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KembaraXtra-Islamic Finance-Islamic Capital Market- Comparison of Secondary Markets
• Auction Market
– Operates in the secondary market.
– Trading takes place through competitive bidding and asking by participants.
– Buyers and sellers interact directly with each other.
– Prices are determined by the highest price a buyer is willing to pay and the lowest price a seller is willing to accept.
– Convergence of buyers and sellers is required for trading to occur.
– No brokers or dealers are needed to determine prices.
– Participants do not hold inventories of securities.
– No participant uses their own capital to provide liquidity.
– Liquidity is generally high when participation is active.
– Execution is fast once bids and offers match.
– Transparency is high because bids and asks are openly declared.
– Competition exists through simultaneous bids and offers.
– Commonly used for stocks.
– Securities are moderately standardised.
– Not used for IPOs.
– Example: New York Stock Exchange (NYSE).
• Dealer Market
– Operates in the secondary market.
– Trading occurs electronically through dealers.
– Investors trade with dealers, not directly with other investors.
– Prices are set through dealer-quoted bid and ask prices.
– Convergence of buyers and sellers is not required.
– Dealers act as principals in transactions.
– Dealers maintain an inventory of securities.
– Dealers use their own capital to provide liquidity.
– Liquidity is high, as dealers are always ready to trade.
– Execution speed is fast.
– Transparency is high because dealer prices are displayed publicly.
– Competition exists among dealers through price quotations.
– Dealers earn profits through the bid–ask spread.
– Commonly used for bonds, currencies, futures, options, and derivatives.
– Securities are moderately standardised.
– Rarely used for IPOs.
– Example: NASDAQ and foreign exchange markets operated by banks.
• Broker Market
– Operates mainly in the secondary market and sometimes in the primary market.
– Trading is successful only when buyers and sellers are matched as counterparties.
– Brokers act as agents, not principals.
– A dealer may act as a counterparty, but this is not the core feature.
– Convergence of buyers and sellers is required.
– The longer it takes to find a counterparty, the lower the liquidity.
– Brokers do not hold inventory of securities.
– Brokers do not use their own capital.
– Liquidity is moderate to low, depending on market conditions.
– Execution can be slow compared to dealer or exchange markets.
– Transparency is moderate.
– Brokers earn income through commissions.
– Commonly used for IPOs, new bond issues, and customised products.
– Securities are less standardised.
– Historically associated with traditional trading floors like Wall Street.
• Exchange Market
– Operates in the secondary market.
– Trading is carried out through automated electronic systems.
– Orders are matched using an order book mechanism.
– Buyers and sellers trade directly through the exchange platform.
– Trades occur only when prices match; otherwise, the trade is cancelled.
– There is no involvement of brokers or dealer intermediaries in matching trades.
– The exchange provides a centralised marketplace.
– No inventory of securities is held by the exchange.
– No use of own capital by intermediaries.
– Liquidity is very high, the highest among all market types.
– Execution is immediate once prices match.
– Transparency is very high due to visible order books.
– Used mainly for highly standardised securities.
– Common instruments include stocks, bonds, futures, options, and standardised contracts.
– Securities are characterised by contract or lot size, tick size, execution time, delivery terms, and quality standards.
– Example: Electronic stock and commodity exchanges.
• Auction Market
– Operates in the secondary market.
– Trading takes place through competitive bidding and asking by participants.
– Buyers and sellers interact directly with each other.
– Prices are determined by the highest price a buyer is willing to pay and the lowest price a seller is willing to accept.
– Convergence of buyers and sellers is required for trading to occur.
– No brokers or dealers are needed to determine prices.
– Participants do not hold inventories of securities.
– No participant uses their own capital to provide liquidity.
– Liquidity is generally high when participation is active.
– Execution is fast once bids and offers match.
– Transparency is high because bids and asks are openly declared.
– Competition exists through simultaneous bids and offers.
– Commonly used for stocks.
– Securities are moderately standardised.
– Not used for IPOs.
– Example: New York Stock Exchange (NYSE).
• Dealer Market
– Operates in the secondary market.
– Trading occurs electronically through dealers.
– Investors trade with dealers, not directly with other investors.
– Prices are set through dealer-quoted bid and ask prices.
– Convergence of buyers and sellers is not required.
– Dealers act as principals in transactions.
– Dealers maintain an inventory of securities.
– Dealers use their own capital to provide liquidity.
– Liquidity is high, as dealers are always ready to trade.
– Execution speed is fast.
– Transparency is high because dealer prices are displayed publicly.
– Competition exists among dealers through price quotations.
– Dealers earn profits through the bid–ask spread.
– Commonly used for bonds, currencies, futures, options, and derivatives.
– Securities are moderately standardised.
– Rarely used for IPOs.
– Example: NASDAQ and foreign exchange markets operated by banks.
• Broker Market
– Operates mainly in the secondary market and sometimes in the primary market.
– Trading is successful only when buyers and sellers are matched as counterparties.
– Brokers act as agents, not principals.
– A dealer may act as a counterparty, but this is not the core feature.
– Convergence of buyers and sellers is required.
– The longer it takes to find a counterparty, the lower the liquidity.
– Brokers do not hold inventory of securities.
– Brokers do not use their own capital.
– Liquidity is moderate to low, depending on market conditions.
– Execution can be slow compared to dealer or exchange markets.
– Transparency is moderate.
– Brokers earn income through commissions.
– Commonly used for IPOs, new bond issues, and customised products.
– Securities are less standardised.
– Historically associated with traditional trading floors like Wall Street.
• Exchange Market
– Operates in the secondary market.
– Trading is carried out through automated electronic systems.
– Orders are matched using an order book mechanism.
– Buyers and sellers trade directly through the exchange platform.
– Trades occur only when prices match; otherwise, the trade is cancelled.
– There is no involvement of brokers or dealer intermediaries in matching trades.
– The exchange provides a centralised marketplace.
– No inventory of securities is held by the exchange.
– No use of own capital by intermediaries.
– Liquidity is very high, the highest among all market types.
– Execution is immediate once prices match.
– Transparency is very high due to visible order books.
– Used mainly for highly standardised securities.
– Common instruments include stocks, bonds, futures, options, and standardised contracts.
– Securities are characterised by contract or lot size, tick size, execution time, delivery terms, and quality standards.
– Example: Electronic stock and commodity exchanges.
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