Making Critical Economic Decisions - Assignment Example

? FINANCIAL MARKETS FINANCIAL MARKETS Financial markets are critical areas of money exchanges that guide financial directors and shareholders in making decisions. It is clear that the financial directors and shareholders can make critical economic decisions within the large and a complicated financial environment. Financial directors make decisions in such environments like the financial markets, financial institutions, taxation and legal instruments as well as the nature of the region's economy. In addition to that, the financial atmosphere both determines the existing monetary substitutes and the influences that come out from many decisions. Therefore, it is considerably important that shareholders and financial directors have an excellent understanding of the financial setting in which they conduct their activities. It is important to note that a strong financial environment plays a significant role in economic expansion and prosperity. The many corporations increasing funds to finance investment expenses as well as shareholders saving to gather resources for future expenses require stable financial markets. A rapid improvement in technology has also played a significant role in the expansion of financial markets. It has been made easier to make cross border transactions. The function of trust and in the financial market and institutions cannot be overemphasized. This is for the reason that transactions carried out throughout the financial markets and institutions depend on trust that everyone is up to the good of the other. It is unfortunate that much as technological development and globalization has improved the efficiency, reports have emerged of extra-large scandals in the financial markets around the globe with the potential of crippling state or global capital raising mechanism as well as dreadful complication on the economy .Scandals in the financial markets such as; The LIBOR incident emerges as one of the worst with the potential of killing the industry. The JPMorgan incident and The Facebook initial public offer. These scandals emerge as the worst with the potential killing of the industry. The thesis of this discussion paper is based on the ‘the effects of technological expansion and globalization on the global financial markets’ particularly in the London financial market. The following issues will be discussed in the paper. Various aspects of the financial markets such as, What it means and what it does in spurring economic growth. Observable crises within the London financial market with its associations with globalization and technological growth A summary of the key issues discussed. Abstract This paper discusses different aspects of financial markets. It has recognized that the strong financial environment promotes economic growth in any state. The financial market also plays a significant role in the economic environment since it enables major firms to obtain funding for facilitating investments. The development 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 worldwide. The thesis for this paper was that much as technological progress and globalization has promoted in the financial markets, reports have also emerged showing that these instruments have also presented a crisis in equal magnitude and measure. Research in this paper has established that computer glitches have had serious consequences in the London Stock Exchange (LSE) because of network failures or technical challenges. The technical incidents resulted in the suspension of trade for hours. 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. In addition, 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 has enabled the institutions to excel. However, on the other hand, they have also presented worrying trends of technology and computer failures resulting in the suspension of trade for hours. Financial markets Several issues are noted following the financial markets: People and institutions with the interest of borrowing money meet with the people with excess money in the financial markets. The notion “markets” indicates that there are many financial markets in well functioning economies. However, the discussion of how the borrowers and lenders in the financial markets require some examination. Capital formation is brought about by the interaction between people with excess money and money borrowers. 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 occurs within the financial markets through three major strategies. Direct transfer This 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. Transmission through investment banks These banks act 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. The transfers conducted through investment banks are made 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 (Gorham, 2008). Transfer through intermediaries The associated financial intermediaries include banks or mutual funds institutions. The intermediaries receive money from savers and offer them as 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. Financial markets, definition It is any marketplace where financial resources are traded. Enable transfer of assets Financial markets facilitate the process of borrowing and loaning through enabling the sale of freshly issued financial resources. It thrives in financial environments with strong financial institutions, which include the establishments that acquire profits from transactions of monetary assets. Examples of financial institutions include discount brokers and highly multifaceted institutions such as Merrill Lynch Functions of financial markets Allowing the movement of purchasing power between individuals interested in investing or buying. Are also critical in cases of price determination in which they provide instruments for setting prices of freshly introduced assets and the existing assets. Aggregates and coordinates information sharing through gathering crucial trading processes including the flow of transferring funds from lenders and those obtaining loans Facilities reselling of financial assets or their insolvency to ensure that participants enjoy liquidity (Esqueda, Assefa and Mollick, 2012) They augment efficiency in the financial environment by controlling and diminishing transaction, transfer, and reporting costs. Types of Financial Markets Spot markets, where financial assets are purchased or sold immediately they are delivered to the marketplace. The future markets. Enlist the involvement of financial market participants in discussing and agreeing now to sell certain financial assets at some future date. The money markets, the borrowing and loaning of funds normally occur for short durations such as less than one year. Capital markets: These are majorly concerned with stocks and middle or long-term debts lasting over one year. The primary markets. These are common among the corporate organizations where they raise capital through mechanisms such as issuance of fresh securities Secondary markets: These normally trades the securities issued by corporate organizations in the primary markets. The trading of the securities normally takes place among financial market participants. Effects of Technological Growth at the London Stock Exchange (LSE) The LSE financial market is divided into four main groups including the main market, AIM, international order books and the professional securities market statistics. 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. Automated trading has positively influenced market efficiency and integrity Technology has enabled LSE trading activities to increase in speed thus ensuring higher competition for liquidity. The company’s Multilateral Trading Facility (MTF), which is managed by LSE group, MTF 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 of LSE offer the company undue advantage over other trading companies running on lower technological platforms. Similarly, technological growth has presented massive challenges to the financial market 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 unexpected changes. This has put the national central banks under pressure to generate regulations applicable in evaluating and lessening risks, financial markets prejudice 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 routes. Globalization in the financial markets 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 certainly obtained from the fee of the 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). Globalization has also presented diverse challenges and risks in the financial markets. The notable include absence of transparency, which emanates from the asymmetry strategy. 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. The Crises that have happened in the London Financial Market and their Association with Technology and Globalization Computers glitches have caused the closure of LSE four hours in the past. 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. In the month of October 2009, LSE indicated that they were planning to acquire a different trading platform called Turquoise Trading. 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. Wojcik, D. (2009), Geography of Stock Markets. Geography Compass, 3: 1499–1514. Shah, A., Thomas, S., & Gorham, M. (2008). India's financial markets: An insider's guide to how the markets work. Amsterdam: Elsevier. 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