Topic_03_E2(1).doc

Topic 3, Exercise 2 Electronic Markets One of the key features of financial markets is to bring investors and issuers of securities together in an efficient fashion. With the advent of technology, more and more market activity is being done electronically. There are numerous active electronic systems in the equity markets. Electronic markets have been a little slower to develop in the debt markets, although formation of new electronic markets has been growing at a rapid rate in the last few years. Electronic markets can be used for both primary market sales and secondary market sales. In a primary market sale, the issuing firm initially sells the security and receives the funds from the sale. In a secondary market sale, an investor decides to sell the security and sells it to another investor. The sale does not involve the issuer directly. The existence of secondary markets makes it easier and less expensive for issuers to sell their securities. CFO Magazine published a report entitled, E-Bonds: Will They Fly? The Bond Market Association has conducted a survey on developments of computer markets for fixed income securities. One example is Bondbook, which provides details on its system for trading bonds. Access and read the information on these sites and answer the following questions. 1. Which companies were identified in the CFO article as having sold bonds in a Dutch auction during the year 2000? A Dutch auction offers a single clearing price that is determined by taking the last bid price that will sell all of the securities. It is the same process that the Treasury uses to sell securities. Deutsche Bank sold $250 million of bonds on August 10, 2000. Bear, Stearns sold $700 in bonds on the same day. On August 15, 2000, Dow sold $300 million in bonds. 2. According to the eCommerce Survey, which areas of the fixed income markets appear to be experiencing the greatest growth in systems? The most rapid growth is taking place in the agency, corporate and municipal markets. The largest number of markets is in the Treasury market, but much of the growth in that market had taken place in earlier years. 3. Which firms are partners in BondBook? What advantages are claimed for this electronic market? BondBook, LLC is an independent company sponsored by market leaders Credit Suisse First Boston, Deutsche Bank, Goldman Sachs, Lehman Brothers, Merrill Lynch, Morgan Stanley, Salomon Smith Barney and UBS Warburg. The electronic marketplace established by BondBook provides: · Easier price discovery · Enhanced price transparency · Access to the liquidity of an active market