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 seller
usually are temporary positionsMAJOR 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 sharesTRADING HALTS
• Circuit Breakers: Rule 80A
rule states that if the Dow Jones Industrial Average (DJIA) moves 50 or more points from a previous closing price, all index arbitrageorders will be subject to the “tick test.”
TRADING HALTS
• Circuit breakers: Rule 80B
if 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 makersPLACING 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 shares
orders sent directly to trading post specialist for immediate exposure and execution
facilitates the trading technique known as program tradingOTHER 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
• Futures
The 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
transactions
a nationwide communication network allows instant access to all major dealersOVER-THE-COUNTER MARKET
NASDAQ CLASSIFICATION OF STOCKS:
• National Market System (NMS)
stocks with larger trading volumes
stocks that are eligible for margin and short transactions
Small Cap IssuesOVER-THE-COUNTER MARKET
SMALL ORDER EXECUTION SYSTEM
• electronic order-routing system
limit: 100 sharesTHIRD AND FOURTH MARKETS
THIRD MARKET:
• A name for a market where
any trading of NYSE security is permitted
trading hours are not fixed
trading is not bound by NYSE trading halts or circuit breakersTHIRD 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: INSTINET
give quotations and executions information immediatelyOTHER METHODS OF ORDERING
THE GROSSING SYSTEM
PREFERENCING
INTERNALIZATION
FOREIGN MARKETS
LONDON STOCK EXCHANGE:
• Significantly changed by the “Big Bang” of 1986:
ending fixed commissions
introduced SEAQ (Stock Exchange Automated Quotations)
attracted trading in non-UK stockFOREIGN 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 dealer
uninformed (liquidity) tradersINFORMATION- 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 informedtraders.
REGULATION OF
SECURITIES MARKETS
