent misconducts and activities like insider trading, market manipulation etc.

The Securities Exchange Act of 1934

The law states the rules, regulations and guidelines that govern the American financial markets and states the various aspects of supervision that the market participants must adhere to.

Public Utility Holding Company Act of 1935

The law regulates the interstate public utility companies that are involved in the business of providing electric utility or distribution of natural or manufactured gases.

Trust Indenture Act of 1939

The law regulates the issue and sale of bonds, debentures, notes and other such debt instruments with a combined value of more than $5 million without the issue of a written formal contract. The contract is referred to as trust indenture and is signed between the debt issuer and an independent trustee to protect the rights of the debt holder.

Investment Company Act of 1940

This law helps SEC regulate the activities of private or public investment management companies whose primary business involves investing and trading in financial securities. However, the act is limited in its scope since it does not allow the SEC to supervise the day to day activities of the company.

Investment Advisors Act of 1940

The law helps SEC in regulating the activities of companies who act as an investment advisor to other investors and earn the income from the same business model. The SEC keeps a check on the functioning of these firms to ensure compliance with the rules and maintain market integrity.

Sarbanes-Oxley Act of 2002

The law was passed in 2002 after a series of financial accounting frauds and misconducts were discovered within the American financial system. The law gives SEC powers in terms of regulating the financial reporting standards and practices within the companies by making the corporate executives more responsible for the internal company controls and imposing heavy sanctions for any misconducts.

Sanctions and penalties

The SEC has been vested with the power to impose sanctions on participants within the financial markets by the following means:

Injunction

Statutory orders that governs the actions of the receiving party and prohibits the violations of rules and regulations in the future. By means of injunctions, SEC contains the future violation of regulations and maintains the smoothness and integrity of the financial markets.

Civil money penalties (CMP)

SEC has the power to impose civil monetary penalties on individuals or companies to make them pay back money made through illicit means and ensure the payment of damages to the harmed investors.

Whistle-blower Program

Under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, Whistle-blowing program was put into place to encourage individuals to share information regarding malpractices and frauds by ensuring them confidentiality and monetary benefits amounting to 10%-30% of the total proceeds from the successful sanctions.

Relevance to the SimTrade Certificate

The activities of the SEC relate to many topics covered in the SimTrade Certificate:

• The different players supervised by the SEC (listed companies which issued stocks then traded on an exchange, investment services providers such as brokers which provide access to the market, asset management companies which buy and sell securities on the market) are the participants to the market introduced in Period 1 of the SimTrade certificate.
• Insider trading and market manipulations are linked to the concept of market efficiency introduced in Period 2 of the SimTrade certificate. These illegal activities have an impact on market prices.
• Short selling is introduced in Period 3 of the SimTrade certificate. Short selling allows to speculate on the market by making a profit when the stock price decrease.

Related posts on the SimTrade blog

   ▶ Akshit GUPTA Autorité des Marchés Financiers (AMF)

   ▶ Nithisha CHALLA Securities and Exchange Board of India (SEBI)

Useful resources

U.S Securities Exchange Commission (SEC)

About the author

The article was written in January 2021 by Akshit GUPTA (ESSEC Business School, Grande Ecole Program – Master in Management, 2021-2023).

Regulations in financial markets

This article written by Akshit Gupta (ESSEC Business School, Master in Management, 2022) presents the regulations that exist in financial markets.

Definition of financial regulation

Financial regulation is a type of regulations or laws that help in maintaining the stability, integrity and transparency of the financial system of a country by subjecting financial institutions to several set of requirements, procedures and guidelines and ensuring adherence to such rules.

Supervision involves monitoring the performance and daily operations of the financial system in order to ensure its compliance with the rules and regulations specified under the financial framework and keep a check on the safety and financial health of the system. Thus, supervision is a part of the financial regulation framework and is needed to ensure the compliance of different parts present within the financial system including financial institutions, investment firms, banks etc. with the regulations.

Several kinds of financial regulations have been put into place by different countries in order to ensure fair and smooth functioning of the financial systems. The primary set of financial regulations includes:

Banking regulations

Banking regulations have been put into place to strengthen the global banking system and ensure its smooth and coordinated functioning. Basel Norms referred to as International banking regulations were introduced by the Basel Committee on Banking Supervision as part of a coordinated effort to fulfil the gap between the different banking regulations and provide a platform for the respected parties to mitigate risk and ensure smooth functioning of the financial systems.

Preventing systematic risk

Systematic risk refers to the risk to the health of the entire financial system of an economy sparked by the failure of one or more financial institutions. With the global financial markets becoming more integrated, the financial institutions have become more inter-connected and dependent on each other. The complex financial structure of companies can be affected severely if a single company faces any disruption. Financial regulations are brought into enforcement to oversee and prevent such systematic risks from happening and affecting the health and integrity of the entire financial system.

Insider trading

Illegal Insider Trading refers to the use of material non-public information by an individual or a group of people to enter into unfair trades and gain illicit profits by breaching the trust and confidence of other investors. For example, Ivan Boesky, an infamous stock trader in the USA, was charged by SEC against allegations of trading in companies, that are about to undergo an M&A activity, with the use of insider information. He was sentenced to 3 years of imprisonment with a fine amounting to $100 million. Insider trading carries serious repercussions in today’s financial system, and stringent financial regulations have been implemented to avoid such incidents from happening.

Dispute resolution

Financial regulations help in the effective dispute resolutions between investors and entities or amongst entities in form of monetary and business disputes by means of arbitration processes. Several regulatory bodies like the Consumer Financial Protection Bureau in USA have been raised up within the financial regulation framework which acts as a mediation platform between different parties and help in implementing resolution controls and plans.

Investor protection

Financial regulations have been set up to protect the rights of every investor present in the financial system by bringing in better transparency and enhancing the quality of services offered to investors by different institutions. Standardized rules and procedures have been designed for the financial products offered by various investment management firms to offer investors with an equal base to evaluate the different product offerings. As part of a legislative framework to protect investor interest and promote transparency in the marketplace, Markets in Financial Instruments Directive (MIFID II) was implemented by the European Union in 2018 to regulate the financial markets and ensure investor protection by safeguarding their rights. The regulation aims to promote better transparency by regularizing unorganized trading activities and transactions that were earlier not captured within the earlier financial system. Also, the directive aims to strengthen the potential risk mitigation strategies for investments done in the modern marketplace, using high frequency trading or algorithm-based trades, by means of implementing circuit breakers.

Objectives of financial regulation

Financial regulations serve as basic code of conduct that is required to be followed by all the market participants with a primary purpose of ensuring market integrity and stability. Different countries have several financial regulatory institutions that ensure that the markets function in a transparent way and the following objectives for setting up the regulations have been achieved:

• Maintaining stability and integrity
• Improving market confidence
• Bringing fairness and transparency
• Enhancing consumer protection
• Ensuring compliance with rules and procedures
• Preventing frauds

Structure of supervision

Over the past few decades, many reforms have been passed by different countries to ensure the smooth functioning of financial systems in this rapidly evolving and integrating global markets. The structure of supervision of the financial markets differ from country to country, but the broader framework behind the structure is primarily defined by unified global bodies (like the Basel Committee for supervision) and adherence to these structures is essential for every financial system.
We deal below with two examples: France and the United States of America.

Organization of financial regulation in France

In France, the following structure of hierarchy is followed to ensure smooth functioning of the financial system:

European Central Bank (ECB)
The European Central Bank has the primary responsibility to supervise all the 6000 banks operating in the euro zone within the defined framework of Single Supervisory Mechanism (SSM) under the European Union Law.

L’Autorité de contrôle prudentiel et de résolution (ACPR)
The ACPR is an institution integrated under the Banque de France and acts as a Lead Bank Supervisor for the French financial system. The ACPR has been set up with the primary function of supervising, monitoring and controlling the French financial system including its participants and ensuring stability therein. It has the authority to grant licenses to financial institutions and at the same time impose sanctions for any misconducts under the broad framework of its statutory powers.

L’Autorité des marchés financiers (AMF)

The AMF is an independent financial institution and administrative authority which possesses regulatory powers over the financial and banking industry in France. It was created under the Financial Security Act of 2003 with the primary purpose of ensuring protection of investor interest and smooth operations within the financial markets.

Organization of financial regulation in the United States of America

The figure below presents the structure for supervision within the United States of America. This figure illustrates the complexity of the supervision with many national and state regulators.

Source:https://blog.gao.gov/2016/07/21/6-years-after-dodd-frank-oversight-of-financial-services-industry-still-needs-streamlining/

Securities Exchange Commission (SEC)

The Securities and Exchange Commission is a federal agency responsible for overseeing and administering the financial market’s laws and regulations in United States of America. It was created in 1934 under the Securities Exchange Act as part of a response measure to revive the financial markets in USA following the Great Repression that took place after the stock market crash of 1929.

Commodity Futures Trading Commission (CFTC)

The Commodity Futures Trading Commission was founded in 1975 as a federal agency regulating and supervising the activities in the commodity and the options market in the US financial industry. The commission was founded under the Commodity Futures Trading Commission Act of 1974 and has the primary objective of maintaining the integrity and efficiency of the commodity market in the USA. It is also embodied with the task of ensuring investor protection and safety from any illegal and fraudulent practices.

Movies about Financial Regulation In Financial Markets

The Wolf of Wall Street – Market Manipulation
The movie shows how Jordan Belfort, a famous stock broker, manipulates the market of penny stocks by spreading false information in the market and thereby operating a ‘Pump & Dump scheme’.

Trading Places (1983) – Insider Trading
The movie shows how the Duke Brothers made use of the insider information regarding the ‘Orange Crop Report’, which is set to be released by the United States Department of Agriculture, to manipulate the commodity futures markets.

Article written by Akshit Gupta (ESSEC Business School, Master in Management, 2022).

High close

This article written by Akshit Gupta (ESSEC Business School, Master in Management, 2022) presents the technique of High Close, which is a type of market manipulation in financial markets.

Definition

High close is a form of market manipulation where manipulators send market orders to buy small quantities of financial assets just before the end of the trading session in order to inflate the closing price of these assets. The price increase created by the execution of these orders may attract the attention of more market participants, leading them to buy the assets. Manipulators use this tactic to create a false image about the asset in the market.

The targeted assets are usually microcap (stocks with a market capitalization between $50 million to $300 million) or nanocap stocks (stocks with a market capitalization less than $50 million). Such stocks –usually penny stocks– present low trading volume, low liquidity and high volatility, which make the trades of manipulators have a big market impact. Generally, manipulators target assets that are less popular, and investors don’t have much information about the market for these assets. But seeing the sudden spike in the closing prices for these assets, investors often get trapped in such assets due to the manipulation.

Mechanism

Under high close, manipulators send small market orders at a high frequency before the end of the trading session to increase the price for a given stock. The tactic gives an artificial appearance to the stock prices and lures other investors to invest in the assets, thereby creating an artificial demand and helping manipulators exit their position by selling at a higher price.

Detection

To spot and stay away from market manipulation strategies executed by manipulators, honest traders have to be extra cautious while investing in microcap or nanocap assets and carry out proper fundamental and technical analysis for securities that have information asymmetry. In the case of high close, studying the Japanese Candlestick chart of any stock can be an effective way to spot abnormal trading activities and artificially created high prices at the end of any trading session.

Financial regulation

High close is a common practice that is used by market manipulators to hamper the free and fair environment and distort the prices and trading momentum in the financial markets. Although, the regulatory bodies such as the Securities exchange commission (SEC) in the United States keep a tight watch to curb the extent of such manipulations, certain perpetrators can still manage to escape the liabilities and penalties.

Example: Athena Capital Research

The SEC convicted Athena Capital Research (a small trading firm based out in New York City) in 2014, with the charges of manipulating the prices of thousands of stocks during a 6-month period from June to December 2009 and giving the prices of these stocks an artificial appearance.

The firm indulged in the market manipulation tactic of “high close” and used sophisticated algorithms to trade in stocks at NASDAQ just before the end of the trading sessions. The traders at the firm used to place many small buy market orders a few minutes before the closing of the day after the NASDAQ issued the “Net Order Imbalance Indicator” showing the order imbalance in the buy or sell orders for the securities before the end of the trading session (the indicator helps in filling all market or limit on-close orders at the best price).

Athena Capital Research generated huge profits by artificially increasing the prices of the stocks by the end of the trading day and infusing liquidity in the market for that stock. The strategy helped the firm create a false image about the stock in the market and drew the attention of other market participants. The firm was later fined by the SEC $1 million for indulging in market manipulation and distorting the prices of thousands of stocks, thereby decreasing investor confidence.

Relevance to the SimTrade Certificate

The concept of high close relates to the SimTrade Certificate in the following ways:

About theory

• By taking the Exchange orders course, you will know more about the different type of orders that you can use to buy and sell assets in financial markets.
• By taking the Market information course, you will understand how information is incorporated into market prices and the associated concept of market efficiency.

About practice

• By launching the Sending an Order simulation, you will practice how financial markets really work and how to act in the market by sending orders.
• By launching the Efficient market simulation, you will practice how information is incorporated into market prices through the trading of market participants, and grasp the concept of market efficiency.

More about SimTrade

Related posts on the SimTrade blog

Market manipulation

Useful resources

SEC document about the Athena Capital Research case (2014).

Talis J. Putnins (2009) “Closing price manipulation and the integrity of stock exchanges, PhD Thesis.

Carole Comerton-Forde and Talis J. Putnins (2011) “Measuring closing price manipulation” Journal of Financial Intermediation, 20, 135-158.

Wikipedia article on “Market_manipulation”

Article written by Akshit Gupta (ESSEC Business School, Master in Management, 2022).

Financial Analyst – Job Description

This article written by Akshit Gupta (ESSEC Business School, Master in Management, 2022) presents the job description of a Financial Analyst.

Introduction

A financial analyst is an individual who is responsible for making financial and investment decisions for a company. The work involves a broad area of expertise and a financial analyst generally works in corporate and investment roles. In the corporate roles, a financial analyst is responsible for making the revenues, costs, budgets and forecasting reports. In the investment side, financial analysts are generally responsible for gathering information about a company to compute their fundamental value. They are employed by different companies including corporates, investment banks, investment firms, hedge funds, equity research firms and mutual funds to serve their specific purpose.

Types of financial analysts

Depending on the company or bank a financial analyst is employed at, he/she can have different roles and responsibilities. Two of the most notable profiles of a financial analyst include:

Buy-side analyst

Buy-side analysts generally work in asset management firms, investment funds, and trading firms, which buy and hold onto securities for a fixed time frame on the basis of the financial analysts’ reports.

The analyst is responsible for gathering financial and non-financial data of a company and make future predictions about its earnings and growth prospects in form of a report. The reports are then given to the asset managers and traders who use the information to execute trades in the financial markets.

Buy-side analysts are commonly more prestigious than sell-side analysts. The competition is stiffer and entry into this job requires a knowledge of corporate finance and a strong experience in the sector followed.

Sell-side analyst

Sell-side analysts are generally employed by the research division of investment banks, investment firms and brokerage houses.

Sell-side analysts are responsible for producing reports on the future performance of a company and making predictions about the financial results that will be published by them in the near future. The reports made by the sell-side analysts are not used by their employer but instead sold to private investment companies and retail investors, who use this information to make informed decisions about their own investments. The sell-side analysts usually specialize in a particular sector or a geographical region and produce reports within that area.

How the work is done?

The job of a financial analyst includes researching and gathering of quantitative and qualitative financial and non-financial information about a company, organizing the data, making forecasts about the future course, and presenting the results to the different stakeholders in form of reports. The stakeholders depend on the company the financial analyst is working for but generally includes internal divisions (portfolio managers, traders, and quantitative analysts) and external clients (private investment firms, retail investors, individual traders, etc.).

Studying market trends A financial analyst is expected to be aware of the past and current market trends based on which the investment decisions are to be made.

Data gathering In the data gathering phase, the financial analyst gathers financial and non-financial information about a company from different sources, which include company annual reports, media releases, financial platforms (Bloomberg, Capital IQ, etc.), investor relation departments of the companies, or reports by other brokerage firms.

Financial modelling The information is then analyzed to build financial models (generally on a spreadsheet like Excel) and do predictions about the company’s future performance.

Using the reports Once the financial models are made, the findings are produced in form of a report which is issued to different internal or external stakeholders.

With whom does a financial analyst work with?

A financial analyst works in collaboration with a lot of different teams:

• Brokerage firms and Investor relations department of companies for gathering data for the reports
• Sales and Trading Divisions for selling the reports produced by the sell-side analysts and executing
  trades on basis of reports made by buy-side analysts
• Portfolio managers – to advise them on different assets
• Sector specialists and Economists – to gather information about specific sectors and economies

How much does as financial analyst earn?

The remuneration of a financial analyst depends on the type of role and organization he/she is working in. As of the writing of this article, an entry-level financial analyst working in a bank earns between €38,000–50,000 in the initial years of joining (source: Glassdoor).
As the analyst grows in experience, he/she earns an average salary of €60,000–70,000 including bonuses and extra benefits.

What training to work as a financial analyst?

An individual working as a financial analyst is expected to understand the different financial statements and their analysis, financial modelling (commonly on Excel), accounting and budgeting techniques, advance research skills and interpersonal skills.

In France, a Grand Ecole diploma with a specialization in corporate finance is highly recommended to get an entry level financial analyst position in a reputed bank or firm.

Also, to gain industry experience as a financial analyst, students ae advised to work as interns and apprentices before stepping into this domain as full-time employees.

Relevance to the SimTrade Certificate

By taking the Market information course in Period 2 of the SimTrade Certificate, you will understand how information is incorporated into market prices and the associated concept of market efficiency.

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Remuneration in the finance industry

Article written by Akshit GUPTA (ESSEC Business School, Master in Management, 2022).