In an AIPO the broker forms a new company to acquire the assets and then invites a small number of institutions to bid for shares in the new vehicle, rather than carrying out a more usual book building exercise. The acquisition vehicle is then floated on AIM. In effect, companies pre-sell their shares to institutions. The process was pioneered by Collins Stewart when it floated Northumbrian Water on AIM in 2003.
The outperformance of an asset against a benchmark that can be attributed to a factor, such as a fund manager’s added value, rather than to the general market or sector performance.
Before continuous trading commences at 08.00 there is a pre-market auction between 07.50 and 08.00 which is known as the ‘auction call process’.
A backwardation occurs when a bid is higher than an offer.
Beta is a measure of the sensitivity of a share to movements in the general market.
If a company’s share has a beta of 1, it tends to rise and fall in line with the market. A beta of less than one, say 0.8, would imply that if the benchmark index fell 10%, the stock would only fall 8%. Defensive stocks tend to have low betas, occasionally negative, whereas growth stocks tend to have higher betas.
A bank will often use a ‘book building’ exercise to gauge market sentiment for a placing, rather than attempting to estimate the right risk price itself by offering the shares at a fixed price.
Callable bonds are repackaged bonds issued by investment banks, generally yielding more than the underlying, with an embedded option giving the issuer the right of repurchase if triggered by certain events.
The normal share trading market, as distinct from derivatives markets such as CFDs, options or futures.
When the bid and the offer are the same price.
Buying shares and shorting an associated instrument, in other words the reverse of the normal approach. For example, shorting a convertible bond against buying the underlying shares.
There is often confusion over the closed period, which is commonly assumed to be the two months leading up to the publication of the interim or final results (if the company reports on a half-yearly basis). However, the closed period can be shorter if the time between the close of the financial year and the publication of results is shorter, and it is this period that counts as the closed period. If a company reports quarterly (common practice in the US), the closed period is one month, or the period from financial year-end until publication if shorter. Directors are prohibited from dealing during the closed period.
Where less liquid stocks, traded on SEATS Plus, have less than two market makers, the market makers are called committed principals.
Where an agreement exists between two parties to acquire and act collectively in regard to their shareholdings. Usually referred to in the context of takeovers and disclosure requirements.
Buying the convertible and selling short the underlying stock to take advantage of a relative mis-pricing. The reverse trading strategy can also be applied if the convertible is deemed to be overvalued in comparison to the underlying (see chinesing the spread).
The likelihood of two shares moving in the same direction at the same time. A correlation of +1 implies that two stocks would always move in the same direction, although not necessarily by the same percentage. A correlation of -1 would imply that two stocks always move in the opposite direction.
The settlement organisation for UK shares.
Shareholders unwilling to lose the benefits of directly holding share certificates, but wanting to benefit from the quicker settlement and other advantages of CREST, can elect to have a CREST Sponsored Membership.
When a company moves from junk to investment grade, or the reverse.
Where a stock rallies upwards on low volumes after a sharp fall, encouraging buyers and giving the impression of a rally, before the price resumes its slide southwards.
A market maker declares ‘dealer in front’ to a broker if he is currently quoting that stock to another member firm, or has executed a trade and has not had a reasonable opportunity to change his price.
Buying or shorting securities in companies that are typically encountering severe financial or trading difficulties, in the anticipation of a likely positive outcome or restructuring not reflected in the current share price.
Combining long and short holdings. Overall, portfolios may be net long or net short, depending on market conditions.
Long and short positions but net exposure will be zero.
Special situations, spin-offs, recapitalisations, corporate actions and share buy-backs. Based around predicting the outcome of a situation.
A transaction whereby an investment bank undertakes to exchange for a client, say, FTSE 100 futures contracts for FTSE 100 Index component stocks.
The futures contract (in a calendar series) that is the closest to expiring.
Stock lending and borrowing is governed by standardised legal agreements that have evolved over the years, but the industry is moving towards the Global Master Securities Lending Agreement (GMSLA) which standardises issues such as the treatment of corporate actions, defaults and non-delivery, under which the signing parties are legally bound.
The term used when an unfriendly shareholder, who is threatening a takeover, is paid to go away. Sometimes the stock is sold back to the company or another friendly shareholder.
A term often used in the context of IPOs: when the underwriter of an IPO is granted an option to sell additional shares if demand warrants it, or buy additional shares back to provide stabilisation for a limited period after trading commences. The name comes from The Green Shoe Company, which was the first to use this type of option. It can give the issuer an opportunity for price arbitrage during the stabilisation period.
Often an IPO stock will trade on a when issued basis (in the ‘grey market’) for a period of time before unconditional dealings commence.
A measure of the historic price changes of a security over a specific period of time. Defined as the standard deviation of the continuously compounded returns on the security. One standard deviation either side of a share price trend represents a band inside which the share price would be expected to remain 66% of the time.
A way of disguising bigger orders by submitting only part of a large order, which is automatically reloaded when the first part is executed. Member firms were executing these orders for some time, but there was always a risk of missing further execution between execution of the first order and subsequent re-loading of another order, however quick the firm’s computer driven system was. The London Stock Exchange introduced the iceberg feature to bring this functionality onto the actual order book itself, rather than having to be programmed into the firm’s connectivity with the SETS system. Effectively, the functionality is now available additionally at the Exchange level rather than just at the firm level. Iceberg orders are colloquially known as re-loaders.
Implied volatility can be calculated for an option and represents what the market thinks future volatility will be for the underlying stock or index.
Where a company expresses an interest in bidding for another company, without a full commitment to make a bid.
Market makers are able to deal between themselves anonymously using ‘inter-dealer brokers’. For years market makers had four different IDB screens on their desks, but the introduction of SETS and SETSmm has reduced demand and now only Cantor Fitzgerald handles the majority of screen-based inter-market deals.
A Level 2 screen indicates the depth of the market by displaying all the bids below (and including) the best bid, and all the offers above (and including) the best offer.
Correctly anticipating price movements in global markets using a top-down global approach to identify extreme price mis-valuations in stocks, foreign exchange, commodities and interest rates.
Market makers are obliged to offer continuous buy and sell prices during the mandatory quote period (between 08.00 and 16.30).
An order without a specific price attached, which will be executed at the best prevailing price, maximising the chance of execution.
Throughout the book there are references to broker-dealers and market makers. Both are member firms of the London Stock Exchange, but the latter have an obligation to make continuous two-way prices in the stocks that they are registered in.
All companies listed on AIM must have a Nominated Adviser, which will usually be the company’s broker. This is in place of the Main Market’s system of suitability criteria and regulations.
Stockbrokers have increasingly encouraged clients to use ‘nominee accounts’, where shares are held centrally in the electronic settlement service called CREST, which are cheaper and faster to use. There are around five million retail shareholders in the UK who hold their shares in dematerialised form in nominee accounts.
When shares are traded on the London Stock Exchange, the market makers have to quote a bid price and offer price at which they will deal. But the prices they quote, which are disseminated to brokers via the SEAQ system, only have to be honoured up to a certain size of order. The Normal Market Size defines what that figure is for each company.
POSIT is an Electronic Communications Network (ECN) for institutions bringing together buyers and sellers in an anonymous environment.
The regulatory news providers (since the London Stock Exchange monopoly was ended in April 2002) are now called ‘Primary Information Providers’ (PIPs). The principle PIPs are: RNS Newswire (London Stock Exchange), PR Newswire, Waymaker Wire News and Business Wire. PIPs in turn issue regulatory announcements to Secondary Information Providers (SIPs), like Bloomberg, Reuters, Thomson Financial and Investegate.
Some market makers can register as ‘reduced size market makers’, which means that they can display prices in a size below NMS.
A regulated service which ensures that price-sensitive information from listed and AIM companies, and certain other bodies, is disseminated to all RNS subscribers at the same time. The London Stock Exchange used to have a monopoly on RNS releases, but this monopoly was ended on 15 April 2002. The regulatory news providers are now known as ‘Primary Information Providers’ (PIPs), and all listed companies are contracted with at least one PIP service to comply with the obligations regarding the release of regulatory news under the Listing Rules.
Taking a simultaneous long and short position in two securities that are historically correlated, e.g. pairs trading.
The RSP network allows automatic instantaneous execution of smaller orders, normally under the Normal Market Size (NMS), thus removing the manual process of phoning a market maker. BZW, Merrill Lynch and Winterflood originally developed the RSP system to release market makers from having to deal with multiple small orders.
Reverse takeovers (or back door listing), are often structured so as to allow a much bigger business with an easy access to a stock market quotation.
A strategy often employed by hedge funds that anticipates the successful outcome of a takeover, merger, MBO or corporate action.
Recently developed by the London Stock Exchange in an attempt to co-ordinate the matrix of RSPs.
Rule 9 waivers are so called because, normally under Rule 9 of the Takeover Code, once a party has increased its stake above 30% in a company it is obliged to make an offer for the whole company.
Colloquial term for the two-year German government bond future.
Shell companies have little or no underlying business activities, usually consisting of just cash and, more importantly, a stock market quote. Shell companies are interesting as they provide an alternative route for a company wanting a listing on one of the exchanges. Instead of an expensive IPO, a company can simply buy an already listed shell company, and reverse into it.
The selling of a stock one doesn’t currently own, in the anticipation of a fall in the share price. Subsequently the position can be bought back, hopefully at a lower price, and the difference can be pocketed.
Large orders that are placed on the order book, but miraculously disappear as soon as they are in danger of actually trading.
The prevailing best bid and best offer prices (usually displayed in the yellow strip of a Level 2 screen). Also referred to as ‘Level 1’.
Where market makers shuffle a share price back on little or no volume after a sharp rise, to induce profit takers to sell stock, allowing them to close short positions at more favourable prices.
The Main Market of the London Stock Exchange.
A measure of a security’s propensity to go up and down in price. A volatile share is one which has a tendency to move violently through a great share price range. Mathematically, this is expressed as the standard deviation from the average performance. Generally speaking, the higher the volatility of a share, the higher the price of option/warrants on the share will be.
The calculation of current VWAP for any particular stock is: the total value traded during the day so far divided by the number of shares traded. In other words, for each trade, multiply the number of shares (shape) by the price at which it was traded, then add them all together and divide by the total number of shares traded. This gives an average price, weighted towards where the majority of the shares traded. VWAP has become one of the primary benchmark measures of trade execution, partly because of the greater awareness among institutional investors of the importance of trading costs.
Colloquial term for a worked principal agreement (WPA) trade.
In the UK a day is designated as ‘triple witching’ when index futures and options, and stock options all expire on that same day. The US now has ‘quadruple witching’ on days where index futures and options, and stock futures and options all expire on the same day.
An agreement by a member firm to act as principal to trade a SETS stock at some point in the future. The trade size must be at least eight times NMS and, once a WPA has been entered into, the dealer must attempt to improve either on the price or size agreed. The trade is colloquially known as a ‘whopper’.