4 Key Environmental Factors Affecting the Trading Industry. Stock Trading and Exchange Fundamentals.

May 12, 2010 by oscadmin
Filed under: Stock Trading 

Environmental Factors Affecting the Trading Industry

Regulatory
Exchanges around the world are regulated by rules approved by governments in their respective jurisdictions. These rules govern operational aspects of the exchange business such as trading, clearing, trade surveillance, admission of members to the exchanges, Initial Public Offerings (IPOs), and reporting among others. For example, the Markets in Financial Instruments Directive (MiFID) is a regulation in Europe which requires that financial services firms take all reasonable steps to provide best execution for their clients under Article 21.




Economic
Interest rates, inflation rates and exchange rates are some of the economic factors that affect trading and exchanges. The interrelation between these economic factors is a major determinant in the demand for traditional assets such as equities, fixed income, foreign exchange and commodities.
For instance, the direction of interest rate movement is of primary importance to the stock market. Stock investors watch for signs from the economy and regulators that may suggest which way interest rates will move in the future. These give an indication as to where interest rates are headed in the short run.
Interest rates control the flow of money through the economy. When rates are low, consumer spending increases and corporate entities can borrow money for expansion and other needs at more affordable rates. The availability of cheaper money in an economy boosts consumer confidence and the tendency is for the consumer to spend more. In broad terms, an economy with an inexpensive flow of money creates new jobs.
However, in a fast-growing economy there is the risk of a rise in the inflation rate. When a government in a country sees signs that inflation is on the rise or there is a chance it could rise, it can control this by raising interest rates.
Higher interest rates slow the flow of money, making it more expensive for both consumers and businesses to borrow. This slowing effect reduces the chance of inflation, but it also reduces corporate profits, which in turn adversely affects stocks prices.
When stock markets are volatile, investors opt for bonds as they provide an element of stability that offsets some of the volatility of stocks. The irony is that bond prices move inversely to interest rates. When interest rates go up, bond prices go down and when interest rates go down, bond prices go up. This is applicable to previously issued bonds trading on the open market.




Socio-Cultural
These environmental factors are centred on the needs of investors. A typical example is the demand for Islamic finance products, which is fuelled by the need for Muslim investors to adhere to the rules of Sharia in their investment
objectives. Under Sharia Islamic law, making money from money, such as charging interest, is usury and therefore not permitted.
One of the more popularly traded Islamic financial instruments is the Islamic bond, also known as Sukuk. These are designed to get around the Islamic prohibition of charging interest. For example, they treat the bond holder as the owner of some of the company’s assets. The bond holder then receives rent, not interest, for the use of these assets.




Technological
The advancement of technology has been instrumental in the way trading has been conducted and how exchanges have operated in recent times. The rapid development of the internet has been a boon to retail traders (investors) trading stocks and currency on a daily basis around the globe.
Technology has also led to the proliferation of alternative execution venues for traders. A typical example is the so-called dark liquidity pools, which are mostly crossing networks of one form or another that match buyers and sellers anonymously, reducing information leakage and market impact, often with lower direct trading costs.

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