Eurozone Crisis 2011

Eurozone Crisis 2011

Akshit Gupta

This article written by Akshit Gupta (ESSEC Business School, Master in Management, 2019-2022) presents the real life case of the Eurozone Crisis 2011.

Introduction

The Eurozone Crisis, also called the European sovereign debt crisis, took place between 2010 and 2012 when several European countries faced an unmanageable increase in their sovereign debts, fall of their financial institutions and a sharp rise in the government bond yield spreads (difference between the yield of bonds issued by a country and the yield of bonds issued by Germany). The crisis was a result of excessive borrowing done by the Eurozone member states and a lowered refinancing or repayment capacity following the financial crisis of 2008.

Origin of the crisis

The Eurozone, also called the Euro area, was formed in 1999 with the primary aim to promote economic integration and have a stable, growth-oriented Europe by means of a unified primary currency across all member countries. Around 2010, Eurozone was comprised of 17 European countries all of which share a unified primary currency named Euro (€). The monetary policies of the Eurozone member states are governed by a central authority named the European Central Bank (ECB), whereas each country has the power to decide their fiscal and economic policies individually. As a result of a unified monetary framework, countries with weaker economy have access to more debt at a comparatively lower interest rates than before the creation of the Eurozone. Due to the excessive availability of debt, weaker countries increased their spending which resulted in high fiscal deficits. Since, the fiscal policies were controlled by countries individually, no centralized authority could keep a tab on it.
The beginning of the crisis came to light in 2009, when the new Greek government reported irregularities in the accounting system followed by the previous government. The new fiscal deficit showed a sovereign debt amounting to €300 billion which represented more than 110% of the country’s GDP at that time. The chances of default on the government’s debt started building up and the tension started to soar across the European continent.

Picture 1

Source: im-an-economist.blogspot.com

The peak of the crisis

After the Greek government reported the higher levels of sovereign debt, rating agencies started downgrading the country’s debt ratings. The creditors started demanding higher yields on the government bonds, leading to higher borrowing costs for the government and a fall in the prices of these bonds (there is an inverse relationship between the price and yield of bonds). The fall in the prices of these securities sparked an outrage when many large European countries, financial institutions and central banks holding these securities started to lose money due to fall in their prices. By 2010, many other countries including Portugal, Italy, Ireland, and Spain reported similarly high level of sovereign debts.

Causes of the crisis

The Eurozone crisis was a result of many policy failures including high fiscal deficits, lack of unified body to monitor fiscal policies, trade imbalances, and also cultural differences. Some of the primary reasons that triggered the crisis are:

  • The Eurozone crisis was triggered by the financial crisis of 2008 when access to capital at low interest rates became tough and the countries with high sovereign debt were unable to refinance or repay their debts without the intervention or help of other countries. During the recession that followed the financial crisis of 2008, tax revenues decreased whereas the public spending on unemployment benefits and infrastructure development increased. This resulted in further worsening the fiscal deficit for the weaker economies.
  • Another cause for the crisis can be attributed to an easy access to cheap capital to the weaker countries during early 2000’s and a lack of centralized fiscal policy framework to put a check on the individual government borrowing and spending.
  • The trade imbalance resulting from the flow of capital from developed countries like France and Germany to southern nations like Greece, Spain, Italy etc. led to an increase in the wages in these countries which was not matched by the increase in productivity. The increased wages led to an increase in prices of finished goods, thus making these country’s exports less competitive. The increase inflow of capital led to a trade deficit in these countries further aggravating the crisis.
  • Solutions

    All the seventeen member states of the Eurozone voted to create a European Financial Stability Facility (EFSF), which was a temporary measure to provide financial assistance to the countries impacted by the sovereign debt crisis. With the intervention of the International Monetary Fund (IMF), the European Central Bank and the EFSF, a bailout package was provided to the debt-ridden countries amounting to €1 trillion. Several conditions were applied on countries which received bailout funds from the EFSF. The countries were bound to apply severe EU-mandated austerity measures which were formed to reduce government deficits and sovereign debts to acceptable levels. But the measures also faced criticism from the impacted countries as it could have halted the economic recovery for the impacted countries by cutting their spending capacities.

    The creation of the EFSF provided remedial measures to the impacted countries by means of financial assistance subject to certain reforms and conditions that the fund – receiving country must undertake. The EFSF functioned by issuing EFSF bonds and other marketable securities to lenders. The bonds and securities were secured and backed by the Eurozone member countries up to the proportion of their share of capital in the ECB.

    After effects

    In 2012, a European Stability Mechanism (ESM) was instated to replace the EFSF as a permanent financial stability and crisis resolution measure for the Eurozone countries. The ESM is fully backed by the members of the Eurozone. This backing provides a relief to the lenders and assures them of their capital protection. The crisis saw the creation of the Eurobonds, which are used as a new way of financing the bailout funds. The ESM is funded by issuance of Eurobonds worth €700 billion which are backed by the Eurozone countries.

    Lessons learnt from the crisis

    The Eurozone crisis has affected the world economy at large, posing a threat to the global markets. Although, the decisions taken by the Eurozone countries helped in containing the damage, some policy changes are required to prevent such events to happen in the future. Political consensus among Eurozone member countries is required to ensure efficient decision making. The coordination and monitoring of the fiscal policies along with the monetary policies of the Eurozone countries is also essential to ensure a balanced economy growth. The policy makers should implement centralized fiscal policies to ensure the long-term viability and stability of the European economies.

    Relevance to the SimTrade certificate

    The concepts about pricing of securities in the secondary market and incorporation of information in market prices can be learnt in the SimTrade Certificate:

    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.

    Take SimTrade courses

    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.

    Take SimTrade courses

    Useful resources

    TheBalance – Eurozone Crisis

    Solving the Financial and Sovereign Debt Crisis in Europe – by Adrian Blundell-Wignall

    European Stability Mechanism

    Investopedia Article – European Financial Stability Facility

    Article written by Akshit Gupta (ESSEC Business School, Master in Management, 2019-2022).

Ponzi scheme

Ponzi scheme

Louis Viallard

This article written by Louis Viallard (ESSEC Business School, Master in Management – Economic Tracks, 2020-2022) presents the basics of a fraudulent financial scheme: the Ponzi scheme. The famous and recent Madoff Affaire is used to illustrate this financial fraud.

In the Letter 142 of The Persian Letters, Montesquieu tells us the mythological tale of the son of Aeolus, god of the wind, who decides to travel the world to sell air-filled otters. The French author presents us with his reflections on a new discipline in gestation in the 17th century that already fascinates minds: modern finance. Indeed, Montesquieu’s work was written in 1720, the same year as the bursting of one of the first financial bubbles of our history following a speculation around the Royal Bank and the Mississippi Company in which Montesquieu, a contemporary of the crash, was interested. The example used in The Persian Letters with the metaphor of the wind to qualify financial speculation and certain fraudulent financial mechanisms is perfectly suited to define a sadly famous fraudulent scheme: the Ponzi Scheme.

Money makes money – What is a Ponzi scheme?

A Ponzi scheme is a form of financial fraud in which participants are paid with money invested by subsequent participants, not by actual profits from investments or business activities. Investors are attracted by windfall dividends that are paid by the entry of new investors into the system to pay the first ones and so on.

The organizers of a Ponzi scheme generally attract investors by offering higher returns than any legitimate business can offer. The rate of growth of new inflows must be exponential in order to be able to remunerate members, and the system inevitably breaks down when the need for funds exceeds new inflows. Most participants then lose their investments, even though the first participants – including the founders – can benefit from high returns or exceptional annuities provided that to have withdrawn from the scheme in time.

Fraudsters organizing such schemes often target groups that have something in common, such as ethnicity, religion or profession, in the hope of exploiting their trust. The example of the Rochette Affaire in 1908 illustrates this well. Henri Rochette managed to capture the small provincial savings by relying on the wave of investment in coal mines at the beginning of the 19th century and by selling the merits of his (fictitious) companies through investment advice journals that he himself controlled.

An example of a Ponzi Scheme – The Madoff scandal

Bernard Madoff was born in 1938. This American broker immersed himself in finance at a very young age and quickly earned a good reputation among the greatest financiers. Reputed to be intuitive, ultra-fast but also very “ethical”, he had finally established himself in the financial community, which earned him the position of President of Nasdaq from 1990 to 1991. Socially-minded, jovial, he managed to capture the confidence of his future clients.

Through his fund (Bernard Madoff Investment Securities), Mr. Madoff received capital to manage, which he supposedly invested in a complex investing technique: the split-strike conversion strategy (see Bernard and Boyle (2009)). It is a three-step technique. First, you buy a portfolio of securities (the S&P100 index in the case of the Madoff). Second, you purchase out of the money put options with a nominal value on the underlying asset equal to the value of your portfolio. The objective is to limit the risk of loss of the portfolio. Third, you write out of the money call options on the underlying asset with a nominal value equal to the value of your portfolio. The sale of calls finances the purchase of puts.

When the performance was not there, instead of reducing the return distributed to investors, Madoff simply took the money from the new investors and used it to pay the old ones. As a result, he gave the impression of an exceptional performance in terms of risk-return trade-off (relatively high performance but delivered regularly year after year). Such an investment track record allowed Mr Madoff to attract more and more investors, but year after year, he squandered the capital they had entrusted to him.

When the stock market crisis broke out in 2008, many investors wanted to withdraw their funds from Madoff investment. Too many at the same time. Mr. Madoff could not give their money back. He informed his son of the situation and he warned the authorities. On December 11th 2008, Bernard Madoff was arrested by the FBI and was then sentenced to 150 years in prison.

Economic and financial damage

Ponzi schemes are expensive for most participants and divert savings from productive investment. If left unchecked, they can grow disproportionately and cause great economic and institutional damage, undermining confidence in financial institutions and regulators and putting pressure on the budget in the event of bailouts. Their collapse can even lead to economic and social instability.

In the case of a Ponzi Scheme detected, there is a need for a rapid government response. However, the authorities often struggle with not only detecting these scams at an early stage but also put an end to it. There are several reasons why it is difficult to stop these practices. Often, neither the leaders nor the schemes are licensed or regulated. In many countries, supervisory authorities do not have appropriate enforcement tools, such as the right to freeze assets and block systems quickly. On the one hand, once a Ponzi scheme has grown, authorities may be reluctant to stop it, because if they do so – thus preventing it from meeting its repayment obligations – subscribers may blame them rather than the inherent flaws in the system. It is not uncommon to see investors supporting the authors of these chains, trusting them blindly. But on the other hand, when the system collapses of its own accord, experience shows that the authorities can be criticized for not acting more quickly.

“Trust does not preclude control” – The necessity to regulate

To prevent Ponzi schemes, authorities must be prepared to intervene on several fronts. Here are the main ideas when it comes to fight Ponzi schemes:

Investigate. Ponzi schemes are generally difficult to detect due to their opaque or even secretive operation, as members are required to maintain confidentiality. In order to detect them, regulators need to develop effective and sophisticated ways to identify this type of fraud. New technologies can provide an answer through an automatic analysis model that identifies (legal) pyramid schemes that would require further analysis.

Intervene urgently. The procedures required for the prosecution of a person alleged to be the perpetrator of a Ponzi scheme are very lengthy. So much time is left for the perpetrator to disappear. It is necessary to have the legal possibility to immediately stop any activity that is proven to be a Ponzi scheme (freezing of assets, protection of spyware interests, etc.).

Arrest. Heavy penalties must be imposed on crooks, including criminal action (as was the case for Bernard Madoff, who was sentenced to 150 years in prison).

Coordinate and cooperate. It is necessary that the financial authorities must collaborate with the legal system to penalize and regularize. To combat scams, financial regulators need effective mechanisms for information exchange and cooperation. To achieve this, the role of the International Organization of Securities Commissions (IOSCO) is central to the articulation of global standards.

Inform. Financial training can be a barrier to scams. It is also essential for financial regulators to inform and educate the public about the main methods used to deceive savers. In the name and shame concept, creating lists of persons or organizations that may or may not be licensed to engage in financial activities, as well as a database describing the actions taken against certain persons and entities, is also a good way to counter any malicious activity.

What lessons can be learned?

Many lessons can be learned from Ponzi schemes, both at the micro and macro levels.

At the micro level, it is important to remind individual investors that the analysis of an investment is essential and must follow three precise criteria: profitability, risk and liquidity (not to be neglected). It is also very wise to follow the adage “don’t put all your eggs in one basket”; portfolio diversification allows you to benefit from the “portfolio effect” due to low statistical correlation among assets.

At the macro level, it is essential for the regulator (like the Securities Exchange Commission (SEC) in the US or the Autorité des Marchés financiers (AMF) in France) to put in place tools to monitor and prevent Ponzi schemes, and to work in collaboration with the legal institutions to dissuade and to punish this type of behavior.

Useful resources

Ponzi schemes

Frankel T. (2012) The Ponzi Scheme Puzzle: A History and Analysis of Con Artists and Victims” Oxford, University Press.

Monroe H., A. Carvajal and C. Pattillo (2010) “Perils of Ponzis” Finance & development , 47(1).

Madoff’s scandal (2008)

Bernard C. and P.P. Boyle (2009) “Mr. Madoff’s Amazing Returns: An Analysis of the Split-Strike Conversion Strategy” The Journal of Derivatives, 17(1): 62-76.

Bernard Madoff’s vision about business (video)

Testimonials by Markopolos (video)

Markopolos Talks About Offering To Go Undercover To Stop Madoff (video)

Wetmann A. (2009) L’affaire Madoff, Pion.

The Rochette Affaire (1908)

Jeannenay J.-N. (1981) L’Argent caché : milieux d’affaires et pouvoirs politiques dans la France du XXe siècle Paris, Editions du Seuil.

Related posts on the SimTrade blog

   ▶ Akshit GUPTA Market manipulation

   ▶ Louis DETALLE Quick review on the most famous trading frauds ever…

About the author

Article written by Louis Viallard (ESSEC Business School, Master in Management – Economic Tracks, 2020-2022).

ETFs in a changing asset management industry

ETFs in a changing asset management industry

Youssef LOURAOUI

In this article, Youssef LOURAOUI (ESSEC Business School, Global Bachelor of Business Administration, 2016-2020) talks about his research conducted in the field of investing.

As a way of introduction, ETFs have been captivating investors’ attention in the last 20 years since their creation. This financial innovation has shaped how investors place their capital.

Definition

An ETF can be defined as a financial product that is based on a basket of different assets, to replicate the actual performance of each selected investment. An ETF has more or less the same proportion of the underlying components of the basket, depending on the style of management of the asset manager. ETFs represent nearly 90% of the asset under management of the global Exchange Traded Products (ETP).

History

The first ETF was the Standard and Poor’s Depository Receipts (SPDR) introduced in 1993. It appears to be an optimized product that enables investors to trade it like a stock, with a price that fluctuates during the day (not like mutual funds whose value is known at the end of the day only). The main advantage of ETFs for investors is to diversify their investment with lower fees than buying each underlying asset separately. The most important ETFs in the market are the ones with the lowest expense ratio as it is a crucial point to attract money from investors in the fund.

Types of ETF

ETFs can be segmented in different types according to the asset class, geography, sector, investment style among other criteria. According to Blackrock’s classification (2021), the overall ETF market can be divided into the following classes:

  • Stock ETFs track a certain stock market index, such as the S&P 500 or NASDAQ.
  • Bond ETFs offer exposure to a wide selection of fixed income instruments.
  • Sector and industry ETFs invest in a particular industry such as technology, healthcare, or financials.
  • Commodity ETFs track the price of a commodity such as oil, gold, or wheat.
  • Style ETFs are devoted to an investment style or market capitalization focus such as large-cap value or small-cap growth.
  • Alternative ETFs offer exposure to the alternative asset classes and invest in strategies such as real estate, hedge funds and private equity.
  • Foreign market ETFs follow non-U.S. markets such as the United Kingdom’s FTSE 100 index or Japan’s Nikkei index.
  • Actively managed ETFs aim to provide a certain outcome to maximize income or outperform an index, while most ETFs are designed to track an index.

Figure 1. Volume of the ETF market worldwide 2003-2019.
Volume of the ETF market worldwide 2003-2019
Source: Statista (2021).

Figure 1 represents the volume of the ETF market worldwide over the period 2003-2019. With over 6,970 ETFs globally as of 2019 (Statista, 2021), the ETF industry is growing at an increasing pace, recording a thirty-fold increase in terms of market capitalization in the 17-year timeframe of the analysis. It reflects the growing appetite of investors towards this kind of financial instruments as they offer the opportunity for investors to invest virtually in every asset class, geographical region, sector, theme, and investment style (BlackRock, 2021).

iShares (BlackRock), Xtrackers (DWS) and Lyxor (Société Générale) can also be highlighted as key players of the ETF industry in Europe. As shown in Figure 2, Lyxor (a French player) is ranked 3rd most important player with nearly 9% of the overall European ETF market (Refinitiv insights, 2019). iShares represents nearly eight times the weight of Lyxor, which is slightly above the average of the overall European ETF volume in dollars.

Figure 2. Market share at the promoter level by Assets Under Management (March 31, 2019)
Market share at the promoter level by Assets Under Management (March 31, 2019)
Source: Refinitiv insights (2019).

It goes without saying that the key player worldwide remains BlackRock with nearly 1/3 of the global ETF market capitalization. According to Arte documentary, BlackRock is without a doubt a serious actor of the ETF industry as shown in Figure 2 with an unrivaled market share in the European and global ETF market. With more than 7 trillion of asset under management, BlackRock is the leading powerhouse of the asset management industry.

Benefits of ETF

The main benefits of investing in ETFs is the ability to invest in a diversified and straightforward manner in financial markets by owning a chunk of an index with a single investment. It allows investors to position their wealth in a reference portfolio based on equities, bonds or commodities. It also helps them to create a portfolio that suits their needs or preferences in terms of expected return and risk and also liquidity as ETFs can be bought and sold at any moment of the day. Finally, ETFs also allow investors to implement long/short strategies among others.

Risks

Market risk is an essential component to fully understand the risk of owning an ETF. According to the foundations of the modern portfolio theory (Markowitz, 1952), an asset can be deconstructed into two risk factors: an idiosyncratic risk inherent to the asset and a systematic risk inherent to the market. As an ETF are composed of a basket of different assets, the idiosyncratic risk can be neutralized by the effect of diversification, but the systematic risk, also called the market risk is not neutralized and is still present in the ETF.

In terms of risk, we can mention the volatility risk arising from the underlying assets or index that the ETF tries to replicate. In this sense, when an ETF tries to emulate the performance of the underlying asset, it will also replicate its inherent risk (the systematic and non-systematic risk of the underlying asset). This will have a direct impact on the overall risk-return characteristic of investors’ portfolio.

The second risk, common to all funds and that can have a significant impact on the overall performance, concerns the currency risk when the ETF owned doesn’t use the same currency as the underlying asset. In this sense, when owning an ETF that tracks another asset that is quoted in another currency is inherently, investors bears some currency risk as the fluctuations of the pair of currencies can have a significant impact on the overall performance of the position of the investor.

Liquidity risk arises from the difficulty to buy and sell a security in the market. The more illiquid the market, the wider the spreads to compensate the market maker for the task of connecting buyers and sellers. Liquidity is an important concern when picking an ETF as it can impact the performance of the portfolio overall.

Another risk particular to this instrument, is what is called the tracking error between the ETF value and its benchmark (the index that the ETF tries to replicate). This has a significant impact as, depending on the overall dispersion, the mismatch in terms of valuation between the ETF and the benchmark can impact the returns of investors’ portfolio overall.

Passive management and the concept of efficient market

Most ETFs corresponds to “passive” management as the objective is just to replicate the performance of the underlying assets or the index. Passive management is related to the Efficient Market Hypothesis (EMH), assuming that the market is efficient. Passive fund managers aim to replicate a given benchmark believing that in efficient markets active fund management cannot beat the benchmark on the long term.

Passive fund managers invest their funds by:

  • Pure replication of the benchmark by investing in each component of the basket (vanilla ETF)
  • Synthetic reproduction of the benchmark by replicating the basket with derivatives products (like futures contracts).

An important concept is market efficiency (also known as the informational efficiency), which is defined as the ability of the market to incorporate all the available information. Efficient market is a state of the market where information is rationally processed and quickly incorporated in the market price.

It is in the heart of the preoccupations of fund managers and analysts to unfold any efficiency in the market because the degree of efficiency impacts their returns directly (CFA Institute, 2011). Fama (1970) proposed a framework analyzing the degree of efficiency in a market. He distinguishes three forms of market efficiency (weak, semi-strong and strong) which correspond to the degree in which information is incorporated in the prices. Earning consistently abnormal returns based on trading with information is the opposite view of what an efficient market is.

  • The weak form of market efficiency refers to information composed of past market data (past transaction prices and volumes). In a weakly efficient market, past market information is already included in the current market price, and investors will not be able to distinguish any pattern or prediction of future prices based on past data.
  • The semi-strong of market efficiency refers to publicly available information. This includes market data (as in the week form) and financial disclosed data (financial accounts published by firms, press articles, reports by financial analysts, etc.). If a market is considered in the semi-strong sense, then it must be in a weak sense as well. In this context, there is no additional gain in determining under or overvalued security as all the public data is already incorporated in the asset price.
  • The strong of market efficiency refers to all information (both public and private). Markets are strongly efficient when they reflect all the available information at any time in the asset prices.

Related posts on the SimTrade blog

   ▶ Micha FISCHER Exchange-traded funds and Tracking Error

   ▶ Youssef LOURAOUI Passive Investing

Useful resources

Academic resources

Fama, E. (1970) “Efficient Capital Markets: A Review of Theory and Empirical Work” Journal of Finance 25(2), 383–417.

Business

Arte documentary (2014) “Ces financiers qui dirigent le monde: BlackRock”.

BlackRock (January 2021) ETF overview.

Refinitiv insights (2019) Concentration of the major players in the European ETF market.

About the author

The article was written in February 2021 by Youssef LOURAOUI (ESSEC Business School, Global Bachelor of Business Administration, 2016-2020).

Markets

Markets

Juan Francisco Rodriguez Rodriguez

This article written by Juan Francisco Rodriguez Rodriguez (ESSEC Business School, Master in Strategy & Management of International Business (SMIB), 2021) presents the basics of markets and details two types of market microstructure: the fixing procedure and the limit order book.

What is a market?

The market is a process that operates when there are people who act as buyers and sellers of goods and services, generating an exchange. There is a market if there are people with the intentions to buy and sell, and when participants agree to exchange goods and services at an agreed price. For the market to work, you need buyers and sellers, and these two parts are what make up the market.

Buyers

On the one hand, the buyer is the person who acts in a market with the intention of acquiring a good or service by paying an amount of money (or in exchange for another good or service). Therefore, when someone buys, this person considers that the good or service he is receiving is worth more than the money he is paying for.

Sellers

On the other hand, the seller is the person who is willing to deliver a good or service by accepting a quantity of money (or in exchange for another good or service). The seller considers that the money that she is receiving has more value than the good or service that she offers.

Supply and demand

In a market, the price of the product is determined by the law of supply and demand. If the price is high, few people will be willing to pay for it but many will want to produce it; if the price is low, many will be willing to buy it but few willing to produce it. The price will be eventually at an acceptable level for both parties.

Market with a fixing procedure

Financial markets

Market used to be a physical place where the processes of exchange of goods and services took place, but due to technology markets no longer need a physical space.

Add two images: one for a physical market, one for a digital market (guys in front of computers) for Wall Street

Market with a fixing procedure

The fixing procedure is a form of trading securities in financial markets by fixing single prices or “fixing”. This procedure is commonly based on auctions. At the close of each auction the orders are crossed to maximize the quantity exchanged between buyers and sellers, and the new price is set.

Auctions are periods in which orders are entered, modified, and canceled. No negotiations are executed until the end of the auction. During this period, an equilibrium price is set based upon supply and demand, and negotiations take place at the end of the auction at the last equilibrium price calculated to maximize the quantity exchanged between buyers and sellers.
The fixing procedure is used for securities presenting a low level of liquidity. It is also used to set the opening and closing prices for continuous markets.

Market with a fixing procedure

Market with a limit order book

A limit order book is a record of pending limit orders waiting to be executed against market orders.

Market with a limit order book

A limit order is a type of order to buy or sell a security at a specific price. A buy limit order is a buy order at a fixed price or lower. When your buy limit order arrives to the market, it is confronted to the other side of the order book: the “Sell” side of the order book. If the sell orders in the order book are at the same or lower price than the price limit of your buy order, a transaction takes place. Similarly, a sell limit order is a sell order at a fixed price or higher. When your sell limit order arrives to the market, it is confronted to the other side of the order book: the “Buy” side of the order book. If the sell orders in the order book are at the same or higher price than the price limit of your sell order, a transaction takes place.

When the price limit of a buy limit order arriving to the market is lower than the best proposition on the “Sell” side of the order book, it is simply recorded in the order book, and is carried out as long as it has reached the market price. When the price limit of a sell limit order arriving to the market is higher than the best proposition on the “Buy” side of the order book, it is simply recorded in the order book, and is carried out as long as it has reached the market price.

Relevance to the SimTrade Certificate

These terms are very relevant to the SimTrade Certificate because they lay the foundations for us to know how financial markets work and the different ways in which a transaction can be carried out, whether to buy or sell an asset. I definitely think this will add value to my career in finance and help me make better investment decisions in the future.

The SimTrade platform uses a market with a limit order book, which corresponds to the current standard for real financial markets organized around the world.

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

About theory

  • By taking the Discover SimTrade course, you will discover the SimTrade platform that simulates a market with a limit order book.
  • 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.

Take SimTrade courses

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 Market order simulation and the Limit order simulation, you will practice market orders and limit orders that are the two main orders used by investors to build and liquidate positions in financial markets.

Take SimTrade courses

More about SimTrade

Article written by Juan Francisco Rodriguez Rodriguez (ESSEC Business School, Master in Strategy & Management of International Business (SMIB), 2021).