3:16 pm - Wednesday January 21, 5570

Key challenges in equity markets

Last week, one of my connections raised a question – what are the key challenges in the equity markets – in a forum we share with each other.

I was trying to provide an answer to the questions from what I have experienced so for in my life. I realized the answer would very much depend on the type of user. The user could be an investor (who looks for long term returns) or a trader (who looks for a short term gain). I also realized that technology solution providers (IT companies) could even face lot more challenges than our investor or trader.

To be honest, I should admit, when I started to note down the points that occurred to me, I realized the enormous challenges the equity markets offer to the investor, trader and to our technology companies.

I decided to share these challenges with every one through this blog so that they can get guided in their respective roles as a trader, investor, and a technology solution provider.

Types of equity

Normally, we come across the following types of equity:

Common stock / Equity shares

  • Preferred stock
  • Convertible preferred stock
  • Warrants
  • Private Equity
  • The challenges posed by these different types will differ

Types of products

  • Next, the following types of markets are available in the equity space.
  • Spot markets
  • Forward markets
  • Derivative products

These markets throw open totally different challenges.

Types of trading

The following trading types have their specific features and naturally the resulting challenges would be different.

  • Block
  • Basket
  • Programme
  • Shorts

Pricing and pricing environment

Capturing factors affecting equity prices and obtaining share price information on real time basis is the real challenge in the equity markets all over the world.

Risk management

Every market has risks to manage and in our equity markets, monitoring beta will be a crucial challenge. And designing appropriate risk measures would be an uphill task.

Market behavior

Watching equity markets from the side lines would be comfortable and easier one as we would not have any stake and hence movements in the markets would not in any way affect us. For the players investors and the traders would be impacted by any movement and they would be studying the following virtually on a real time basis.

  • Advance-Decline Line, Ratio and Net Difference
  • Upside-Downside Volume Line, Ratio and Net Difference
  • Advance-Decline / Upside-Downside Index
  • High-Low Differential Ratio and Index
  • Bottom Indicator
  • Cycles
  • Large Block Index
  • Short Term Trading Index
  • Trend Indicator
  • Volatility Index (VIX)
  • Put/Call Ratio
  • Call/Put Ratio
  • Put/Volume Ratio
  • Call/Volume Ratio
  • Calendar Spread
  • Short Sales Statistics
  • Sentiment Indicators

Naturally our technology solution providing IT companies will have to understand first these critical features and then proceed to calculate, capture and present in a very efficient manner.

Clearing and settlement

Entering into a trade in equity markets may be easier when compared to the subsequent actions/reactions. Clearing and settlement is the one area which ensures that the trade dealt with is delivered flawlessly. The IT companies pain areas lie mostly in these parts:

  • Legal framework
  • Trade confirmation
  • Settlement cycles
  • Central counter parties (CCP)
  • Securities lending
  • Central securities depositories (CSD)
  • Delivery versus payment (DVP)
  • Timing of settlement finality
  • CSD risk controls to address participants failures to settle
  • Cash settlement assets
  • Operational reliability
  • Protection of customer securities
  • Governance
  • Access
  • Efficiency
  • Communication procedures and standards
  • Transparency
  • Regulation and oversight
  • Risks in cross-border links


There are other areas which pose equally major challenges to every one in the equity markets. They are:

  • Index composition
  • Inclusion in an index
  • Capturing corporate actions on real time
  • Listing in multiple exchanges
  • Complex operations of exchange houses
  • Issues and operations of depository receipts
  • Emerging markets challenges
  • Market research and business intelligence
  • External dilemma

Well. One should not get bewildered by these challenges. S/he should accept them and conquer them. The real joy lies in mastering and mitigating these challenges.

Are we willing?

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