Secondary market liquidity definition finance
In the futures markets , there is no assurance that a liquid market may exist for offsetting a commodity contract at all times. Some future contracts and specific delivery months tend to have increasingly more trading activity and have higher liquidity than others. The most useful indicators of liquidity for these contracts are the trading volume and open interest.
There is also dark liquidity , referring to transactions that occur off-exchange and are therefore not visible to investors until after the transaction is complete. It does not contribute to public price discovery. In banking, liquidity is the ability to meet obligations when they come due without incurring unacceptable losses. Managing liquidity is a daily process requiring bankers to monitor and project cash flows to ensure adequate liquidity is maintained. Maintaining a balance between short-term assets and short-term liabilities is critical.
For an individual bank, clients' deposits are its primary liabilities in the sense that the bank is meant to give back all client deposits on demand , whereas reserves and loans are its primary assets in the sense that these loans are owed to the bank, not by the bank.
The investment portfolio represents a smaller portion of assets, and serves as the primary source of liquidity. Investment securities can be liquidated to satisfy deposit withdrawals and increased loan demand.
Banks have several additional options for generating liquidity, such as selling loans, borrowing from other banks , borrowing from a central bank , such as the US Federal Reserve bank , and raising additional capital. In a worst-case scenario, depositors may demand their funds when the bank is unable to generate adequate cash without incurring substantial financial losses. In severe cases, this may result in a bank run.
Most banks are subject to legally mandated requirements intended to help avoid a liquidity crisis. Banks can generally maintain as much liquidity as desired because bank deposits are insured by governments in most developed countries. A lack of liquidity can be remedied by raising deposit rates and effectively marketing deposit products. However, an important measure of a bank's value and success is the cost of liquidity. A bank can attract significant liquid funds.
Lower costs generate stronger profits, more stability, and more confidence among depositors, investors, and regulators. In the market, liquidity has a slightly different meaning, although still tied to how easily assets, in this case shares of stock, can be converted to cash.
Generally, this translates to where the shares are traded and the level of interest that investors have in the company. For illiquid stocks, the spread can be much larger, amounting to a few percent of the trading price. Liquidity positively impacts the stock market. When stock prices rise, it is said to be due to a confluence of extraordinarily high levels of liquidity on household and business balance sheets, combined with a simultaneous normalization of liquidity preferences.
On the margin, this drives a demand for equity investments. One way to calculate the liquidity of the banking system of a country is to divide liquid assets by short term liabilities. From Wikipedia, the free encyclopedia. For the accounting term, see Accounting liquidity.
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Indeed, I've spoken publicly about this very issue on a number of occasions, most recently less than two weeks ago at the annual SEC Speaks conference. Specifically, proposed rules under Regulation A-plus and Crowdfunding, and final rules under Rule c of Regulation D, would permit wide distributions of securities and also allow such securities to be freely-traded by security holders immediately upon issuance, or after a one-year holding period.
The combined results of these existing and pending rules is that companies will be able to sell their securities to a wider swath of the public and remain outside of the protections of the registration provisions of the Exchange Act for longer periods of time—perhaps even permanently. One idea that been suggested as a way to foster an active secondary market for small company stocks is for the Commission to approve one or more venture exchanges.
Venture exchanges are hardly a new idea, however, and prior efforts to establish them in this country have fared poorly. This created the impression that the ECM was populated only by unsuccessful companies. But, it is not the only source of guidance available to us. There have been other attempts to create viable markets for smaller companies. For example, many European stock markets have experimented with a junior exchange for companies too small to meet normal listing requirements.
Moreover, efforts in to establish a new venture exchange in the U. The Commission should attempt to determine the underlying causes of these problems and how best to address them. In this regard, we may need to ask some difficult questions.
For example, should venture exchanges be structured as dealer markets, rather than auction markets? Also, could venture exchanges enhance liquidity through batch auctions, rather than continuous trading?
How can the Commission, consistent with the Exchange Act, encourage traders to execute transactions on venture exchanges, rather than in off-exchange venues? Importantly, each of these questions presents the possibility of a trade-off between what is best for investors, and what is best for the exchange and its participating broker-dealers.
We must be mindful of these trade-offs as we review any proposals for new venture exchanges. We must also never lose sight of our core responsibility, which is to protect investors above all else. Investors will also need to understand what venture exchanges are—and what they are not. Investors may think venture exchanges will be the place to find the next Apple, Google, or Facebook. To be sure, venture exchanges can, and do, attract reputable and profitable companies.
The Commission needs to understand how best to address these risks before approving more of these exchanges. It also needs to make certain that investors understand these risks. Those who have studied venture exchanges believe that they are far more likely to succeed when they focus on investor protection and education. Venture exchanges that implement appropriate listing standards, enforce them conscientiously, and educate investors about the higher risks involved with small cap companies seem to do better.
For example, several academics have argued that some listing standards are more important than others. In particular, these experts believe that effective corporate governance standards and accounting requirements are essential to the viability of any venture exchange. In sum, venture exchanges are a possible solution to a looming problem and need to be considered. We should do so in a thoughtful and measured manner—fully cognizant of benefits, costs, and challenges—and always with the needs of investors at the forefront.
Rule 15c is widely used by broker-dealers to trade in unlisted securities. In order to use Rule 15c, broker-dealers who wish to publish a quote of unlisted securities, which will often be smaller issuers, are required to review and maintain certain information about the security and the issuer.
In addition, Rule 15c requires broker-dealers, prior to publishing quotes of these unlisted securities, to have a reasonable basis for believing that this information is accurate in all material respects and that it was obtained from reliable sources.
Specifically, investors need to have confidence that the quotes for these securities are fair and accurate. Without this confidence, a fair and liquid secondary market for these securities will not exist. In this regard, the use of current Rule 15c often fails to meet expectations of fair and accurate pricing, and often fails to result in reliable quotes.
As a result, broker-dealers need not review the information collected and reviewed by other broker-dealers before publishing a quote. Moreover, because the exception allows broker-dealers simply to rely on their own prior quotations, broker-dealers have no obligation to confirm that the information they initially relied on when they first published a quotation is still valid, no matter how old the initial quotation is.
The problems of Rule 15c have long been recognized.