In addition, securities companies also help investors find effective investment opportunities, participate in the market conveniently and contribute to the formation of a stock investment culture. By finding and helping investors who do not have knowledge and time, encouraging them to participate in the market, securities companies have contributed to the most important thing in the market, which is to stimulate demand for stocks.
1.2. Securities company activities
1.2.1. Principles of operation of securities companies
The activities of securities companies affect the interests of investors participating in the market. Therefore, to ensure the interests as well as ensure fairness among the subjects participating in the market, securities companies must comply with the general principles for securities companies when conducting activities. These principles are specified in legal documents regulating securities companies. The principles of securities companies' activities are divided into two groups of principles: the group of financial principles and the group of professional ethics principles.
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*. Financial principles
+ Due to the characteristics of securities companies that must meet the legal capital requirements for business activities, during the business process, securities companies must ensure financial resources in their securities trading commitments with customers.
+ Ensure requirements on capital, capital structure and accounting and reporting principles according to regulations of law.
+ Because securities companies can simultaneously perform many operations on the stock market such as brokerage, portfolio management and proprietary trading, the company must separate customers' money and securities from the company's assets. Securities companies are not allowed to use customers' securities as collateral to borrow capital or use customers' money to buy securities for the company unless
unless agreed to in writing by the customer. This principle is introduced to avoid risks for customers.
*. Professional ethics
Because securities companies operate in a sensitive field, it has a profound impact on the psychology of investors. Therefore, for securities company employees, they must comply with the code of professional ethics issued by the association of securities traders. This code of ethics aims to ensure honesty and fairness in the work of securities company employees. The code of professional ethics includes the following main points:
+ Fair and honest transactions for the benefit of customers
+ The company's employees must be skilled, dedicated and responsible.
+ Prioritize customer orders before company orders
+ Obliged to keep customer information confidential, not to disclose customer account information without the customer's written consent unless requested by state management agencies.
+ Do not engage in business activities outside the scope of the license.
+ Do not conduct activities that may mislead customers and the public about the price, value and nature of securities or activities that cause damage to customers.
+ For the activities that securities companies provide to customers, they must have a contract with the customer before performing services for them.
1.2.2. Activities of securities companies
The main activities of securities companies include: brokerage, proprietary trading, underwriting, securities investment consulting and financial consulting. These activities include:
can be divided into two main areas of activity: proprietary trading and securities service provision (including the remaining activities of securities companies).
1.2.2.1. Self-employed activities
Is one of the basic activities of securities companies. This activity is considered as an investment activity of securities companies because when conducting self-trading, securities companies have to spend money to buy, the company will make a profit when the price of securities increases and vice versa, will lose when the price of securities decreases. Therefore, self-trading activities of securities companies also contain potential risks of fluctuations in securities prices on the market. Thus, self-trading activities are when securities companies buy and sell securities with their own capital to make a profit, while also accepting the risks from that activity.
When conducting proprietary trading activities, the profit that a securities company earns can come from the difference between the buying price and the selling price or from dividends and bonds paid by the issuer.
Securities companies' proprietary trading activities can be carried out on the Stock Exchange or on the OTC market. When carrying out proprietary trading activities on the OTC market, securities companies will buy and sell securities directly with partners through negotiations and through a networked computer system. When carrying out proprietary trading activities on the Stock Exchange, securities companies are now like other investors in the market, so securities buying and selling orders of securities companies are also entered into the system and executed similarly to the buying and selling orders of investors. Securities companies' orders can be executed with any customer who is not identified in advance.
Depending on the purpose and nature of investment, the securities company's proprietary trading activities include specific activities such as proprietary trading for the purpose of profit, control, fund management or market making...
+ Self-trading for profit: is one of the main goals of securities companies when conducting self-trading activities. Securities companies often accept risks to seize opportunities to quickly buy or sell a certain type of security and gain immediate profits or conduct arbitrage trading between two markets (arbitrage trading). Depending on the ability to accept risks to gain profits as well as the expectation of future profits, securities companies can conduct self-trading in high-risk securities or securities with high safety.
+ Self-trading with the purpose of gaining control: In some cases, securities companies conduct self-trading of a certain type of security with the goal of obtaining a certain minimum number of shares to be able to participate in the process of operating the production and business activities of that issuing organization (TCPH). When pursuing this goal, securities companies can ignore the short-term profit target.
+ Self-trading for the purpose of managing funds: Like other production and business enterprises, securities companies also need to manage the amount of cash in the company to ensure both payment ability and profitability of capital. Therefore, securities companies invest in short-term securities to ensure 2 goals in managing the company's funds.
+ Self-trading with the purpose of taking on the role of a market maker: one of the important goals when a securities company carries out self-trading activities is to take on the role of a market maker. When taking on this role, the securities company must always hold a large enough quantity of securities to be ready to sell when there is a demand for purchase and must reserve a certain amount of money to buy securities when investors have a need to sell [46]. In case an investor has a need to sell a type of security that the securities company
If the securities company does not make a market for that type of security, it will search for a suitable corresponding order for the customer. Thus, to perform this role, the securities company must simultaneously conduct brokerage activities and proprietary trading activities.
Based on the above purposes, the proprietary trading activities of securities companies have the following characteristics:
+ Large investment scale. Securities companies must have a large amount of capital (in the form of cash and securities) to be able to achieve the goals of their proprietary trading activities.
+ Staff with professional qualifications, high sensitivity in work, ability to analyze and make reasonable investment decisions.
Securities companies can carry out many activities, including activities that may lead to conflicts with proprietary trading activities in terms of the interests of customers and the securities company. Therefore, when carrying out proprietary trading activities, securities companies must meet the requirements prescribed by law, specifically:
Firstly, there must be a separation between proprietary trading activities and brokerage activities, between proprietary trading activities and securities investment consulting activities.
When a securities company conducts both brokerage and proprietary trading activities, conflicts of interest between the securities company and its customers are likely to arise. Therefore, to avoid legal conflicts of interest and to ensure transparency and clarity in operations, all countries require securities companies to separate brokerage and proprietary trading activities. This separation includes: separation of human factors, meaning that employees of the securities company are not allowed to work in both the brokerage and proprietary trading departments; separation of business processes; separation of assets and capital of customers and the company, meaning that the company is not allowed to use capital and assets of customers to do business for the company but must use the company's own capital to conduct business. There are countries
Securities companies are not allowed to conduct both brokerage activities on the centralized market and proprietary trading activities.
In addition, proprietary trading activities must also be separated from securities investment consulting activities, otherwise the interests of investors will not be guaranteed. When the proprietary trading department wants to buy a certain security, the consulting department will advise the customer to sell that security, and vice versa, when they want to sell, they will advise the customer to buy that security.
Second, prioritize the execution of customer orders before those of the securities company. Due to the special characteristics of the ability to access information and analyze the market better than individual customers, securities companies have many advantages over individual investors in deciding to buy and sell securities. Therefore, to ensure fairness between individual investors and securities companies (professional investors), securities companies must comply with the principle of prioritizing customer orders before those of the company. That means that in the case of a customer's trading order and a securities company's self-trading order arriving at the same time, the customer's trading order must be processed before the securities company's self-trading order.
Third, market price stabilization. Accordingly, when the market has a decline in stock prices, the securities company is responsible for buying, when the stock price increases suddenly, the securities company is responsible for selling to keep the stock price stable. When performing the function of stabilizing stock prices in the market, the securities company ignores the profit target. To fulfill this requirement, countries often stipulate that securities companies must reserve a certain percentage of their transactions for the purpose of market stabilization.
Fourth, create a market for newly issued securities. When newly issued securities do not have a trading market, to create a market for
These securities, securities companies conduct proprietary trading activities through buying and selling securities, creating liquidity for those securities in the secondary market. In the OTC market, securities companies continuously have quotes to buy or sell securities with other traders, thereby, securities companies have created and maintained a continuous market for the securities they trade.
In addition to creating a market for newly issued securities, securities companies also create a market for less traded securities by buying and selling those types of securities. Especially for newly established markets, investors participating in the market are mainly small individuals with low professionalism in investment activities. Therefore, they only focus on a number of popular securities on the market. Therefore, with self-trading activities, securities companies will contribute greatly to regulating supply and demand, orienting the entire market.
In addition, securities companies also need to comply with a number of other regulations for proprietary trading activities such as:
+ It is not allowed to buy and sell the same type of securities on the same trading day.
+ Do not let others use the company's self-employed account.
+ Disguised transactions, i.e. transactions that do not transfer ownership and affect the price of securities, must not be conducted.
+ Do not take advantage of customer decision information to buy and sell in advance.
+ Investment is limited to a certain percentage depending on the type of securities in circulation. This requirement is to ensure the safety of business operations.
securities, limiting risks when securities prices fluctuate strongly, especially for high-risk securities.
In order for self-trading activities to be highly effective, securities companies must have a thorough analysis before making investment decisions. Therefore, self-trading activities at securities companies will generally be conducted according to a systematic, scientific process and include the steps in diagram 1.1:
Build an investment strategy
ARSC
Make an investment
Analyze and evaluate the quality of investment opportunities
Investment management and capital recovery
Diagram 1.1: Self-employed operating process
+ Step 1: Build an investment strategy:The company must determine its investment strategy; must build a reasonable investment portfolio depending on each stage of market and company development, depending on the company's investment perspective (accepting high risk or safety...).