Market Organization and Structure

How the financial system works: why people use it, the assets and contracts that trade in it, the intermediaries that connect buyers and sellers, long, short and leveraged positions (leverage ratio, margin return, margin-call price), order instructions, primary and secondary markets, market structures, and what makes a system well functioning and well regulated.

1. 1. What the financial system does, and what makes it work wellThe financial system moves money through time, moves risk to those willing to bear it, and swaps assets; it works well when markets are complete, cheap to trade in and priced on good information, and regulation keeps it that way.Free14 min
2. 2. Classifying assets and markets: securities, pooled vehicles, currencies, commodities and real assetsPractitioners sort what trades by what it is (security, currency, contract, commodity, real asset) and where it trades (spot or forward, primary or secondary, money or capital, traditional or alternative).15 min
3. 3. Contracts: forwards, futures, swaps, options and insuranceContracts are agreements to do something later; forwards lock in a price but carry counterparty and liquidity problems, futures fix both with standardisation and a clearinghouse, swaps repeat the exchange, and options give a right rather than an obligation.14 min
4. 4. Financial intermediaries and the services they provideIntermediaries stand between buyers and sellers: some match them directly (brokers, exchanges), some trade with them across time or place (dealers, arbitrageurs), some repackage cash flows and risks (securitisers, banks, insurers, funds), and some make sure trades settle (clearinghouses, custodians).15 min
5. 5. Long, short and leveraged positions: leverage ratio, margin return and margin callsA long position gains when prices rise, a short position when they fall; borrowing to buy multiplies both gains and losses by the leverage ratio, and the maintenance margin sets the price at which the broker calls for more equity.Video · 5 min15 min
6. 6. Orders: execution, validity and clearing instructionsEvery order states what, how much and which side; execution instructions say how to fill it, validity instructions when it may fill, and clearing instructions how it settles; market orders trade fast at uncertain prices, limit orders protect price but may not trade.Video · 6 min14 min
7. 7. Integrated cases: a leveraged loss, a hedge with a floor and a stop-limit buyIn a case, the exhibit gives you the inputs; the skill is picking the right lines: equity including the purchase commission, interest on the loan only, a put as a floor rather than a lock, and a stop-limit buy that caps the price only if it fills.16 min
8. 8. Primary markets, secondary markets and how trades are arrangedIssuers sell new securities in the primary market and investors trade them in secondary markets, whose liquidity lowers issuers' cost of capital; secondary trading is organised as call or continuous sessions in quote-driven, order-driven or brokered markets.Free15 min