The benefits of trading structured products on-exchange
Structured products are traded either via the stock exchange or over the counter (OTC). Off-exchange trades are not routed via the stock exchange, but agreed and settled individually between two market participants. Trading structured products on the stock exchange has many advantages for investors and issuers alike. SIX Swiss Exchange has put together a summary of these benefits and the key arguments:
|Benefits for investors||Benefits for issuers|
|Price-setting||Broader distribution channel|
|Comparability||Lower administrative costs|
|Trading rules||Opportunity to stand out|
|Rapid execution times|
Since buy and sell prices for structured products are set by the market maker, the investor can find out the value of a structured product on any given trading day for the entire term of the product. In addition, investors in exchange-listed structured products can compare identical products (with the same underlying instrument) offered by different banks. For example, they can track performance over recent months, the current price, the spread between bid and ask prices, and tradable contract volumes.
Stock exchange trading in structured products is subject to strict trading rules that guarantee fair and transparent settlement for every market participant. Compliance with these trading rules is enforced by the corresponding market and trading surveillance unit at SIX Swiss Exchange. This regulated market means that private and institutional investors are treated in the same way. In addition to this form of regulation, free competition is a further mechanism that protects the investor. The large number of tradable products results in price competition between the banks, which try to offer their products at prices that are as low as possible. This enables the investor to find the lowest-cost product for them, with the smallest spread, from a selection of identical products. Care is needed when choosing the lowest-cost product, however. From the legal perspective, structured products constitute bearer bonds and will thus not be honoured should the issuer become insolvent. Here too, investors should take advantage of the broad selection of products on offer and include only structured products from well-rated issuers in their portfolio.
Buy/sell orders that are entered at or above/below bid/ask prices respectively lead to trades in fractions of a second. Rapid order execution enables investors to pursue dynamic investment strategies and respond in seconds to current market events.
Unlike OTC trades, which are characterised primarily by very high transaction sums, the stock exchange can also be used to conclude small transactions. This makes the on-exchange trading of structured products accessible to those investors who wish to invest smaller amounts.
By choosing to distribute their products on-exchange, issuers of structured products reach a larger pool of potential buyers. Combined with innovative products and attractive prices, it is a strategic move that can generate higher revenues.
Compared with distribution via the OTC market, the standardised procedure for on-exchange trading means that issuers can bring their structured products to market quickly and efficiently. Following the launch of Internet Based Terms (IBT), newly registered structured products can provisionally be admitted to trading just one day after registration. This allows issuers to respond rapidly to current trends and events and to launch the corresponding products swiftly on to the on-exchange market.
Choosing on-exchange trading gives issuers opportunities to differentiate their products from others on the market. For example, issuers with a strong presence on the forward markets are able to offer a particularly wide range of commodity-based structured products on excellent terms for investors. Meanwhile, issuers that are heavily involved in the foreign exchange markets will tend to offer products that have exchange rates as their underlying instrument.