ETFs in a changing asset management industry

February 3, 2021 by Youssef LOURAOUI

ETFs in a changing asset management industry

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.

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)

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.

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

February 16, 2025February 3, 2021 by Juan Francisco RODRIGUEZ RODRIGUEZ

Markets

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.

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 limit order book

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

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 Trade orders course, you will know more about the different type of orders that you can use to buy and sell assets in financial markets.

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.

More about SimTrade

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

Quote stuffing

February 16, 2025January 23, 2021 by Akshit GUPTA

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 Trade 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.

About the author

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

Insider trading

January 23, 2021 by Akshit GUPTA

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.

September 11
Examples of Insider Trading

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

Examples for illegal insider trading

January 23, 2021 by Akshit GUPTA

Examples for illegal insider trading

This article written by Akshit GUPTA (ESSEC Business School, Grande Ecole Program – Master in Management, 2019-2022) presents famous examples of insider trading seen across financial markets.

As discussed in the previous post, Illegal Insider trading refers to “buying or selling a security, in breach of a fiduciary duty 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 passed on to any unrelated party or when it is used to execute the trades.

Ivan Frederick Boesky (1987)

Ivan Boesky, a stock trader in the US, is infamous for his role in an insider trading scandal that shook the American markets during the late 1980s. Boesky started a stock brokerage company named Ivan F. Boesky and Company during 1976 and used to speculate on corporate takeovers. Within a span of few years, his company started generating huge profits and Boesky became a renowned broker. He received new buy-in investments from many partnership agreements he signed. But later, Boesky was sued by his group of partners for deceptive clauses stated in their partnership agreement. The case came under the scanner of the SEC and eventually Boesky was convicted of profiting from M&A takeovers based on privileged inside information from corporate insiders leading him to an imprisonment of 3 years and a fine of $100 million. He then became an aide to the SEC, helping the staff in cracking other high-profile scandals taking place in the US.

Martha Stewart & ImClone (2001)

Martha Stewart is an infamous investor who was convicted of insider trading by the SEC in the early 2000s. Stewart owned the stocks of the biopharmaceutical company, ImClone Systems. The Foods and Drugs Administration (FDA) rejected ImClone’s experimental cancer treatment drug, Erbitux. Stewart had the privileged access to this information by her broker before it came into the public domain and acted on it. By selling the stocks before the news became public, she was able to avoid losses nearing $50,000 that she would have incurred otherwise. Eventually, Stewart was convicted guilty for trading on grounds of inside information and was sentenced an imprisonment of 5 months.

Robert Foster Winans (1984)

Robert Foster Winans was a former journalist at the Wall Street Journal and penned the influential “Heard on the Street” column for the newspaper during early 1980s. His column in the newspaper had the power to move prices for the stocks he was mentioning in his column. He was convicted by the SEC for supplying confidential information about his upcoming articles to brokers who used to trade the shares on his behalf. The case was complex to crack due to lack of concrete evidence in the favour of insider trading being followed by Winans, but in the end, he was convicted of stealing confidential information belonging to the Wall Street journal and was sentenced to an imprisonment of one year.

Raj Rajaratnam (2009)

Raj Rajaratnam was the founder and former manager of the hedge fund group named Galleon Group based out in New York founded in 1997. Owing to his successful investments in healthcare and technology industry, Rajaratnam grew up the market ranks very quickly and gained a huge reputation in the global markets. He made ties with several corporate executives from leading companies and received insider tips and information on a regular basis.

Rajaratnam was convicted of making illicit profits amounting to $60 million by trading on non-public material information and was found guilty for 14 counts of securities fraud. He was sentenced to 11 years of imprisonment and a penalty amounting to $10 million. His prison time was the longest term given for crimes involving insider trading and was a wake-up call for all the individuals involved in such a vicious cycle.

About the author

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

Securities and Exchange Commission (SEC)

February 3, 2024January 23, 2021 by Akshit GUPTA

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.

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

January 23, 2021 by Akshit GUPTA

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).

AMF

January 22, 2021 by Akshit GUPTA

Autorité des Marchés Financiers (AMF)

This article written by Akshit GUPTA (ESSEC Business School, Master in Management, 2022) presents the structure and functioning of Autorité des Marchés Financiers (AMF).

Introduction

The Autorité des Marchés Financiers (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 investors’ interests and smooth operations within the financial markets.

The authority has an independent legal identity and exercises authority, regulations, controls and sanctions over the players in the French financial system. In 2003, the AMF was formed as part of a merger between several financial regulators including Conseil de discipline de la gestion financière (CDGF), Conseil des marchés financiers (CMF) and Commission des Opérations de Bourse (COB).

The AMF is embodied with the primary objective of protecting the investors’ interests and savings in the financial markets along with monitoring and regulating the markets by issuing rules, guidelines, control measures and ensuring transparent flow of information. The authority is also responsible for issuing sanctions and penalties to market players in case any malpractices occur.

Organizational Structure

The Autorité des Marchés Financiers (AMF) primarily consists of 2 bodies namely, Le Collège and a Sanctions commission.

The Collège is headed by the President of the AMF, who is directly nominated by the President for the Republic of France for a non-renewable tenure of five years, along with a team of 16 people appointed directly by the public authorities. The operations and administrative work for the AMF is carried out by the Secretary General who is appointed by the President of the AMF and works under his supervision. The Collège has the powers to open sanctions and injunction proceedings against financial participants. The body is also responsible for defining the job framework, setting the budgets and staff remunerations for the AMF.

The Sanctions commission is an autonomous decision-making body that is responsible for exercising the sanctions on behalf of the AMF. The Commission consists of 12 people who are directly appointed by the public authorities.

The executive committee (Comité exécutif or Comex) is an additional body responsible for presenting proposals for the smooth execution of operational and strategic objectives for the AMF. The body is chaired by the President of the AMF and brings in an additional viewpoint to streamline the processes of the AMF.

Powers and responsibilities

The AMF is responsible for overseeing and regulating the activities in the French financial system and its players including listed companies, credit institutions, investment banks, investment firms and asset managers. It also looks after the financial products offered by the stated players in order to ensure the protection of investors’ interests and rights.

The AMF carries the above stated activities by means of enacting rules and regulations, authorizing products offered by financial players, issuing sanctions, implementing control measures and offering mediation system to ensure the smooth flow of market operations. It has the powers to investigate transactions carried out by any market participants to ensure the compliance of such transactions with the financial regulations of the French financial system.

Sanctions and penalties

The AMF is vested with the powers to issue sanctions and penalties to market professionals who act in contradiction to the rules and regulations of the financial system. The power to issue sanctions by AMF is split between the two primary bodies of the AMF that are the Collège and the Sanctions commission.

If any breach is found to have happened, the Collège is vested with the powers to decide upon the initiation of legal proceedings. If the Collège agrees upon initiating the legal proceedings, the Sanctions commission is responsible for deciding the quantum and degree of the sanctions to be inflicted upon the suspected individual/individuals.

The kind of malpractices that can take place in the financial system involves insider trading, stock price manipulations, circulation of false information, etc. which can affect the investors and possess a threat to their investments or financial safety.

The AMF can issue injunctions and individual sanctions to financial professionals (including individuals or firms) depending on the nature and magnitude of the breach that took place.

The Sanctions commission has the power to issue disciplinary sanctions which involve ban on practicing or reprimands and financial penalties amounting to 100 million euros or 10 times the amount of profits made by any individual or organization. The degree of such penalties depends upon the magnitude of the financial crimes involved and the advantages or benefits gained by the suspects.

Relevance to the SimTrade Certificate

The activities of the AMF relate to many topics covered in the SimTrade certificate:

The different players supervised by the AMF (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.

Useful resources

Autorité des Marchés Financiers (AMF)

Autorité des Marchés Financiers (AMF) Impose Sanctions

About the author

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

Trader – Job description

January 22, 2021 by Akshit GUPTA

Trader – Job description

This article written by Akshit GUPTA (ESSEC Business School, Grande Ecole Program – Master in Management, 2019-2022) presents the job description of a Trader.

Definition

Trading in financial markets refers to the buying and selling of financial assets (stocks, bonds, currencies, commodities, etc.) in order to make money from capital gains that result from the increase or decrease in asset prices. In financial markets, a trader is a person who deals in the purchase and sale of securities. Traders try to maximize the capital gains on their trades by thoroughly analyzing the markets for the assets they trade in and accounting for the risk and return strategies.
Traders are generally hired by investment banks, investment firms, brokerage firms and commercial banks (currency trading).

Types of traders

There are different types of traders depending on the type of trades they execute and the clients or companies they serve for. We usually classify traders into three broad categories:

Flow traders

Flow traders are responsible for executing the trades on behalf of the bank’s clients and use client’s money to take positions in the market. They act as an agency trader and a proprietary trader at the same time. For example, if a client wants to buy the shares of an investment bank XYZ where the flow trader works, the trader will sell the shares of the bank XYZ to the client and serve the interest of both the parties.

Agency traders

The agency traders, also known as brokers, act as an intermediary between the bank’s clients and the proprietary or flow traders. Such traders generally take instructions from the clients and are responsible for skillfully executing trades to generate profits for the clients. The trader is responsible for searching for counterparties for their client’s demand and trade on the basis of the instructions received. The company earns fees and commissions on the trades the agency trader settles on behalf of the company’s clients.

Proprietary traders

Unlike agency traders, proprietary traders are hired by the banks and execute trades on behalf of them. Such traders are engaged in the buying or selling of financial securities by using the bank’s own money. Their objective is to generate profits for the bank. Proprietary traders generally possess more freedom than the agency traders in terms of the autonomy they hold to execute trades as per their discretion. They are also more accountable for the actions they undertake.

Types of securities

The trading activities of a trader depends on the securities they specialize and deal in. With the world of financial products becoming more complex, investment firms and banks have categorized different departments based on financial products they trade in. Some of the major investment categories include:

Equities

Traders working in equity products work in collaboration with the research team which is responsible for collecting and analyzing data about different companies and presenting the findings to the trading team. The traders act on behalf of the inputs received from the research team and execute the trades. In some firms, the equity trading desk is also subdivided as per sector specialization.

Fixed income

Traders working in the fixed income category generally deal in the bonds, government securities, treasury notes etc. They generally follow the macroeconomic trends of different geographies and trade in the fixed income products of a geography or a company on the basis of their interest rate policies and ratings.

Currencies

Different banks and investment firms deal in currency hedges to mitigate the risk associated with cross border transactions. Traders working for these firms or banks trade in foreign exchanges and generally focus on mitigating the financial risks to the bank associated with currency fluctuations.
Some individual traders also deal in foreign exchanges on the basis of their knowledge about the geographical trends.

Derivatives

The traders working the derivates segment of trading specialize in one of the many categories of derivatives which involve equity futures and options, fixed income options, commodity futures, structured products etc. They work in collaboration with the respective research and structuring teams which are responsible for providing inputs on behalf of the current market trends.

Types of stock trading

The type of stock trading varies depending on the financial products they trade in and also on the type of trade a trader wants to execute. Generally, every trader skillfully executes a trade after thinking about the various factors including the financial burden, the risk appetite, the return expectations and the duration for which he/she wants to hold the trade for. Every trade comes with a financial cost and it is imperative for every trader to lay out the basic requirements before entering into any trade.

Some of the most common types of stock trading different traders across different financial products practice are:

Day Trading
Positional Trading
Scalping
Momentum Trading
Swing Trading
Market Making

With whom does a trader work?

Traders work in coordination with different teams which are responsible for feeding the trader with adequate research and data regarding the stocks the bank can invest in. In general, the trader works with the research team which is responsible for providing a summary of the company’s financials for which the trades will be entered. For structured finance products, a trader works with the quantitative, sales and structuring teams for getting the right inputs about the structuring of the products. They also work alongside risk analysis teams, to ensure risk adjusted returns on their portfolios.

How much does a trader earn?

The salary of traders varies upon the type of bank they are employed at and the relevant market experience they have. As per the figures given by Glassdoor, a novice stock trader earns a yearly salary ranging between €40,000-€60,000 in the initial years of their joining. As the trader gains experience, they earn an average salary of €70,000-€75000 euros excluding bonuses and extra benefits. The bonuses and extra compensations vary from bank to bank and the performance of the specific trader but are usually very high.

What training to become a trader?

In France, an individual who wants to work as a trader is highly recommended to have a Grand Ecole diploma with a specialization in market finance. The knowledge of coding languages like Python and R is also a very desirable skill in the current world driven by technology and automation. To start a career as a trader, it is advised to start the career as an intern or an apprentice at a French or an International bank while pursuing the diploma. This can help in building a strong foundation as a successful trader and learn directly from the industry practitioners.

What positioning in the career?

A career in trading generally involves long working hours and requires excellent research and execution skills for entering trades at the right time. A trader forms the backbone of every investment bank, investment firm, commercial banks, exchanges, treasury departments of companies and brokerage houses and is highly required for their proper functioning. The remuneration of a trader seems lucrative but comes with challenging situations and often requires strong analytical, research and communication skills, long working hours, financial knowledge, and IT expertise.

With the advent of algorithm-based trading, the trading floors across the world have shifted to high frequency trading and all major investment banks have reduced the size of their workforce working as a trader. With increasing liquidity across equities and fixed income products, algorithms have become more advanced and trades executed using such algorithms have become simpler. Advanced skills including knowledge of financial products and writing codes for the algorithms provides the person with an edge over the other applicants.

For more information regarding the remuneration and pay scale of a trader, you can refer to my previous post “Remuneration in the finance industry”

Useful resources

Glassdoor

About the author

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

Was there insider trading before September 11?

January 22, 2021 by Akshit GUPTA

Was there insider trading before September 11?

This article written by Akshit GUPTA (ESSEC Business School, Grande Ecole Program – Master in Management, 2019-2022) presents the case whether there was insider trading before September 11?.

Introduction

The plane crash on the World Trade Center on 11 September 2001 is an infamous occurrence of a terrorist attack that is etched in the hearts of every individual in the world. The attack had a severe impact on the global stock markets. The markets across USA saw a sharp sell-off as seen by the sharp decline of 14% in S&P 500 index in the first week after markets opened on September 17,2001. The market chaos was caused by the panic amongst investors and the loss in value the crash brought to the economy. The airlines and the insurance industries were the ones that were most affected by this crash.

The abnormal pattern in financial markets

During the investigation of the attack, political, economic and financial impacts of the crash were considered. Concerning the financial impact, an unusual pattern of trading was found to have happened in the stocks of major airline companies including United Airlines, American Airlines, Delta Airlines and KLM Airlines. The question of whether an abnormal trading pattern was observed in the financial markets, gauged the interest of common people.

As per the analysis done by market analysts, a discrepancy in the put-call options on the stocks of the mentioned airlines were discovered. As per Bloomberg data as quoted by Snopes, “On September 6, 2001, the Thursday before that black Tuesday, put-option volume in UAL (the parent company for United Airlines) stock was nearly 100 times higher than normal: 2,000 options versus 27 on the previous day.”

(Options are a form of derivative instruments that have an underlying stock and gives the investor a right to buy or sell the stock (not an obligation) at a previously agreed upon price and time. The options can be classified into two categories: put options and call options. The Put options give the investor the right to sell a stock at a predetermined price and time and is generally used by an investor when he/she anticipates a fall in the prices of the underlying stock in the near future. Whereas, a Call option gives the investor the right to buy a stock at a predetermined price and time (not an obligation) and is used by an investor when he/she anticipates a rise in the prices of the underlying stock in the near future.)

The analysis raised questions about the possibility of an insider trading activity that took place before the infamous plane crash. The chances of traders being aware about the possible terrorist attack on the World Trade Center was a cause of worry.

Conclusion

After exhaustive investigation, the various federal agencies including Securities & Exchange Commission (SEC) and Federal Bureau of Investigation (FBI) found no conclusive evidence on the stated abnormalities and no person was found involved in connection to the prospective act of insider trading which might have resulted in illegally generated high profits for some individuals.

But as far as the high level of trades are concerned, some level of abnormalities can be seen in the high put call ratio ranging between 25-100 times of the ratio seen in normal trading days. However, the lack of conclusive evidence led to no sanctions or penalties to the people who could have been involved in these activities. I would be happy to receive your opinions on the same. What do you all think about the trading patterns and the abnormalities observed in the months preceding the day of the attack?

Useful Resources

Academic research

Poteshman A. M. (2006) Unusual Option Market Activity and the Terrorist Attacks of September 11, 2001 The Journal of Business, 79(4): 1703-1726.

Other

Wikipedia September 11 attacks advance-knowledge conspiracy theories

Snopes (October 3, 2001) Were Stocks of Airlines Suspiciously Shorted Just Before 9/11?

Business Insider (April 18, 2017) An author and economist says a reader once approached him with a chilling story

About the author

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

The SimTrade Certificate: Freedom to learn

January 17, 2021 by Prof. François LONGIN

The SimTrade Certificate: Freedom to learn

In this post I share with you the pedagogical philosophy of SimTrade: freedom to learn.

Freedom to learn

In the SimTrade Certificate, participants have freedom to learn the way they would like. Contrary to traditional courses in the classroom, there is no specific time and no specific space to learn in SimTrade. In other words, the SimTrade Certificate offers a full ATAWADAC experience:

Any Time (AT): you can work on the SimTrade certificate whenever you like. The market simulation platform is especially available 24/7.
AnyWhere (AW): you can access the SimTrade application wherever you are as long as you have an internet connection.
Any Device (AD): the SimTrade application is compatible with Mac or PC and every size of screen ranging from X large trader screen to tiny mobile phone.
Any Content (AC): the SimTrade Certificate offers well-established content including on-line courses, market simulations and simtrading contests. Through case studies and discussions, it also provides interactive user-generated content.

From the beginning of certificate (and each period), you already know all the work to do: courses, simulations, contests, case studies and exams. You also know the deadline for the work to do. In addition, you also know the dates of the webinars (one at the beginning of each period and another at the end of each period).

Responsibility

Responsibility is the flip side of freedom. Note that it may be more difficult for some of you to navigate in the SimTrade world of pedagogical freedom. The constraints of the pedagogical framework are indeed very loose (you have one month to do all the work) but you have to organize yourself to achieve the objectives. Note that this is a pedagogical experience where, by construction, it is not possible to work at the last minute.

The time to spend on-line on Period 1 (courses, simulations, contest, case study and exam) is estimated to 8 hours.

Remember that beyond the courses, simulations, contests, case studies and exams, this course has nothing to offer but hard work. The return on this course only depends on your personal investment.

A few tips to succeed in the SimTrade Certificate:

Work regularly!
Study in small groups to progress quicker
Navigate between the different elements – courses, simulations, contest and case study – to get a global view by combining theory and practice
Use the discussion forum to share your questions/problems and get some help from the community.

On the SimTrade application, participants have the tools to monitor their progress in the Certificate.

In the “My progress” page, you can access your grade in real time and follow the evolution of your Bloom profile.

In the “My path” page, you can access your working history in the Certificate.

I count on your responsibility and your intelligence to maximize your investment in the SimTrade Certificate.

Pedagogical algorithm

The SimTrade Certificate is run by an algorithm. The algorithm organizes everything from the apparition of content over time (each period and within each period) to the sending of the grades to your institution.

High Close

February 16, 2025January 15, 2021 by Akshit GUPTA

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 Trade 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 Send 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

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).

Corner of Volkswagen

January 15, 2021 by Akshit GUPTA

The corner of Volkswagen (2008)

This article written by Akshit GUPTA (ESSEC Business School, Grande Ecole Program – Master in Management, 2019-2022) presents the real life case of the Corner of Volkswagen, which is a very infamous example of market manipulation in financial markets.

Introduction

Cornering refers to the attempt of manipulating the market by acquiring a significant portion of stocks of a particular company in order to gain a controlling interest in the market and influence the market in the manipulator’s favor.

Such a manipulation was seen in 2008 when the world’s famous automaker Porsche tried to corner the market of the shares of Volkswagen. This attempt of cornering made Volkswagen the world’s most valuable company in terms of market capitalization for a brief period. It is considered as one of the greatest attempts of cornering ever made in global financial markets.

Volkswagen cornering

In 2008, Porsche made an attempt to acquire Volkswagen by cornering the shares of the company in a unique manner. As per the Volkswagen shareholders’ structure, 20% of the shares of Volkswagen were held by the State of Lower Saxony in Germany while the other 80% were owned by retail and institutional investors.

Wendelin Wiedeking, the then CEO of Porsche, had dreamt of acquiring the Volkswagen group and started accumulating the shares of the company in order to gain controlling interest in Volkswagen. In 2005, Porsche held a 20% stake in the Volkswagen group which later grew to 30% by 2007. As per the rules for mergers and acquisitions, Porsche had to make a mandatory purchase offer to Volkswagen, which was later denied by the shareholders of Volkswagen.

As the 2008 financial crisis hit financial markets, equity markets throughout the world went into a turmoil. Short sellers started increasing their positions in the auto industry since the auto sales faced a sharp decline after the crisis. In particular, short sellers started taking large sell positions in the stocks of Volkswagen in the expectation of a decrease in prices of the company’s shares. But to the short-seller’s misfortune, the share prices of Volkswagen saw an upward curve against the market predictions.

In October 2008, the price of Volkswagen share started representing the weak fundamentals of the industry and saw a downward trend making the short sellers optimistic. But a Porsche’s press statement about its holding position in Volkswagen equity hit the financial markets and panic started building up amongst traders. Over a span of few years, Porsche acquired around 42% of the outstanding shares of Volkswagen by purchasing them from the open market and also purchased option contracts on the Volkswagen shares amounting to 32% of additional shares resulting in potential holdings of more than 74% of the total shares of the company at the expiry of those options.

Press Release:Porsche

Short sellers were holding a position of 12% of the total shares outstanding for the Volkswagen company, but there was only 6% of shares available for public trading (74% were held by Porsche and 20% by the Lower State of Saxony). This created a short squeeze in the market.
Short sellers panicked and had to pay huge amounts of money to cover their positions in the market. This resulted in a sharp increase in the Volkswagen share price, which reached a high of $999 within a span of a few days.

The panic then subsided, and the share price returned to its pre-crisis average trading range of $200. But the sudden upward trend made many traders lose millions worth of investments due to the manipulation done by Porsche.

Source: Bloomberg

Owing to Porsche’s greed, the company fell short of cash to settle the option contracts at the time of expiry and was not able to acquire 75% of the outstanding shares of Volkswagen to trigger an acquisition. The debts that Porsche took to manipulate the shares of Volkswagen and falling car sales, led to the bankruptcy proceeding for the company. In late July 2009, Volkswagen bailed out Porsche and later Porsche merged with Volkswagen.

Aftermaths

Although the two famous automakers merged at the end, the failed attempt made by Porsche to acquire Volkswagen is a classic example of cornering practices used by a company to manipulate the share prices of another company. Wendelin Wiedeking, the former CFO of Porsche, had to face market manipulation charges and the company faced legal proceedings with claims amounting to more than $1 billion for the losses that were incurred by small traders and hedge funds for this unjustifiable act.

Technical terminology

Short squeeze is a market situation where a mismatch of demand and supply (high demand and low supply) of an asset results in the prices of the assets to rise significantly. In generally seen instances, when the share prices of a company start rising, the short sellers rush to close their positions in order to avoid heavy losses. The sudden increase in demand is mismatched with the market supply, driving the prices of the assets upwards in a frenzy manner.

Link with the SimTrade Certificate

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

About theory: by taking the Financial Leverage course, you will understand how leverage is taken by investors to increase the size of their market position.
About practice: by launching the Sending an Order, you will understand how financial markets really work and how to act in the market by sending orders.

Useful resources

NASDAQ (01/05/2010) When Porsche Cornered Volkswagen: A Legitimate Complaint

New York times (26/09/2005) Porsche Says it Plans to Amass a 20% Stake in Volkswagen

About the author

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

Financial Analyst – Job Description

January 15, 2021 by Akshit GUPTA

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.

Market maker – Job Description

February 16, 2025January 15, 2021 by Akshit GUPTA

Market maker – Job Description

This article written by Akshit GUPTA (ESSEC Business School, Grande Ecole Program – Master in Management, 2019-2022) describes the job of a Market Maker.

Definition

A market maker is a market participant in the financial markets that simultaneously buys and sells quantities of any particular asset by posting limit orders. The market maker posts limit orders in the market and profits from the bid-ask spread, which is the difference by which the ask price exceeds the bid price. They can exist in all the different markets (including foreign currency, bonds, equity etc.), but generally markets maker play a significant role in the equity markets. Due to the high quantity of securities needed to ensure the required volume of trading and huge capital, market makers are generally large institutions like investment banks and asset management firms.

A market maker plays a significant role in the financial markets throughout the world. They benefit in the financial markets by maintaining a sizable bid-ask spread for every security they trade in. By holding a large number of shares, a market maker is able to provide liquidity to the market for an asset. If investors or traders are selling in a market with low trading volumes, market makers buy the assets to provide liquidity, and vice versa. Market makers help in maintaining a balance between the demand and supply of an asset in the market. Their role includes taking a position in the opposite side of whatever direction the market is moving in at any given point in time.

Thus, with this strategy, they are able to fulfill the market demand for a stock and facilitate its circulation. Market makers help the financial markets and its participants to buy or sell shares easily by providing them with liquidity.

Two types of market makers:

Activity for a bank (proprietary trading) The bank thinks that is a profitable activity
Contract for a firm to provide liquidity for the market of the stocks issued by the firm. A service provided for firms

Duties of a market maker (for a firm)

Providing liquidity by being present on the buy and sell sides of the market (by posting limit orders)
Matching orders in the order book
Providing depth to the asset’s market

Risks of the activity of market making

Market makers have to undertake high risks while executing trades in the market as the market can move in the opposite direction of their positions in no time. If a seller is willing to sell shares of a company by sending a sell market order, the market maker is be ready to buy by posting buy limit orders to provide liquidity to the market. However, if the number of sellers keep on increasing in the market, the share price will eventually go down against the market maker’s position. This can lead to huge losses for the market makers, increasing the associated risks of this activity.

Who does a market maker work with?

A market maker works in collaboration with different teams and individuals who are responsible for providing him with the right knowledge and inputs.

Normally, a market maker works with:

Brokerage firms – Market makers work with the brokerage firms who help them in executing orders in the
financial markets
Research Teams – They also work in collaboration with the research teams who are responsible for providing them with financial and non-financial information about different assets.
Sector Specialists – They help market makers in gathering information about different sectors and geographical markets.

How much does a market maker earn?

The remuneration of a market maker largely depends on the type of organisation and sector he or she works in. The practical experience in financial markets is a major deciding factor while calculating the remuneration of a market maker. As of the writing of this post, an entry level market maker can earn between $35,000-$45,000 per annum in the initial years.
A market maker is also entitled to bonuses and extra benefits depending on the organisation he or she works at and the profits he or she generates.

What training do you need to become a market maker? ?

To become a market maker, an individual is required to have at least a bachelor’s degree with a specialization in finance. He or she is expected to have the basic understanding of financial markets and different financial instruments. Also, good level of interpersonal skills is required to communicate with different stakeholders on a daily basis.

In France, a Grand Ecole diploma with a specialization in market finance is highly recommended for an individual to get a good entry level position in a reputed bank or asset management firm.

Different trading qualification exams like AMF examination is also recommended to understand the French financial markets in a more practical sense and enter the market with sufficient knowledge.

Link with the SimTrade Certificate

The concepts about market making can be learnt in the SimTrade Certificate:

About theory

By taking the Trade 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 Send 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.

About the author

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

Corner

February 16, 2025January 15, 2021 by Akshit GUPTA

Corner

This article written by Akshit GUPTA (ESSEC Business School, Grande Ecole Program – Master in Management, 2019-2022) presents the technique of Cornering, which is a type of market manipulation in financial markets.

Introduction

Cornering a market refers to the acquisition of a significant amount of an asset which gives the manipulator a controlling interest in the market. This strategy is used to manipulate the market for the asset and the manipulator has the power to move the asset price in his/her favor. Cornering has been observed in the financial markets since a long time and strong regulations and rules have been put into place by regulators worldwide to prevent such activities to happen. In the United States, the Securities and Exchange Commission (SEC) and Federal Trade Commission (FTC) supervise the trading activities in the financial markets to catch the manipulators who indulge in such practices. While cornering can be considered as legal or illegal depending on the circumstances and the intention of the individual involved, most of the times it is done to deceit the honest investors and earn illegal profits.

In cornering, the manipulator acquires a controlling stake in the asset and pushes up the prices for the underlying asset. Once the prices have reached a significant level, the manipulator exits his/her position leading to market correction and a sharp fall in the asset prices.

Short squeeze

Short squeeze is a market situation where a mismatch of demand and supply (high demand and low supply) of an asset results in the asset price to rise significantly. In generally seen instances, when the share price of a company starts rising, short sellers rush to cover their positions to meet the margin requirements and avoid more losses. The sudden increase in demand is mismatched with the market supply, driving the asset price upwards in a frenzy manner.

Practices used to corner the market

Beyond the accumulation of assets in his/her position, the manipulator usually uses many practices to manipulate the price up or down in his/her favor. The most common practices used are the pump and dump scheme and the poop and scoop scheme detailed below.

Pump and dump scheme

In the pump and dump scheme, the manipulator circulates false positive information about a particular asset which leads to an increase interest amongst the investors for the particular asset and leads to more demand. As the demand for the asset rises, the prices also go up and the manipulator exits his/her position, thereby generating high profits and crashing the market for the asset. Such schemes are generally carried on lesser-known assets which have an information asymmetry, and the manipulator has the means to manipulate the market.

Poop and scoop scheme

In the poop and scoop scheme, the manipulator circulates false negative information about an asset in the market. Hearing the negative information, other investors undertake panic selling, thereby decreasing the prices for the asset. The manipulator buys the asset once the prices fall and manipulates the market.

Silver Thursday (1980)

Silver prices

The manipulators who practice cornering in a market, hoard large quantities of a security in the initial accumulation phase. As seen in the graph above, in the silver market cornering that started in the 1970s, the Hunt Brothers bought large quantities of silver over a period of 10 years in an attempt to corner the silver market. They were holding approximately one third of the world’s deliverable silver supply. The price of silver went up drastically over this period. But as their practices came to be noticed, the regulatory bodies in the United States amended the rules and regulations regarding commodity trading, bringing an end to their manipulation practice. Then the silver market crashed on March 27, 1980, a day known as ‘Silver Thursday’.

‘Silver Thursday’ is infamous for recording one of the highest falls in the market price of silver. In the months preceding the Silver Thursday, the U.S. Federal Reserve brought in new regulations restricting banks to issue loans for commodity speculations. At the same time, the Chicago Board of Trade (CBOT) increased the margin requirements on silver futures contracts, leading to high margin calls for the Hunt Brothers. Due to lack of access to new leverage, they were unable to meet the margin requirements for the silver contracts they held. The new regulations led to the failure of the attempt made by the Hunt Brothers to corner the silver market. As soon as the news hit the market, investors starting panicking leading to a sharp selling of the silver futures contracts. This ultimately led to a fall in the silver price from around $50 per ounce to $11 per ounce over a short span of time. Hunt Brothers were charged with civil charges for manipulating the silver market over the years and artificially increasing the silver price. Due to the new regulations and stricter laws, they also had to pay heavy fines amounting to millions of dollars which led to their bankruptcy.

Conclusion

Illegal cornering has been regarding as a common market manipulation practice throughout the world and the regulators keep a tight watch to control such practices from occurring. Although many attempts of cornering the financial markets have been made by several manipulators in the past, most of them have been unsuccessful. The manipulators also take huge risks while trying to corner the market as the irregular market patterns can be observed by professional investors. The inefficiencies seen in markets manipulated through cornering can prompt other investors to take opposing positions leading to heavy losses to the manipulators.

Relevance to the SimTrade Certificate

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

About theory

By taking the Trade 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 Send 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.

About the author

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

David Ricardo

February 16, 2025January 15, 2021 by Akshit GUPTA

David Ricardo (1772-1823)

This article written by Akshit Gupta (ESSEC Business School, Master in Management, 2022) presents the portrait of David Ricardo, who is a well-known economist.

Introduction

David Ricardo, born in England in 1772, is one of the most well renowned economists of all times. He is famous for his contribution in the field of public finance and is known for his theories of labor value, comparative advantages and rents. He has also written many research papers and books on the policies of the British Central Bank and has made important contributions to the development of monetary policies in Great Britain.

David Ricardo

David Ricardo started his career in the stock markets at the age of 14 when he joined his father who used to work at the London Stock Exchange as a stockbroker. His talents and understanding about the financial markets helped him gain a good reputation in the market. He developed interest in economics in 1799 when he started following the work of Adam Smith, a renowned Scottish economist and philosopher.

Career in the stock market

What is lesser known about David Ricardo is the fact that alongside of being a famous economist, he was also very famous as a quantitative trader. He used to trade in the stock markets using his strong mathematical skills to buy under-priced stocks and short sell the overpriced stocks. He is believed to have made short-term investments in the stock market, investing large amounts of capital with a low-risk appetite, that helped him accumulate a huge wealth.

Two of the Ricardo’s primary rules for trading in the stock market included: a trader should “cut short his losses” and a trader should “let his profits run on”.
In the end, it’s not about making the correct choice always, but correcting the wrong choices at the right time.

Link with the SimTrade Certificate

The two rules by Ricardo by correlate to the learning we derive from the SimTrade Certificate.

The stop loss orders that are taught as part of the different trade orders are an efficient way that every trader should use to protect their capital and cut short on their losses.

This type of order helps a trader to exit his/her position automatically if the prices of an asset declines by a predefined amount. Such orders are frequently used by traders as an effective risk management strategy to avoid huge losses which may arise if the markets move in the unfavorable direction.

The concepts about different trading strategies and their practical implementation can be learnt in the SimTrade Certificate:

About theory: 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 market simulations, you will understand how financial markets really work and how to act in the market by sending orders. By executing the stop loss order, a trader will learn the risk management strategy of cutting short their losses.

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

Bonne année 2021 !

January 1, 2021 by Jennifer LEE

Price Fixing

December 19, 2020 by Akshit GUPTA

Price fixing

This article written by Akshit GUPTA (ESSEC Business School, Grande Ecole Program – Master in Management, 2019-2022) presents the concept of Price Fixing.

Definition

Price fixing refers to an agreement between two or more participants operating in a market to collude and set the prices of an asset to serve their interest. In financial markets, price fixing refers to a form of market manipulation where the manipulators rig asset prices by inflating or deflating them to benefit from such practices. The main markets where price fixing takes place are for the following assets: interest rates, currencies and commodities.

The price fixing practice works in contradiction to the free and fair financial market forces and hampers public confidence in the markets. The asset prices should be decided by the natural market forces of supply and demand. Price fixing is banned and deemed illegal across global financial markets and stringent regulations.

In the United States of America, several laws have been implemented including the Sherman Act of 1890, which prohibits any form of price fixing or collusion among financial institutions to fix asset prices. The market manipulation tactic of price fixing comes with severe civil and criminal liabilities along with heavy penalties (see the example of the Libor scandal below).

Mechanisms

Price fixing can take different forms: collusion among market participants and window dressing.

Collusion among market participants

In such a form of price fixing, the market participants operating on the same side of a market often collude to set the buying or selling prices of an asset to manipulate the asset prices and serve their personal interest.

Window dressing

It is often carried out to give an artificial appearance to assets offered by certain companies, done by window dressing their creditworthiness and inflating the demand for the financial products offered.

Examples of price fixing

The Libor Scandal

Price fixing came to light when the Libor scandal was uncovered in 2012.

What is Libor?

Libor (London Inter-Bank Offered Rate) is a benchmark interest rate that is decided on the basis of the average inter-bank unsecured borrowing rates over a short-term period ranging from 1 day to 1 year. It is computed on a daily basis by the ICE Benchmark Committee working under Intercontinental Exchange, which is the overseeing body for Libor. Every day, at 11:00 AM, major banks from all across the world submit their borrowing interest to the ICE Benchmark Committee.

The Libor rate is used worldwide by major financial institutions to determine interest rates for different loans (for corporations to finance their investments and operational activities, for individuals to finance their consumption and the acquisition of their home, students to finance their studies, etc.) and the flows of financial derivatives.

How the Libor is calculated on a daily basis?
As seen in the picture, 18 major banks from all across the world sends their estimated unsecured borrowing rates on a daily basis at 11 AM to the ICE Benchmark Committee.

The committee then ranks the rates in a top to down order and eliminates the top and bottom 25% of the outliers from the list. The remaining rates are then averaged out and a five decimal Libor figure is issued at 11:55 AM on a daily basis. The committee issues the Libor in 5 currencies and with 7 different maturities, thus issuing a total of 35 different rates. The three-month US Libor is generally termed as the current Libor rate.

What happened?

A pool of banks colluded to artificially inflate or deflate the Libor rate over a couple of decades. The traders working at these banks submitted higher or lower rates to the ICE Benchmark Committee than they actually paid for unsecured short-term borrowings to manipulate the Libor on a daily basis. The price fixing was carried out to benefit traders and banks who traded financial derivatives to make profits by artificially inflating or deflating the Libor, which was the reference rate for such instruments.

The Libor scandal was unearthed in 2012 when a series of international investigation uncovered the price-fixing activities that were carried out by banks that formed a major part of the group of banks submitting their borrowing rates.

The Libor is used worldwide and the price fixing impacted millions of honest people around the globe, who took loans on inflated fixed Libor, and companies, which held derivative contracts.

The investigation led to fines amounting to $9 billion for the major banks that were involved in the scandal including Citi Bank, Barclays, JP Morgan Chase, Deutsche Bank and Royal Bank of Scotland. Many individual brokers and traders working for these banks were also sued by the regulatory bodies and charged with severe punishments and fines.

To know more about price fixing

The links mentioned below provides a comprehensive picture of how price fixing works in the financial markets and also provides a deeper view of the different scandals that happened using price fixing manipulation and shook the world.

About the Libor scandal

Wikipedia Libor Scandal

About the author

Article written in December 2020 by Akshit GUPTA (ESSEC Business School, Grande Ecole Program – Master in Management, 2019-2022).

Spoofing

February 16, 2025December 19, 2020 by Akshit GUPTA

Spoofing

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

Definition

Spoofing is a form of market manipulation in which a trader places a large order to buy or sell a financial asset with no intention of execution of the order but to create the illusion of a change in the demand and/or supply for the asset and eventually maneuver market prices. Upon receiving the market response, the trader then cancels his or her order and then benefits from other investors’ reactions by trading on the asset thus earning huge but illegitimate payoffs. Spoofing is usually based on algorithmic trading, which allows to trade in the market at high speed.

Spoofing Mechanism

Under spoofing, the manipulator places small buy or sell orders at shorter time frames near the best bid (or ask) price in a manner that the order has very less probability of being executed in the market. The orders are placed in such a manner that creates a misleading impression of increasing liquidity in the market. The orders help in creating artificial demand/supply for the asset in the market and lures other investor’s interest towards the asset. The manipulator doesn’t have the intent of executing the order and generally takes advantage of the price movements that might result from the misleading impression of increasing liquidity that the orders created.

Spoofing and financial regulation

According to the Financial Conduct Authority, “Abusive strategies that act to the detriment of consumers or market integrity will not be tolerated” and Spoofing, being a type of market manipulation, is an illegal practice in UK accompanying penalties. In U.S. too, as per the Dodd-Frank Act of 2010, Spoofing is unsanctioned by law. Despite the criminal liability, however, some institutions and individuals continue to get involved in it for undue gains.

Spoofing and high frequency trading

Spoofing has been around for decades as traders attempt to take advantage of other market participants by artificially inflating or deflating the price of an asset. Spoofing became more prominent in the 2010s with the rise of High Frequency Trading (HFT) which is a powerful, automated way to transact a large number of orders at very high speed. HFT provides opportunities for price manipulation through spoofing as orders can be placed and canceled very quickly. However, with time, it also attracted the notice of financial regulators and law enforcement officials as the following case will explain.

The ‘2010 Flash Crash’

On May 6, 2010, a dramatic decline was seen in the US stock market as the Dow Jones Industrial Average index fell more than 1,000 points in 10 minutes along with other stock market indexes such as the S&P 500 and Nasdaq Composite. Over one trillion dollars of market capitalization were wiped out, though 70% was regained back by the market before the end of the day. This dramatic event has been named the ‘2010 Flash Crash’.

Among a frenzy of speculation, the cause for this market crash was attributed to some big HFT bets on the Chicago Mercantile Exchange. London-based futures trader Navinder Sarao was actually spoofing in the e-Mini S&P 500 contracts.

The US Commodity Futures Trading Commission (CFTC) alleged that Sarao’s use of the dynamic layering technique contributed to an order book imbalance between buy-side and sell-side orders, which created downward pressure on prices in the market, especially given the size of orders he was placing. The CFTC said that Sarao made $879,018 in net profits in the e-Mini S&P 500 contracts that day.

Relevance to the SimTrade certificate

The concept of spoofing relates to the SimTrade certificate in many ways:

About theory

- By taking the Trade 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.

ETFs in a changing asset management industry

Definition

History

Types of ETF

Benefits of ETF

Risks

Passive management and the concept of efficient market

Related posts on the SimTrade blog

Useful resources

Academic resources

Business

About the author

Markets

What is a market?

Buyers

Sellers

Supply and demand

Financial markets

Market with a fixing procedure

Market with a limit order book

Relevance to the SimTrade Certificate

About theory

About practice

More about SimTrade

Quote stuffing

Introduction

The mechanism

Structure in US financial markets

Rules and Regulations

Real life example

Relevance to the SimTrade Certificate

About theory

About practice

Related posts on the SimTrade blog

About the author

Insider trading

Definition

Economic/moral effects of insider trading

Rules to respect for the top management team

Laws / Regulations for different Countries

USA

European Union (FRANCE)

Movies related to insider trading

Related posts

Examples for illegal insider trading

Ivan Frederick Boesky (1987)

Martha Stewart & ImClone (2001)

Robert Foster Winans (1984)

Raj Rajaratnam (2009)

Related posts on the SimTrade blog

About the author

Securities and Exchange Commission (SEC)

Introduction

Organizational structure

Administration of security laws

Sanctions and penalties

Relevance to the SimTrade Certificate

Related posts on the SimTrade blog

Useful resources

About the author

Regulations in financial markets

Definition of financial regulation

Banking regulations

Preventing systematic risk

Insider trading

Dispute resolution

Investor protection

Objectives of financial regulation

Structure of supervision

Organization of financial regulation in France

Organization of financial regulation in the United States of America

Movies about Financial Regulation In Financial Markets

Autorité des Marchés Financiers (AMF)

Introduction

Organizational Structure

Powers and responsibilities

Sanctions and penalties

Relevance to the SimTrade Certificate

Related posts on the SimTrade blog

Useful resources