CHAPTER VI

Market Structure and Trading

Mechanisms
PREPARED BY: KADUSALE, LEONISA
BATAL, MELISA C.
 MARKET
STRUCTURE
-The organization and characteristics of
market. It determines how goods and
services are exchanged between buyers and
sellers and the level of competition in the
market.

Prepared by Kadusale
 TRADING
MECHANISMS
-These are the methods and processes used to
facilitate the buying and selling of financial
instruments, such as stocks, bonds, currencies, and
commodities.
 TYPES OF MARKET
STRUCTURE
Perfect competition - characterized by a
large number of buyers and sellers,
homogeneous products, ease of entry and
exit, perfect information, and price takers.
Monopolistic competition - there are many
firms, but their products are differentiated.
Oligopoly - consists of a small number of large firms
dominating the market.

Monopoly -there is only one seller or producer of a product or

service.The monopolist has significant pricing power and can
set prices without fear of competition.
Duopoly - consists of two dominant firms in a market ,often
engage in fierce competition and can influence
prices.Examples include Boeing and Airbus in the aircraft
manufacturing.
Trading mechanisms can vary depending on the
market structure and the type of financial instrument
being traded.
 COMMON TRADING
MECHANISM
Auctions markets - are used in markets with a limited
number of buyers and sellers, such as art or antique
market where buyers and sellers interact directly to
determine prices.Common types include English auctions,
Dutch auctions, and sealed-bid auctions.Stock exchanges
like themarkets
Dealer NYSE use auction
- also mechanisms.
known as tradingpits or OTC markets,
involve the participation of intermediaries called dealers
who buy and sell securities on their own behalf.
Electronic trading (Electronic Communication Networks
(ECNs) - platforms have gained significance in modern
financial markets and allow investors to trade financial
instrument electronically, matching buy and sell order.

Dark pools - are private trading venues where large

institutional investors can trade large blocks of shares
anonymously.They are often used to minimize price
impact in the open market. Examples include Liquidnet
and Credit Suisse's Cross finder.
 Hybrid Markets - combine elements of both auction
and dealer markets. They allow for electronic trading
while maintaining the presence of market makers. The
Chicago Mercantile Exchange (CME) is an example.

Continuous vs. Periodic Auctions

Continuous trading mechanisms - like those in most stock

exchanges, allow for trades to occur continuously throughout
the trading day.

Periodic auctions - like those used in some ETFs, have set

intervals for trading.
MARKET STRUCTURE AND
TRADING MECHANISMS
INTERPLAY
1.Liquidity and Efficiency - Market structure influences
liquidity, which is the ease with which assets can be
bought or sold without affecting their prices
significantly.
2.Price Discovery - refers to the process of determining
the fair market price for an asset.
3.Transparency and Information Flow - The level of
transparency varies across market structures and
trading mechanisms.
4.Market Manipulation and Fairness - Market manipulation is
more challenging in auction markets with a large number of
participants and real-time pricing information. Dealer
markets may be more susceptible to manipulation if there
are fewer participants.
5.Innovation and Technology - Advances in technology have
led to the proliferation of electronic trading platforms,
changing how trading mechanisms operate.

6. Market Access and Investor Preferences - Different market

structures and trading mechanisms cater to different types of
investors. Institutional investors often prefer dark pools or
direct market access for large block trades. Retail investors
may favor the transparency of auction markets.
 Stock
-provideExchange
a platform for buying and selling securities,
enabling companies to raise capital and investors to trade
and invest in various financial instruments. Here are veral
important aspects to consider when discussing stock
exchanges.
Function and Purpose - Stock exchanges act as
intermediaries between buyers and sellers of securities.
They facilitate the orderly and efficient trading of stocks,
bonds, derivatives, and other financial instruments.
Role in Capital Formation - Stock exchanges play a crucial
role in capital formation, allowing companies to issue
stocks and bonds to raise funds for expansion
Market Regulation - Stock exchanges are subject to
stringent regulations to ensure fair and transparent
trading practices.
Liquidity and Price Discovery - Stock exchanges provide
liquidity, allowing investors to buy or sell financial
instrument quickly and without significant price impact.

Global Financial Integration - Stock exchanges are

increasingly interconnected globally.
Indexing and Benchmarking - Stock exchanges often
create and maintain market indices, such as the S&P 500
or FTSE 100, which track the performance of specific
groups of stocks, These indices serve as benchmarks for
measuring the overall market performance.
Technology and Electronic Trading -
Advancements in technology have revolutionized
stock exchanges. Electronic trading platforms
have replaced traditional trading floors, enabling
faster execution, increased transparency, and
access to real-time market data.
Investor Protection - Stock exchanges play a vital role
in safeguarding investor interests. They enforce strict
listing criteria to ensure that only reputable companies
can access the public markets.
Impact on Economy and Society - Stock exchanges
have a broader impact on the economy and society. By
mobilizing capital, stock markets support job creation,
 Philippine Stock Exchange
Philippine Stock Exchange (PSE) - the primary stock exchange in
the country and has been operating since 1927. It serves as a
platform for the trading of equities, exchange-traded funds
(ETFs), and other related securities. The PSE is governed by the
Securities and Exchange Commission (SEC) and has a significant
impact on the Philippine economy.
Philippine Dealing & Exchange Corporation (PDEx) - a fixed-
income exchange, PDEx specializes in the trading of bonds,
treasury bills, commercial papers, and other debt securities. It
provides an alternative market for investors looking to diversify
their holdings beyond equities. The PDEx offers a transparent and
regulated marketplace for debt securities, promoting efficient
price discovery and liquidity.
“PSE and PDEx provide a platform for investors to allocate their funds and
access various investment opportunities. Additionally, these stock exchanges
contribute to the overall economic”.
 INTERNATIONAL STOCK
EXCHANGE
-play a crucial role in the global economy by facilitating the buying
and selling of financial securities, such as stocks and bonds. They
provide a platform for companies to raise capital and for
individuals and institutional investors to invest in businesses,
contributing to economic growth and development.
History and Development - Stock exchanges have been around for
centuries, with the first modern stock exchange established in
Amsterdam in 1602. Since then, stock exchanges have
proliferated globally, with the major ones located in prominent
financial centers such as New York, London, Tokyo, and Hong
Kong.
 Size and Importance —International stock exchanges vary in terms
of their size and importance .The largest and most prominent
exchanges, such as the New York Stock Exchange (NYSE) and the
NASDAQ in the United States, the London Stock Exchange (LSE) in
the United Kingdom, and the Tokyo Stock Exchange (TSE) in Japan
have a significant impact on global financial markets. These
exchanges feature large market.
Listing Requirements and Regulations - Each stock exchange
has specific listing requirements that companies must fulfill
to trade their shares. These requirements often include
certain financial thresholds, corporate governance standards,
and periodic reporting obligations. And regulated by local
regulatory authorities to ensure fair and transparent trading.
 Types of international
Exchange
• Primary exchanges - such as NYSE or LSE trade stocks listed
by companies in an auction-style trading.
• Secondary exchanges - like NASDAQ which provide a platform
for electronic trading.
• Over-the-counter (OTC) markets - such as the OTC Bulletin
Board or Pink Sheets

Market Structure - International stock exchanges can have different

market structures. Some exchanges operate as centralized
marketplaces, where orders are matched and executed at a central
location. Others function as decentralized markets, with multiple
trading venues that facilitate order matching through electronic
networks
 Trading Mechanisms - Stock exchanges employ various
trading mechanisms to match buy and sell orders.
These include electronic trading platforms, auctions,
specialist systems, or market makers.
Technology - Advancements in technology have transformed
stock exchanges globally. Electronic trading platforms have
replaced traditional open outcry trading, leading to faster
transaction processing and increased liquidity.
Global Connectivity - Stock exchanges worldwide are now
interconnected, allowing investors to trade securities across
borders. Various trading platforms facilitate international
trades and provide access to foreign securities. This
globalization of stock exchanges has expanded investment.
Market Performance and Indices - International stock
exchanges are often tracked using market indices, such
as the S&P 500, FTSE 100, or Nikkei 225. These indices
provide a snapshot of overall market performance,
representing the movement of selected stocks.

Risks and Challenges - The international stock exchanges

are important support for the world financial system.
They have long-standing roles in helping businesses
raise capital, presenting investment opportunities, and
promoting economic expansion.
 Limitations

Stock exchanges are essential in modern financial systems

but face challenges such as market volatility, transparency
issues, speculation, liquidity risk. Regulatory challenges,
market manipulation, external shocks, high entry barriers,
wealth inequality, and ethical concerns. Market volatility can
lead to substantial losses, while transparency can hinder fair
trading. Speculation can drive investors towards short-term
profits, causing market bubbles and crashes. Liquidity risk
arises from limited trading volume in some stocks. Regulatory
challenges and external shocks can also complicate market
stability and fairness maintenance. Acknowledging these
limitations is crucial for engaging
TYPES OF OTC - Over-the-counter (OTC) markets are decentralized financial
markets where securities are traded directly between parties,
MARKETS offering flexibility, accessibility, and lower regulatory
requirements.
1.Equity OTC Markets
• Pink Sheets: Pink Sheets is a platform where companies that do not meet the listing requirements of
major stock exchanges are quoted. Stocks traded on Pink Sheets are often smaller companies with lower
liquidity and transparency.
• OTC Bulletin Board (OTCBB): OTCBB is another platform for trading small-cap and micro-cap stocks. It
offers regulatory oversight than Pink Sheets and is used by companies looking to eventually move to a
major exchange.
2.Debt OTC Markets
• Corporate Bonds: Many corporate bonds are traded over-the-counter. Companies issue bonds to raise
capital, and these bonds can be bought and sold by investors in OTC markets.
• Government Bonds: Some government bonds, such as U.S. Treasury securities, are also traded OTC.
These are considered among the safest investments.
3.Foreign Exchange (Forex) OTC Market
• The Forex market is one of the largest OTC markets globally. It involves the trading of currencies from
different countries. It operates 24/5 and has a decentralized structure with major bans, financial
institutions, and retail traders participating.

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4.Derivatives OTC Markets
• Interest Rate Swaps (IRS): IRS are agreements between two parties to exchange a fixed and variable
interest rate on a notional principal amount. They are used for hedging and speculating on interest rate
movements.
• Credit Default Swaps: CDS are financial instruments that provide insurance against the default of a specific
debt obligation, such as a bond or loan.
• Options and Swaptions: Various options and swaptions (options on swaps) are traded OTC. These provide
flexibility in managing risk and taking positions in the underlying assets.
5.Commodities OTC Markets
• The OTC commodities market includes the trading of physical goods such as oil, gold, and agricultural
products. These markets are used by producers, consumers, and traders to manage price risk and secure
future deliveries.
6.Cryptocurrency OTC Markets
• With the rise of cryptocurrencies lie Bitcoin and Ethereum, OTC markets for digital assets have emerged.
High-net-worth individuals and institutional investors often prefer OTC trades for large cryptocurrency
transactions due to reduced price slippage and increased privacy.
7.Structured Products OTC Markets
• Structured products, such as collateralized debt obligations (CDOs) and mortgage-backed securities (MBS),
are traded OTC. These complex financial instruments played a role in the 2008 financial crisis.
8.Private Equity OTC Markets
• Private equity investments, such as shares in startups and venture capital, are often traded OTC. These
transactions involve private negotiations and are not publicly disclosed. BATA
9.Precious Metals OTC Markets
• Markets for precious metals like gold and silver are largely OTC. Participants include banks, refiners, and
individual investors looking to buy and sell physical metal or derivative contracts.
10.Real Estate OTC Markets
• OTC markets for real estate involve the direct buying and selling of properties, often between individuals,
investors, and real estate professionals. Real estate transactions may not always involve a formal exchange and
are subject to negotiation.
11.Energy OTC Market
• OTC markets for energy products, such as natural gas and electricity contracts, are used by producers,
suppliers, and consumers to manage their energy needs and price risks.
12.Collectibles and Art OTC Markets
• Collectibles like rate coins, stamps, and artwork can be traded OTC through dealers, galleries, and auctions.
These markets rely heavily on expertise in assessing the value of unique items.
13.OTC Markets for Unique Financial Instruments
• Some OTC markets deal with highly specialized financial instruments, like catastrophe bonds (CAT Bonds) used
for insuring against natural disasters or weather derivatives, which are tied to weather-related events.
14.Structured Notes and Certificates of Deposit (CDs) OTC Markets
• Structured notes and OTC CDs are customized debt securities with embedded options or features designed to
suit specific investment objectives. They are offered by banks and financial institutions to cliets seeking tailored
investment solutions.
15.OTC Markets in Developing Countries
• In many emerging and developing economies, OTC markets play a crucial role in facilitating transactions when
formal exchanges may be less developed. These markets can involve a wide array of financial assets and BATA
16.OTC Markets for Intellectual Property Rights
• OTC markets also exist for the buying and selling of intellectual property rights, such as patents, copyrights, and
trademarks. These transactions often involve negotiations and legal considerations.
17.OTC Markets for Loans and Credit Derivatives
• Loans, especially those involving complex structures or distressed assets, can be traded OTC. Additionally, credit
derivatives lie credit default swaps (CDs) are used to hedge or speculate on credit risk.
18.OTC Markets for Structured Settlements
• Structured settlements often result from legal settlements or insurance claims. In OTC markets, individuals holding
structured settlements can sell future payments to investors or financial institutions for a lump sum.
19.OTC Markets for Pre-IPO and Restricted Stock
• Pre-IPO shares and restricted stock (shares subject to trading restrictions) can be traded OTC. This allows early
investors and employees of private companies to potentially monetize their holdings before the company goes public
or restrictions lift.
20.OTC Markets for Foreign Securities
• Some OTC markets specialized in the trading of foreign securities that are not listed on domestic exchanges. This
allows investors to access international markets and diversify their portfolios.
21.OTC Markets for Private Debt and Loans
• Private companies and individuals may engage in OTC markets to raise capital through the issuance of private debt
or loans. These transactions may involve institutional investors, private equity firms, or peer-to-peer lending
platforms.
22.OTC Markets for Intellectual Property and Royalties
• Beyond patents and copyrights, OTC markets can also facilitate the buying and selling of royalties from
intellectual property, such as music or book royalties.
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C. Auction
Systems
An auction system is a method of buying and selling goods or services through a competitive
bidding process. It can be either in-person or conducted online, and involves participants
placing their bids to win the item being auctioned.

Types of Auction Systems:

1.English Auction 2.Dutch Auction 3.Sealed-Bid 4.Vickrey Auction

This is the most well- In contrast to the Auction Also known as a
known type, where English Auction, Participants submit second-price sealed-
participants openly the price starts their bids in a bid auction,
bid against each high and gradually sealed envelope or participants submit
other, with the item decreases until a online, without sealed bids, but the
going to the highest participant accepts knowing the bids of winner pays the
bidder. the price and others. amount of the
makes a bid. second-highest bid.

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ADVANTAGES
USING AUCTION
SYSTEMS:
1.Efficient Pricing 2.Transparency 3.Wide Reach 4.Quick Sales
Auctions allow goods Auctions provide a Online auction Auctions are often
or services to be sold transparent and platforms have used when sellers
at their true market open process, extended the reach want a quick sale,
value, as allowing of auctions, allowing as items can be sold
participants compete participants to participants from within specific
to secure the item. understand the around the world to timeframe.
market dynamics bid on items.
and make informed
decisions.

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LIMITATIONS AND
CHALLENGES ASSOCIATED
WITH AUCTION SYSTEMS:
1.Limited 2.Fraud and 3.Risk Overpayment
Participation Manipulation In highly competitive
Some potential buyers Auctions have the auctions, participants
or sellers may be potential for fraudulent may get caught up in the
excluded from activities, such as shill heat of the bidding and
participating in certain bidding (the practice of end up paying more for
auctions due to various artificially increasing the an item than its actual
reasons such as lack of bids) or bid value.
information, access to manipulation.
bidding platforms, or
understanding of the
auction process.

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 Auction Systems in the
Auctions systems in the Philippines have a long history, tracing back to the Spanish colonial period, Initially
Philippines
used to distribute land, property, and public offices, they became a significant part of the Philippine
economy, generating revenue for the Spanish government. While auctions served a vital economic role,
they also reflected darker aspects of the era, including the sale of slaves. Today, auctions remain a
prevalent method for buying and selling goods across various industries in the Philippines.
VARIOUS ASPECTS OF AUCTION SYSTEMS IN THE COUNTRY:
1.Governmen 2.Auctions 3.Agricultural 4.Banking 5.Charity
t Auctions Houses and Commodities Sector Auctions
Public auctions Online These auctions Auctions are Charity auctions in
are commonly Platforms create a also prevalent in the Philippines are
conducted by These auction competitive the banking gaining popularity
government houses act as environment and sector, for raising funds
agencies to sell intermediaries establish fair prices especially for for various causes,
off surplus or between sellers for the agricultural foreclosed involving donated
seized assets, and potential commodities. properties or goods or services
such as vehicles, buyers, providing benefitting both non-performing from individuals or
equipment, or real a trusted platform
farmers and assets. businesses.
estate properties. and expertise in
consumers.
appraising and
marketing the
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items.
Auctioneers in the Philippines
The following examples are not endorsements, and it is recommended to conduct research and due
diligence before participating in any auctions:
• Paul C. Perez Auctions - Established in 1997, they specialized in auctioning high-end luxury item
such as art pieces, jewelry, memorabilia, and rare collectibles.
• Benitez Auctions - Known for conducting estate auctions, they handle various items like antique
furniture, paintings, vintage cars, and other valuable assets.
• MJD Public Auction - They specialized in government auctions, selling properties seized by
various government agencies, including houses, lots, vehicles, and other assets.
• HMR Auction Services - As one of the leading auction companies in the country, they conduct
liquidation auctions for surplus and excess inventory from major retailers, offering a wide range of
products at discounted prices.
• Besa’s Auction House - With over 40 years of experience, they hold regular auctions featuring
different types of items such as antiques, artwork, coins, and vintage items.
• Prime Auction New York - Primarily focused on luxury goods, they auction a wide range of items
including designer bags, watches, jewelry. and high-end fashion items.
• Philauctions.com - An online auction platform that caters to various items such as real estate
properties, vehicles, machinery, and equipment, providing convenience and accessibility for
buyers and sellers nationwide.
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Types of Auctions, with origins in ancient Babylon and Greece (where they were
used to sell women and spoils of war, respectively), became
Auction - standardized in 17th and 18th century Europe. Sotheby’s, established
in 1744, exemplifies this evolution. Auctions are a competitive bidding
Systems process for buying and selling goods or services, with various systems
designed to maximize seller revenue or buyer efficiency.
1.English Auction
Starts with a low price, gradually increasing until only one bidder remains. Transparency allows bidders
to see competitors’ actions. Commonly used for art, antiques, and collectibles.
2.Dutch Auction
Begins with a high price that gradually decreases until a bidder accepts. The first bidder to accept wins
at that price.
3.Sealed-Bid Auction
Bidders submit private bids; the highest bidder wins at their submitted price. Common in government
contracts, real estate, and high-value art.
4.Vickrey Auction (Second-Price Auction)
The highest bidder wins but pays the second-highest bid. Encourages truthful bidding and minimizes
winner’s regret; used in online advertising and spectrum auctions.

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5.Reverse Auction
The buyer specifies the item; sellers compete to offer the lowest price. Common in
business-to-business procurement.
6.Silent Auction
Bids are written down; highest bidder wins. Often used for charity or items with
sentimental value.
7.Multi-Round Auction
Multiple bidding rounds eliminate the lowest bidders until a winner remains. Used in
complex procurement situations (e.g., government contracts) to ensure competitive
pricing.
8.Combinatorial Auction
Allow bidders to bid on packages or combinations of items, not just individual
items. The auctioneer then allocates items to maximize overall value. These
auctions ae useful when items have complementaries or synergies, such as in radio
spectrum allocation or transportation logistics.

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D. Clearing and
Settlement
Clearing and settlement are crucial processes in financial markets ensuring
the efficient and safe transfer of assets and funds between buyers and sellers
of financial instruments. Clearing involves validating, confirming, and matching
trades, typically done by a clearinghouse acting as an intermediary between
buyer and seller, guaranteeing performance and fulfilling contract terms. This
reduces counterparty risk through novation (the clearinghouse becomes the
counterparty to all trades). Settlement is the process of delivering financial
instruments or transferring funds according to agreed terms, ensuring
ownership transfer securely and promptly. Technology, like electronic systems,
significantly improves the speed and efficiency of these processes.

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Clearing and Settlement in the
Philippines
In the Philippines, clearing and settlement are crucial for the final
completion of financial transactions in the stock market. These processes
ensure buyers receive securities and sellers receive funds. Multiple entities
are involved, including the Philippine Stock Exchange (PSE), the Philippine
Depository & Trust Corporation (PDTC), custodian banks, and settlement
bank. The PSE’s trading system matches trades, and the PDTC then checks
security availability and net settles transactions, streamlining the process.
The largely computerized clearing and settlement process operates on a T+2
basis, meaning transactions are cleared and settled two days after the trade
date.

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Types of ClearingClearing and settlement are crucial processes in financial
markets that ensure the efficient and secure transfer of
- and Settlementassets and funds between buyers and sellers of financial
instruments. These processes help mitigate counterparty
risk, reduce operational errors, and maintain the integrity
1.Physical Delivery Settlement of the financial system.
• Stock Markets: In traditional stock markets, physical delivery settlement involves the
transfer of actual physical stock certificates from the seller to the buyer.
• Commodity Markets: Physical delivery is still prevalent in commodity markets, where the
buyer takes possession of the physical commodity from the seller.
2.Book-Entry Settlement
• Stock Market: Securities are held electronically in dematerialized or electronic book-entry
form. Ownership change are recorded electronically in the central securities depository
(CSD), and funds are transferred between the buyer’s and seller’s accounts.
• Bond Market: Bonds are typically settled in book-entry form, where ownership is recorded
electronically.
3.Cash Settlement
• In some markets (especially derivatives and options), profit or loss is settled in cash, without
physical delivery of the underlying asset.
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4.Central Counterparty (CCP) Clearing
• A central counterparty acts as intermediary between buyer and seller, reducing
counterparty risk.
5.Netting
• Multiple trades between two parties are consolidated into a single net position, reducing
the number of transactions and capital required for settlement. This can occur on a gross
or multilateral basis.
6.Real-Time Gross Settlement (RTGS)
• Transactions are settled individually and immediately upon submission.
7.Delivery versus Payment (DVD)
• The transfer of securities occurs simultaneously with the risk of one party delivering
assets without receiving payment.
8.Payment versus Payment (PVP)
• Used in foreign exchange markets to ensure simultaneous exchange of one currency for
another, reducing currency exchange rate risk.
9.Hybrid Systems
• Some markets use a combination of settlement methods depending on the asset and
participants.
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10.Regulatory Oversight
• Countries regulate clearing and settlement, setting rules and standards for safety
and efficiency.
11.Counterparty Risk Mitigation
• Clearinghouses act as intermediaries to mitigate risk; if one party defaults, the
other is protected.
12.Collateral Management
• Participants post collateral (cash, securities, etc.) to cover potential losses.
Management is crucial for determining he amount and ensuring availability.

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Thank You