Regulatory Principles Of Dynamic Financial System - Research Paper Example

Regulatory Principles Of Dynamic Financial System Introduction Financial markets are a complex field of money exchanges that guides decision making among financial directors and shareholders. It is notable that the financial directors and shareholders are able to make critical economic decisions within the large and intricate fiscal environment (Roberts, 2008). The environment whey they make decisions is inclusive of the financial markets, financial institutions, taxation and legal instruments, and the nature of the region’s economy. Furthermore, the financial atmosphere both determines the existing monetary substitutes and influences the outcomes of many decisions (Wójcik, 2009). Consequently, it is significantly important that shareholders and financial directors have an excellent comprehension of the financial setting in which they conduct their activities (Roberts, 2008). It is worth noting that a strong financial environment plays a critical role in economic expansion and prosperity. The many corporations increasing funds to finance investment overheads as well as shareholders saving to amass resources for future expenses require stable financial markets (Roberts, 2008). The rapid technological advance has played a critical role in the financial markets expansion. It is presently possible to undertake cross border financial exchanges in a highly efficient financial environment. The role of trust in the financial markets and institutions cannot be overemphasised (Roberts, 2008). This is because transactions undertaken throughout the financial markets and institutions are based on trust that everyone is up to the good of the other (Roberts, 2008). It is regrettable that much as technological expansion and globalization has augmented the efficiency, reports have emerged of mega scandals in the financial markets around the globe with the potential of crippling state or global capital raising mechanism as well as dreadful ramification on the economy (Roberts, 2008). Scandals in the financial markets such as the LIBOR incident emerge as one of the worst with the potential of killing the industry. The other notable scandals in the financial markets include the JPMorgan incident and the Facebook initial public offer. This paper seeks to discuss various aspects of the financial markets such as what it means and what it does in spurring economic growth. This paper will base the discussions around the thesis statement “the effects of technological expansion and globalization on the global financial market” with particular attention to the London financial market. Further, the paper will highlight the crises that have happened in the London financial market and its association with globalization and technological growth. Finally, it provides a summary of the key issues discussed in the paper. Abstract This paper set out to discuss diverse aspects of financial markets. It has recognized that strong financial environment promotes economic growth in any state. The financial market also plays a critical role in the economic environment since it enables major firms to obtain funds for facilitating investments. The progress in technology, telecommunications and globalization has promoted the growth of financial markets. Indeed, the expansion has taken place in the financial markets within national boundaries and internationally. These instruments have also promoted the efficiency, liquidity, and integrity of the financial activities. The thesis for this paper was that much as technological progress and globalization has promoted in the financial markets, reports have also emanated showing that these instruments have also presented crisis in equal magnitude and measure. Research in this paper has established that computers glitches have had serious ramifications in the London Stock Exchange (LSE). This has taken place because of network failures or technical challenges. The technical incidents resulted in the suspension of trade for hours. The challenges faced by the LSE forced the company to change their technology on several occasions. Globalization has also presented varied threats and risks in the financial markets including the absence of transparency. This has increased cases of assumption among investors. Furthermore, the financial markets in diverse nations access information differently. This is a danger because it enhances negative choices of investment and a lack of responsiveness among the investors in scenarios when the financial institutions face bankruptcy. Therefore, this paper authoritatively suggests that the application of technological tools in the financial markets have enabled the institutions to excel. However, on the other hand, they have also presented worrying trends of technological and computer failures resulting in the suspension of trade for hours. Financial Markets It is notable that people and institutions interested in borrowing money and those who have excess funds normally meet in the financial markets (Roberts, 2008). The notion “markets” is an indicator that there are many financial markets in well functioning economies. However, the discussions of how these two groups of people interact (those borrowing and those having excess funds) in the financial markets require some interrogation (Roberts, 2008). The following section discusses the capital formation in the capital markets. FIGURE 1 Capital Formation Process 1. Direct Transfers Securities (Stocks or Bonds) Business Savers Dollars 2. Indirect Transfers through Investment Bankers Securities Securities Business Investment Banking Savers Houses Dollars Dollars 3. Indirect Transfers through a Financial Intermediary Business’s Intermediary’s Securities Securities Business Financial Savers Dollars Intermediary Dollars The interaction between the group who needs to borrow money and the group who have excess funds to give out in the financial markets leads to capital formation (Roberts, 2008). Capital Formation in stable financial markets, the flow of capital from those who are providing to those who require it is always consistent and efficient. The transfer of capital normally occurs through three major strategies including direct transfers, transmission through investment banks, and transfer through intermediaries (Roberts, 2008). Direct transfer facilitates the movement of money and securities through the sale of stocks or bonds by diverse businesses to savers without the involvement of third parties such as financial institutions (Beck, Kunt and Levine, 2010). In this case, the selling business is responsible for moving the sold securities to the savers. The savers upon receipt of the securities also provide the money. The transfers conducted through investment banks are done by underwriters who underwrites the issue. The underwriter facilitates the provision of securities (Roberts, 2008). This happens when a business sells its securities to the intermediary bank, which eventually sells them to savers. The investment bank acts a conduit through which the money provided by savers and securities sold by businesses. The investment banks sometimes buy securities and hold them for a while to sell to savers later (Roberts, 2008). Transfers also take place through financial intermediaries including banks or mutual funds institutions. The intermediaries receive money from savers and offer them securities. The intermediaries then utilize the money to acquire additional business securities (Roberts, 2008). Intermediary’s participation in the financial markets enhances the effectiveness of funds and capital markets. Definition of Financial Markets A financial market is any marketplace where financial resources are traded. They enable the transfer of financial assets issued in the past as well as facilitate the process of borrowing and loaning through enabling the sale of freshly issued financial resources. All stable economies have financial markets for example the New York Stock Exchange. The financial markets thrive in financial environments with strong financial institutions (Roberts, 2008). Financial institutions include all establishments, which acquire profits from transactions of monetary assets. The notable examples of financial institutions include discount brokers and highly multifaceted institutions such as Merrill Lynch (Roberts, 2008). Financial markets have diverse functions they play in any financial environment. First, the financial markets plays a critical in borrowing and loaning mechanisms through allowing the movement of purchasing power between individuals interested in investing or buying (Roberts, 2008). They are also critical in cases of price determination in which they provide instruments for setting prices of freshly introduced assets and the existing assets. Thirdly, financial markets aggregates and coordinates information sharing through gathering crucial trading processes including the flow of transferred funds from lenders and those obtaining loans (Lee and Chou, 2012). Fourthly, they facilitate risk sharing between investors and lenders. Fifthly, financial markets facilities reselling of financial assets or their insolvency to ensure that participants enjoy liquidity (Galariotis and Giouvris, 2007). Lastly, they augment efficiency in the financial environment by controlling and diminishing transaction, transfer, and reporting costs. Types of Financial Markets There are diverse types of financial markets including spot markets where financial assets are purchased or sold immediately they are delivered to the marketplace (Roberts, 2008). The futures markets enlist the involvement of financial markets participants in discussing and agreeing now to sell certain financial assets at some future date. In the money markets, the borrowing and loaning of funds normally occur for short durations such as less than one year (Roberts, 2008). The capital markets are majorly concerned with stocks and middle or long-term debts lasting over one year. The primary markets are common among the corporate organizations where they raise capital through mechanisms such as issuance of fresh securities (Roberts, 2008). Finally, secondary markets normally trade the securities issued by corporate organizations in the primary markets. The trading of the securities normally takes place among financial markets participants (Lee and Chou, 2012). Effects of Technological Growth at the London Stock Exchange (LSE) The LSE financial market is divided into four major groups including the main market, AIM, international order books, and Professional Securities Market Statistics. The global evolution of financial markets has created impacts in the marketplace (Roberts, 2008). The main market at the LSE caters to the needs of superior companies requiring massive capital outlay to fund their growth. The main market presents the major companies with opportunities to access the greatest level of a pool of resources and benefit from augmented profile and liquidity (Galariotis and Giouvris, 2007). The High Growth Segment (HGS) on the other hand, provides corporations the chance to fund their expansion as they await official listing. The expansion of financial systems globally has certain links with advance in the technological application and effects of globalization (Esqueda, Assefa and Mollick, 2012). At the LSE, the most recent development in the monetary markets emerged from diverse impacts in the marketplace. The notable ones are technological growth and regulations (Ho, Palacios and Stoll, 2013). The automation of trading has escalated the creation of liquidity. Technological expansion has provided traders in the financial markets with the opportunity to conduct their activities in real time (Roberts, 2008). Furthermore, traders in the financial markets have taken advantage of technological expansion to minimize trading risks (Esqueda, Assefa and Mollick, 2012). The technological growth and its application in automated trading have positively influenced market efficiency and integrity (Lee and Chou, 2012). Technology has enabled LSE trading activities to increase in speed thus ensuring higher competition for liquidity (Galariotis and Giouvris, 2007). The company’s Multilateral Trading Facility (MTF), which is managed by LSE group, has provided traders with the opportunity to trade in the financial successfully at almost 96% success rate. Other trading specialists have reported that the advanced application of technology at LSE offer the company undue advantage over other trading companies running on lower technological platforms (Lee and Chou, 2012). LSE has therefore played a critical role in the stabilisation of market prices thus eliminating volatility, which was originally associated with low-quality technological platforms (Roberts, 2008). Foresight research has shared the preliminary indicators of the significance of technology on the financial markets. The successes of the LSE are evident in the daily trading of the company. The result of the daily trading for the company over the last five days indicates growth and consistency in the marketplace (Lee and Chou, 2012). Many shifts have occurred in the financial markets over the last few years. The growth in technology including processors and telecommunications as well as the globalization of financial institutions has resulted in deregulation (Esqueda, Assefa and Mollick, 2012). The outcome of this development has been enhanced competition in the financial markets globally. The two factors have indeed augmented global competition and intercontinental marketplace networks (Roberts, 2008). It is notable that these developments have been extolled for the impact they have created in the marketplace. Conversely, they have presented massive challenges to the financial markets policy makers. It has been alleged that inconsistencies in the financial markets are rendering national economies defenseless (Roberts, 2008). This is because the markets expose economic mechanisms in a country to shocks associated with unforeseen changes. This has put the national central banks under pressure to generate regulations applicable in evaluating and diminishing risks, financial markets predispose local economies (Ho, Palacios and Stoll, 2013). It is notable that such moves have been warranted by the need to cushion the economies to unexpected shocks. The local economic mechanisms and institutions are also susceptible to disruptions that emerge from the massive capital that are transferred across the globe. The disruption might take place because of unexpected shifts in interest and trading rates (Lee and Chou, 2012). The challenges faced by financial markets and financial institutions remind stakeholders on the need to enhance interaction among market regulators at global levels (Beck, Kunt and Levine, 2010). Achieving a coordinated and regulated financial market has been untenable because of the nature of the individual markets. The varying national financial activities and security markets and unwillingness among diverse nations to abandon their economic policies have presented massive challenges (Antoniou, Galariotis and Spyrou, 2006). The regulators have developed a consensus that financial markets require monitoring by a global team. Globalization has also presented a new trend in the financial markets linked to the use of derivatives in trading securities (Lee and Chou, 2012). It is noteworthy that derivatives include securities whose worth is consequentially obtained from the fee of other essential asset. Globalization has caused the marketplace for derivatives to augment extraordinarily (Esqueda, Assefa and Mollick, 2012). This development has offered companies with more opportunities as well as renders them susceptible to external risks. Derivatives are applicable in lessening risks or for speculation (Esqueda, Assefa and Mollick, 2012). The Crises that have happened in the London Financial Market and the Association with Technology and Globalization The celebration that globalization and technological advancement have expanded the financial markets has received criticism because they have also presented diverse crisis to the industry (Esqueda, Assefa, and Mollick, 2012). Critics argue that much as they have enhanced efficiency, liquidity, and integrity they have been responsible for some unexplained disruptions in the marketplace. This section discusses the crises that London Financial Markets have experienced due to technological and technical challenges (Fletcher, 2011). It is notable that computers glitches have caused the closure of LSE for hours in the past. Indeed, LSE has faced a myriad of technical problems that have affected trading (The Associated Press, 2011). The most notable technical problems have caused the closure of the marketplace for several hours (Fletcher, 2011). The technical incidents resulted in the suspension of trade for eight hours midway in 2008. The LSE trading at the time was using TradElect, which they changed after similar incidents. LSE faced continued challenges with the platform that they adopted Millennium IT platform, which was running on Linux. The change of the technical platform resulted in back and forth arguments that put the marketplace into uncertainty (Fletcher, 2011). In the month of October 2009, LSE indicated that they were planning to acquire a different trading platform called Turquoise Trading. The targeted trading facility enjoyed a stronger technical system, which was already renowned in the financial marketplace (Fletcher, 2011). Turquoise trading was operated on stronger technological platform that LSE. In the same period, LSE faced a technical challenge in the data management system, which led to one-hour outage (Collett, 2004). It is notable that although one hour is such a short period, for investors in the financial markets it means lifetime. LSE also faced another challenge when a server software malfunction stopped trading activities. The challenges did not stop there; LSE faced another backlash when networking problems led to halting of trading activities. It is notable that LSE at certain points admitted easily to traders that they were facing technical problems (Fletcher, 2011). The periods when LSE experienced these challenges have been argued to disrupt financial trading at key times of the day. The acknowledgement that sometimes their technical personal are unable to comprehend the problems with the servers only serves to worry traders (Fletcher, 2011). The personnel have also indicated at certain times that their technical systems experiences suspicious network issues. Globalization has also presented diverse challenges and risks in the financial markets (Esqueda, Assefa and Mollick, 2012). The notable include absence of transparency, which emanates from the asymmetry strategy. This has increased cases of speculation among investors. Furthermore, the financial markets in national locations access information differently. This is a danger because it enhances negative choices of investment and a lack of responsiveness among the investors in scenarios when the financial institutions face bankruptcy (Beck, Kunt, and Levine, 2010). The movement of capital around the globe into financial markets with minimal values is normally exposed to shocks associated with financial crises in the international economies. This is because many international financial market traders trading in developing nations frequently withdraw their shares in such markets whenever there are economic crises (Roberts, 2008). The trade in foreign currencies sometimes cause crisis in the financial institutions whenever there are challenges in the marketplace. Globalization has also promoted monetary liberalization, which limits the number of trading instruments in the financial institutions (Kaminsky and Schmukler, 2008). The result of this has been the credit booms, which are frequently taken care of by foreign currencies and bodies. The credit booms are presently a headache for the financial institutions causing crises in the sector. Figure 2: Daily Trading Chart in the London Financial Market for the Last five Days Value Last 5 Days Date Shares Turnover (£) Trades Traded Stocks Advanced Stocks Declined Stocks Unchanged Stocks 10/Apr/2013 14:15 496,113,184 1,972,880,786 414,173 1,190 778 354 58 09/Apr/2013 19:45 875,355,316 3,912,750,750 634,330 1,417 931 418 68 08/Apr/2013 19:45 795,249,393 3,375,025,639 545,107 1,408 915 432 61 05/Apr/2013 19:45 1,071,992,898 4,470,359,365 717,536 1,487 354 1,087 46 04/Apr/2013 19:45 1,017,603,704 4,257,319,458 697,036 1,462 418 990 54 References Antoniou, A., Galariotis, E. C. and Spyrou, S. I. (2006), Short-term Contrarian Strategies in the London Stock Exchange: Are They Profitable? Which Factors Affect Them?. Journal of Business Finance & Accounting, 33: 839–867 Beck, T., Kunt, A and Levine, R. (2010). Financial Institutions and Markets across Countries and over Time: The Updated Financial Development and Structure Database, World Bank Economic Review. 24(1): 77-92. Collett, N. (2004), Reactions of the London Stock Exchange to Company Trading Statement Announcements. Journal of Business Finance & Accounting, 31: 3–35 Esqueda, A. Assefa, A. and Mollick, V. (2012). Financial globalization and stock market risk. Journal of International Financial Markets, Institutions and Money, 22(1), 87-102. Fletcher, N. (2011). London Stock Exchange halted by computer problem: LSE suspends trading after another flaw is found in its new system. The Guardian. Friday 25 February 2011. Galariotis, E. C. and Giouvris, E. (2007), Liquidity Commonality in the London Stock Exchange. Journal of Business Finance & Accounting, 34: 374–388 Ho, T. S. Y., Palacios, M. and Stoll, H. R. (2013), Dynamic Financial System: Complexity, Fragility and Regulatory Principles. Financial Markets, Institutions & Instruments, 22: 1–42.  Kaminsky, G and Schmukler, S. (2008). Short-Run Pain, Long-Run Gain: Financial Liberalization and Stock Market Cycles. Review of Finance, 12 (2):253-292. Lee, C.-H. and Chou, P.-I. (2012), Trading Activity and Financial Market Integration. Financial Review, 47: 589–616. Roberts, R. (2008). The city: A guide to London's global financial centre. London: Profile. The Associated Press. Midday Shutdown Shows Struggle of London Exchange. New York Times. February 25, 2011. Wójcik, D. (2009), Geography of Stock Markets. Geography Compass, 3: 1499–1514.  List of Figures Figure 1: Capital formation in the financial markets Figure 2: Daily Trading Chart in the London Financial Market for the Last five Days Read More