CHAPTER THREE SECURITY MARKETS. TYPES OF SECURITY MARKETS n CALL MARKETS have posted hours for trading only “called” securities are for sale to those.

CHAPTER THREE

SECURITY MARKETS

TYPES OF SECURITY MARKETS

CALL MARKETS•have posted hours for trading only

•“called” securities are for sale to those buyers or sellers

TYPES OF SECURITY MARKETS CONTINUOUS MARKETS

•trading may occur at any time during a regular trading day

•dealers (market makers)provide liquidity to brokers who cannot

find a suitable buyer or sellerusually are temporary positions

MAJOR U.S. SECURITY MARKETS THE NEW YORK STOCK EXCHANGE

(NYSE)•established as a corporation, with a

charter and regulations for membership

•approximately 1,366 members

•Board of Directors: 26 elected

MAJOR U.S. SECURITY MARKETS NYSE SEATS:

•purchased from a current member

•give privileges to members to execute trades

•held by individuals as well as brokerage firms

MAJOR U.S. SECURITY MARKETS LISTED SECURITIES: Some criteria

to list•the degree of national interest

•relative position and stability in the industry

•prospects of maintaining its relative position

TRADING HALTS

THE EXCHANGE MAY IMPOSE TRADING HALTS AND CIRCUIT BREAKERS•Trading Halts:

are temporary suspensions of trading in a listed firm’s shares

TRADING HALTS

•Circuit Breakers: Rule 80Arule states that if the Dow Jones

Industrial Average (DJIA) moves 50 or more points from a previous closing price, all index arbitrage orders will be subject to the “tick test.”

TRADING HALTS

•Circuit breakers: Rule 80Bif a 350 point change before 3 PM

occurs, the NYSE shuts down for one-half hour

if a 550 point change (total) occurs after the reopen, NYSE shuts down for 1 hour.

PLACING AN ORDER

4 TYPES OF NYSE MEMBERSHIPS:•commission brokers:

earn commission for their brokerage firms

•floor brokers:assist commission brokers during overload

periods

•floor traders:trade only for themselves

•specialists:keep unfilled limit orders/act as market makers

PLACING AN ORDER

LARGE ORDERS:•Found in blocks of at least 10,000

shares

•Usually place by institutional investors

•Handled mostly by upstairs dealer market

PLACING AN ORDER

SMALLER ORDERS:•in the past these orders were often

overlooked in favor of larger orders

PLACING AN ORDER

•to correct this oversight the SuperDOT system was create

•stands for Super Designated Order Turnaround:handles smaller orders involving 30,999 or

fewer sharesorders sent directly to trading post specialist

for immediate exposure and executionfacilitates the trading technique known as

program trading

OTHER EXCHANGES

THE AMERICAN STOCK EXCHANGE:•Lists stocks of smaller-sized

companies

OTHER EXCHANGES

REGIONAL EXCHANGES:•Boston

•Cincinnati

•Chicago

•Pacific

•Philadelphia

OTHER EXCHANGES

REGIONAL EXCHANGES:•Options

Chicago Board Options Exchange– one of the largest

•FuturesThe Chicago Mercantile Exchange

– offers interest rate, commodities, and index futures contracts

OVER-THE-COUNTER MARKET NASDAQ is an o-t-c market:

•created by the National Association of Securities Dealers (NASD)

•the NASD created the NASD automated quotation system (NASDA) to clear transactionsa nationwide communication network

allows instant access to all major dealers

OVER-THE-COUNTER MARKET NASDAQ CLASSIFICATION OF

STOCKS:•National Market System (NMS)

stocks with larger trading volumesstocks that are eligible for margin and

short transactionsSmall Cap Issues

OVER-THE-COUNTER MARKET SMALL ORDER EXECUTION SYSTEM

•electronic order-routing systemlimit: 100 shares

THIRD AND FOURTH MARKETS THIRD MARKET:

•A name for a market where any trading of NYSE security is permittedtrading hours are not fixedtrading is not bound by NYSE trading

halts or circuit breakers

THIRD AND FOURTH MARKETS THE FOURTH MARKET:

•Direct trading in exchange-listed securities

•Between investors without the benefit of a broker

•Trading facilitated by an automated system: INSTINETgive quotations and executions

information immediately

OTHER METHODS OF ORDERING THE GROSSING SYSTEM PREFERENCING INTERNALIZATION

FOREIGN MARKETS

LONDON STOCK EXCHANGE:•Significantly changed by the “Big

Bang” of 1986:ending fixed commissionsintroduced SEAQ (Stock Exchange

Automated Quotations)attracted trading in non-UK stock

FOREIGN MARKETS

TOKYO STOCK EXCHANGE:•Has introduced major reforms:

introduced CORES (Computer-Assisted Order Routing and Execution System)

introduced FORES (Floor Order Routing and Execution System)

Saitori System of Trading follows IYATOSE Method at market open

similar to a call marekt– Zaraba used where orders are process continuously

FOREIGN MARKETS

TORONTO STOCK EXCHANGE:•Uses CATS (Computer-Assisted

Trading System)

•Similar to IYATOSE trading in Tokyo

INFORMATION- AND LIQUIDITY-MOTIVATED TRADERS THE DEALER’S DILEMMA: Adverse

Selection•Assume there are two types of

traders that a dealer may confront during the trading day:informed traders whose information and

identity are unknown to the dealeruninformed (liquidity) traders

INFORMATION- AND LIQUIDITY-MOTIVATED TRADERS THE DILEMMA: How to quote the

correct price and make a profit?•Solution:

set the bid-ask spread wide enough so that the gains from the uninformed traders offsets the mistaken price quotes to the informed traders.

REGULATION OF SECURITIES MARKETS THE FOUR PILLARS OF SECURITY

REGULATION:•The Securities Act of 1933

•The Securities Exchange Act of 1934

•The Investment Company Act of 1940

•The Investment Advisors Act of 1940

REGULATION OF SECURITIES MARKETS

•Provisions of the Securities Act of 1933known as the “truth in securities” lawrequires registration of new issuesdisclosure of relevant information by

issuerprohibits misrepresentation and fraud

REGULATION OF SECURITIES MARKETS

•Provisions of the Securities Exchange Act of 1934requires national exchanges, brokers,

and dealers to be registeredmade possible creation of Self

Regulatory Organizations (SROs) to oversee the industry

established the Securities Exchange Commission (SEC)

REGULATION OF SECURITIES MARKETS

•Provisions of the Investment Company Act of 1940extends disclosure and registration

requirements to investment companies

REGULATION OF SECURITIES MARKETS

•Provisions of the Investment Advisors Act of 1940

required registration of those providing advice

END OF CHAPTER 3