Securities Investor Protection - Essay Example

Security Trading Student’s Name Institutional affiliation Security trading Security trading forms part of the wider financial market which involves selling and buying of securities between economy subjects based on demand and supply. Security market comprises of bond markets, equity markets, and derivative markets where both professional and non-professional participants meet, and prices are specified. These markets consist of many professional participants such as market makers, brokerages, investment managers, broker-dealers, speculators, and those involved in the provision of infrastructures like securities depositories, and house clearing. The paper examines security markets, its professional participants, aims of financial regulations and the existing control structures. Security markets are significant in an economy to enhance transfer of real assets to financial ones, attract new capital, balance demand and supply through sustainable prices, and boost long and short-term investment (U.S. Securities and Exchange Commissions, 2016). Therefore, All the participants in security market come together to ensure: Commercial functionality through profit generation in the market. Sustainable market regulations are determined in the form of trade rules, priority determination, and contention control. Valid price determination to avoid securities mispricing and ensure a balance of supply and demand. The participants also ensure successful transfer of bonds and stock from willing sellers to buyers. Long-term and short-term security investment to generate profitability. Clearing Agencies They are charged with the responsibility of clearing activities in defining mutual obligation. They ensure collection, correction, and collation of vital information concerning security deals as well as preparing bookkeeping documents during securities delivery. Clearing agencies also consist of depositories responsible for warehouse activities. Their services include ensuring that security certificates are kept safely, and documenting and transfer of security rights. Depositories also provide safe keeping of securities’ owner's register. The task involves fixing, collection, storage, processing and provision of data in the register of securities’ owners (U.S. Securities and Exchange Commissions, 2016). Investment Advisor They constitute the firms or individuals operating the business of offering investment advice to investors. They also provide reports or in-depth analyses about securities to potential investors to guide them in decision making. Their services are however subject to compensation. Transfer Agents Transfer agents are responsible for tracking and recording changes of security ownership, issuing and cancelling certificates, keeping issuer’s security holder documents, and distributing dividends. They stand between security holder and the issuing company to ensure smooth and transparent transaction. Credit Rating Agencies They offer crucial information used to determine the creditworthiness or security of a company. They ascertain the quality of credit through grading. Credit ratings help distinguish between non-investment grade and investment grade. For instance, a top investing category may be represented by a triple A and non-investing grade may be represented by a double-B credit rating. Broker-dealer A broker- dealer is a firm or an individual operating the business of selling and buying securities. He/she can serve as a dealer or a broker based on the type of transaction. A brokerage operates as a dealer when it transacts for its account and as a broker when it operates on behalf of a client. Broker-dealers perform significant functions in a security market or financial industry at large (U.S. Securities and Exchange Commissions, 2016). They are involved in offering investment advice to customers, enhancing trade activities, supplying liquidity, publishing investment research, and generating capital for companies. The above definition of a dealer is insufficient in that it involves the activities of a typical trader rather than a dealer. This is because persons involved in sales of securities for themselves are referred to as traders and not dealers. A dealer can be identified for instance, if the individual or firm publicly advertises that it participates in making market in securities. Characteristics of a dealer include: Individuals involved in business transactions with the general public either institutional or retail. Persons letting others know that they participate in the business of selling and buying securities. Firms or individuals who make the market, or suggest the price for sales and purchases of securities. People involved in underwriting securities or selling group. Individuals writing derivative contracts in security trading industry. Firms or individuals offering services to investors including extending credit, handling securities and money and providing investment advice to investors. However, security market issuers cannot be considered as either brokers or dealer. They do not qualify as brokers because they are involved in securities’ selling for themselves and not for others. Additionally, they cannot act as dealers because they do not participate in buying and selling of securities as part or regular business for themselves. Some issuers buy securities from investors, and those operating markets effectively in their securities or those whose term can be altered. However, the employees or individuals assisting an issuer to sell its securities can be referred to as a broker especially when the issuer compensates them for their services. Market Maker A market making security is a designated security for tick rule or short selling exemption. A security market maker is thus responsible for offering a bid, providing enhanced liquidity and asking prices for Exchange Traded Funds (ETFs) to ensure continuity in security trading. The services of market makers are essential especially in the absence of active sellers and buyers leading to limited less liquid ETFs. Moreover, actively traded ETFs gain additional liquidity from security market makers when there are numerous task queues and orders at the bid. Aims of Financial Regulations Financial regulations are carried out especially in security market mainly to ensure protection for investors, reduce systemic risks and ensure transparency, fairness, and efficiency in financial markets. Investor Protection It is important that financial services sector be kept at high standards based on consumer protection and market conduct. Efficient market conduct among the financial services would help solve the high risks faced by investors (Securities Investor Protection Corporation Accessed, 2016). Securities regulations, in particular, would protect investors from manipulative, misleading or fraudulent activities such as front running, insider trading as well as misuse of client assets. Such regulations are aimed at compelling the securities market participants such as the brokers and dealers to comply with state requirements for conducting business. It aims at making accessible the neutral mechanism for addressing issues of misconduct in the market to the investors for appropriate action to be taken. Ensuring Fairness, transparency and efficiency in the market The regulations aim to provide fundamental operation rules and to license of exchanges to ensure fair securities market. The rules also aim to ensure efficiency and transparency in the market by providing equitable access to market facilities and information by the investor and other entities. Systemic Risk Reduction The regulations aim at minimizing the risk of failure of the financial market as well as averting the failure when it occurs to reduce spreading to other institutions. Through effective and efficient risk management tools it promotes comprehensive risk management by ensuring adequacy of financial requirements. Regulation Structure The financial management body consists of non-government or government organizations involved in monitoring and enforcing laws. The financial regulatory structure comprises: Supervisor of stock exchange: which is an exchange act for controlling exchange trading by ensuring that it is carried out correctly regarding execution, pricing process and trade settlement Supervision of listed companies: It is the responsibility of trading regulators to ensure that companies listed under market participant adhere to trading act provisions. Supervision of investors: Ensuring smooth operation of investment and asset management. Supervision of financial service providers and bank: The regulations under banking acts mitigates inappropriate developments interfering with bank operations. References Securities Investor Protection Corporation Accessed: April 6, 2016. Retrieved from: http://www.sipc.org U.S. Securities and Exchange Commissions. Market participants, Accessed: April 6, 2016. Retrieved from: http://www.Sec.gov/divisions/marketing/mrclearing.shtml North American Securities Administrators Association. The voice of state and provincial securities regulators. Accessed: April 6, 2016 Retrieved from: http://www.nasaa.org Read More