Financial system

Stock exchanges

Trading in the different categories of instrument takes place in different types of market. "Primary markets" for pensions and insurance policies take the form of one-to-one "over-the-counter" (OTC) transactions with their suppliers, and there is seldom any further trading because those instruments are considered to be "non-negotiable". The primary markets in stocks and shares and bonds usually start with an "initial public offering" (IPO) in which the issuers deal directly with professional traders, and through them with the public. Subsequent trading in those instruments can take place, either as over-the-counter deals between dealers and individual customers, or in "auction markets" in which numbers of holders trade with each other, or in "dealers' markets" in which numbers of holders trade with dealers. The traditional way of making deals on an exchange is by "open outcry" in which sellers/buyers shout an offer and buyers/sellers shout an acceptance. Few financial exchanges now use that method and those that do plan to change to an electronic trading system such as London's "Stock Exchange Electronic Transfer System" (SETS), (augmented by clearing and settlement systems that provide the buyer with his stock and the seller with his payment). A company's shares may be traded on a stock exchange only if it is granted a "listing", the granting of which is typically subject to rules concerning the meeting of a minimum capital value requirement, and concerning the qualifications and conduct of its directors. Most stock exchanges also provide for trading in other financial instruments including structured products, and some provide a second-level market for the shares of smaller firms (such as London's "Alternative Investment Market). Conventional stock exchanges publish frequent listings of the ruling price for each traded security, but there has been a recent growth in the number of less transparent trading systems known as dark pools . The activities of the traders in the different countries interact so strongly that the system behaves as though all trading were done in one centrally-administered exchange. The system is referred to as the foreign exchange (or "Forex") market although there is no central market to coordinate its transactions. The central banks of countries with "fixed exchange rates" buy and sell their countries' currencies in order to keep its exchange rate with the dollar (or other reference currency) within an intended range. Otherwise, most trading is done by banks, on there own account or on behalf of private-sector clients. Other central banks do not normally intervene in the forex market (although they sometimes act to sterilise the domestic effects of foreign exchange movements).

Exchange rate movements influence other international financial transactions and - because of the interactive character of the global financial system - they influence, and are influenced by, financial activities within trading countries.