Chapter 6_05.ppt

Chapter 6Chapter 6

ORGANIZATION AND ORGANIZATION AND FUNCTIONING OF SECURITIES FUNCTIONING OF SECURITIES

MARKETSMARKETS

Chapter 6 QuestionsChapter 6 Questions

• What is the purpose and function of a What is the purpose and function of a market?market?

• What are the characteristics that determine What are the characteristics that determine the quality of a market?the quality of a market?

• What is the difference between a primary and What is the difference between a primary and secondary capital market and how do these secondary capital market and how do these two markets support each other?two markets support each other?

• What is the typical underwriting organization What is the typical underwriting organization structure for corporate stock issues?structure for corporate stock issues?


• What are Rules 415 and 144A and how do What are Rules 415 and 144A and how do they affect corporate security underwriting?they affect corporate security underwriting?

• For secondary equity markets, what are the For secondary equity markets, what are the two basic trading systems?two basic trading systems?

• What are the major primary listing markets in What are the major primary listing markets in the United States and how do they differ?the United States and how do they differ?

• What are call markets and when are they What are call markets and when are they typically used in U.S. markets?typically used in U.S. markets?


• How are national exchanges around the How are national exchanges around the world linked and what is meant by “passing world linked and what is meant by “passing the book”?the book”?

• What is Nasdaq and how has its growth and What is Nasdaq and how has its growth and influence impacted the securities market?influence impacted the securities market?

• What are the regional exchanges and what What are the regional exchanges and what securities do they trade?securities do they trade?

• What is the third market?What is the third market?


• What are Electronic Communications What are Electronic Communications Networks (ECNs) and alternative trading Networks (ECNs) and alternative trading systems (ATSs) and how do they differ from systems (ATSs) and how do they differ from the primary listing markets?the primary listing markets?

• What are the major types of orders available What are the major types of orders available to investors and market makers?to investors and market makers?

• What are the major functions of the specialist What are the major functions of the specialist on the NYSE?on the NYSE?


• What new trading systems on the NYSE and What new trading systems on the NYSE and Nasdaq have made it possible to handle the Nasdaq have made it possible to handle the growth in U.S. trading volume?growth in U.S. trading volume?

• What are the three recent innovations that What are the three recent innovations that contribute to competition within the U.S. contribute to competition within the U.S. equity market?equity market?

• What are Rule 390 and the trade-through rule What are Rule 390 and the trade-through rule and what is their effect regarding competition and what is their effect regarding competition on the U.S. equity market?on the U.S. equity market?

What is a market?What is a market?

• The means through which buyers and The means through which buyers and sellers are brought together to aid in the sellers are brought together to aid in the transfer of goods and servicestransfer of goods and services

• Does not require a physical locationDoes not require a physical location• ““The market” itself does not have to The market” itself does not have to

own the goods and services involvedown the goods and services involved• Buyers and sellers benefit from the Buyers and sellers benefit from the

marketmarket

Characteristics of a Good Characteristics of a Good MarketMarket

• Availability of past transaction informationAvailability of past transaction information– must be timely and accuratemust be timely and accurate

• Liquidity: sell quickly at a good priceLiquidity: sell quickly at a good price– marketabilitymarketability– price continuityprice continuity– depthdepth

• Transaction cost are low (Internal efficiency)Transaction cost are low (Internal efficiency)• Prevailing market prices reflect all relevant Prevailing market prices reflect all relevant

information (External efficiency)information (External efficiency)

Decimal PricingDecimal Pricing

• The movement to decimal pricing is a The movement to decimal pricing is a case study in making a market bettercase study in making a market better

• Benefits:Benefits:– Ease of understanding prices for investorsEase of understanding prices for investors– Reduction in minimum bid-ask spreadsReduction in minimum bid-ask spreads– Lower transaction costs through enhanced Lower transaction costs through enhanced

global competitionglobal competition

Organization of the Organization of the Securities MarketSecurities Market

• Primary marketsPrimary markets– New issuesNew issues

• Secondary marketsSecondary markets– Outstanding securities are bought and soldOutstanding securities are bought and sold

Primary Capital MarketsPrimary Capital MarketsGovernment BondsGovernment Bonds

• Sold regularly through auctionsSold regularly through auctions

• Treasury bills: one year maturity or lessTreasury bills: one year maturity or less

• Treasury notes: maturities of two to ten Treasury notes: maturities of two to ten yearsyears

• Treasury bonds: original maturities of Treasury bonds: original maturities of more than ten yearsmore than ten years

Primary Capital MarketsPrimary Capital MarketsMunicipal BondsMunicipal Bonds

• Sold by three methodsSold by three methods– Competitive bid sales: sealed bidsCompetitive bid sales: sealed bids– Negotiated sale: contractual arrangements, Negotiated sale: contractual arrangements,

underwriter helps prepare, price, and sell the issueunderwriter helps prepare, price, and sell the issue– Private placements: Issuer sells directly to investorsPrivate placements: Issuer sells directly to investors

• Underwriters servicesUnderwriters services– Origination: design of the issueOrigination: design of the issue– Risk-bearing: purchase the issue, risk resellingRisk-bearing: purchase the issue, risk reselling– Distribution: selling the issueDistribution: selling the issue

Primary Capital MarketsPrimary Capital MarketsCorporate BondsCorporate Bonds

• Negotiated arrangement with an Negotiated arrangement with an investment banking firm who maintains investment banking firm who maintains a relationship with the issuing firma relationship with the issuing firm

• Underwriting firm often organizes a Underwriting firm often organizes a syndicate for distributionsyndicate for distribution

Primary Capital Markets Primary Capital Markets Common StockCommon Stock

• New issues are divided into two groupsNew issues are divided into two groups• Seasoned new issuesSeasoned new issues

– New shares offered by firms that already have New shares offered by firms that already have stock outstandingstock outstanding

• Initial public offerings (IPOs)Initial public offerings (IPOs)– Firms selling their stock to the public for the first Firms selling their stock to the public for the first

timetime

• New issues normally underwritten by New issues normally underwritten by investment banking firmsinvestment banking firms

Relationships with Relationships with Investment BankersInvestment Bankers

1. Negotiated1. Negotiated– Most commonMost common– Full services of underwriterFull services of underwriter

2. Competitive bids2. Competitive bids– Corporation specifies securities offered, then seeks Corporation specifies securities offered, then seeks

bidsbids– Reduced costs but also reduced services of Reduced costs but also reduced services of

underwriterunderwriter

3. Best-efforts3. Best-efforts– Investment banker acts as broker, selling all it can at Investment banker acts as broker, selling all it can at

a specified pricea specified price

Introduction of Rule 415Introduction of Rule 415

Shelf registration:Shelf registration:• Allows firms to register securities and Allows firms to register securities and

sell them piecemeal over the next two sell them piecemeal over the next two yearsyears

• Increased flexibility for timing issuesIncreased flexibility for timing issues• Reduces registration fees and Reduces registration fees and

expensesexpenses• Mostly used for bond salesMostly used for bond sales

Private Placements and Private Placements and Rule 144ARule 144A

• Firms sells to a small group of Firms sells to a small group of institutional investors, with some institutional investors, with some assistance of an investment bankerassistance of an investment banker

• Lower issuing costs than public offeringLower issuing costs than public offering

• Extensive registration not requiredExtensive registration not required

• Issues can trade among large, Issues can trade among large, sophisticated investorssophisticated investors

Secondary MarketsSecondary Markets

Involves the trading of Involves the trading of issues that are issues that are already outstandingalready outstanding

• Provide a means Provide a means obtaining cash for obtaining cash for sellerssellers

• Provide buyers with Provide buyers with more investment more investment choiceschoices

Why Secondary Markets Why Secondary Markets Are ImportantAre Important

• Provide liquidity to investors who Provide liquidity to investors who acquire securities in the primary marketacquire securities in the primary market– Helps issuers raise needed funds in the Helps issuers raise needed funds in the

primary market since investors want primary market since investors want liquidityliquidity

• Help determine market pricing for new Help determine market pricing for new issuesissues

Secondary Bond MarketsSecondary Bond Markets

• Secondary market for U.S. government and Secondary market for U.S. government and municipal bondsmunicipal bonds– U.S. government bonds traded by bond dealers U.S. government bonds traded by bond dealers

who specialize in these issueswho specialize in these issues– Banks and investment firms make markets in Banks and investment firms make markets in

municipal bond issuesmunicipal bond issues

• Secondary corporate bond marketSecondary corporate bond market– Traded in an OTC market by bond dealersTraded in an OTC market by bond dealers– A much more limited market than for stock issuesA much more limited market than for stock issues

Financial FuturesFinancial Futures

• Bond futures contracts allow the holder Bond futures contracts allow the holder to either buy or sell a specific bond to either buy or sell a specific bond issue at a specific price on a future dateissue at a specific price on a future date

• Bond futures are traded in separate Bond futures are traded in separate marketsmarkets– Chicago Board of Trade (CBOT)Chicago Board of Trade (CBOT)– Chicago Mercantile Exchange (CME)Chicago Mercantile Exchange (CME)

Secondary Equity MarketsSecondary Equity Markets

• Basic Trading SystemsBasic Trading Systems– Pure auction marketPure auction market

• Buyers “bid” and sellers “ask”Buyers “bid” and sellers “ask”• Buy and sell orders are matched at a central locationBuy and sell orders are matched at a central location• Price driven market: trades are made by determining the Price driven market: trades are made by determining the

highest bid and the lowest askhighest bid and the lowest ask

– Dealer marketDealer market• Dealers buy shares (at the bid price) and sell shares (at Dealers buy shares (at the bid price) and sell shares (at

the ask price) from their own inventorythe ask price) from their own inventory• Dealers compete against each otherDealers compete against each other

Call Versus Continuous Call Versus Continuous MarketsMarkets

• Call markets trade individual stocks at Call markets trade individual stocks at specified times to gather all orders and specified times to gather all orders and determine a single price to satisfy the determine a single price to satisfy the most ordersmost orders– Used for opening prices on NYSE if orders Used for opening prices on NYSE if orders

build up overnight or after trading is build up overnight or after trading is suspendedsuspended

• Continuous markets trade any time the Continuous markets trade any time the market is openmarket is open

Classification of U.S. Classification of U.S. Secondary Equity MarketsSecondary Equity Markets

• Primary Market ListingsPrimary Market Listings

• Regional Stock ExchangesRegional Stock Exchanges

• The Third MarketThe Third Market

• Alternative Trading SystemsAlternative Trading Systems

Primary Market ListingsPrimary Market Listings

• Large number of listed securitiesLarge number of listed securities

• Listing often seen as a sign of prestigeListing often seen as a sign of prestige

• Wide geographic dispersion of listed Wide geographic dispersion of listed firmsfirms

• Diverse clientele of buyers and sellersDiverse clientele of buyers and sellers

• Firms wanting to list must meet listing Firms wanting to list must meet listing requirementsrequirements

Primary Market Listings: Primary Market Listings: NYSENYSE

• Largest organized securities market in United Largest organized securities market in United StatesStates

• Established in 1817, but dates back to 1792 Established in 1817, but dates back to 1792 Buttonwood Agreement by 24 brokersButtonwood Agreement by 24 brokers

• About 3,000 companies listedAbout 3,000 companies listed• Market value over $12 trillionMarket value over $12 trillion• Accounts for about 80% of the trading Accounts for about 80% of the trading

volume for listed stocksvolume for listed stocks

Primary Market Listings: Primary Market Listings: AMEXAMEX

• Started by a group who traded unlisted Started by a group who traded unlisted stocks at the corner of Wall and stocks at the corner of Wall and Hanover Streets in New York as the Hanover Streets in New York as the Outdoor Curb MarketOutdoor Curb Market

• Emphasis on foreign securitiesEmphasis on foreign securities• Doesn’t trade stocks listed on NYSEDoesn’t trade stocks listed on NYSE• Merged with Nasdaq in 1998, although Merged with Nasdaq in 1998, although

operations remain separateoperations remain separate

Primary Market Listings: Primary Market Listings: Global Stock ExchangesGlobal Stock Exchanges

• Tokyo Stock Exchange (TSE)Tokyo Stock Exchange (TSE)

• London Stock Exchange (LSE)London Stock Exchange (LSE)

• Other National ExchangesOther National Exchanges– Frankfurt, Toronto, ParisFrankfurt, Toronto, Paris

• New exchanges in emerging countriesNew exchanges in emerging countries– Russia, Poland, China, Hungary, Peru, Sri Russia, Poland, China, Hungary, Peru, Sri

LankaLanka

Primary Market Listings: Primary Market Listings: Global Stock ExchangesGlobal Stock Exchanges

• Trend toward consolidation of exchanges Trend toward consolidation of exchanges – Economies of scale, especially in terms of the Economies of scale, especially in terms of the

required technologyrequired technology– Liquidity is enhanced with more firms tradingLiquidity is enhanced with more firms trading

• Larger firms dual-listed on a U.S. exchangeLarger firms dual-listed on a U.S. exchange– Must meet listing requirements of bothMust meet listing requirements of both

• Strong exchanges abroad enable continuous Strong exchanges abroad enable continuous global trading for firmsglobal trading for firms

The Global Twenty-four The Global Twenty-four Hour MarketHour Market

• Investment firms “pass the book” Investment firms “pass the book” around the world to maintain nearly around the world to maintain nearly continuous trading by utilizing markets continuous trading by utilizing markets at Tokyo, London, and New York at Tokyo, London, and New York

• This means that the markets are This means that the markets are increasingly interrelated, moving toward increasingly interrelated, moving toward a single world marketa single world market

Primary Market Listings: Primary Market Listings: Nasdaq NMSNasdaq NMS

• Historically known as the Over-the-counter Historically known as the Over-the-counter (OTC) market(OTC) market

• Not a formal organization or a single locationNot a formal organization or a single location• Almost 3,500 issues actively traded on Almost 3,500 issues actively traded on

Nasdaq’s NMS ( National Market System) Nasdaq’s NMS ( National Market System) • More issues traded, but less dollar trading in More issues traded, but less dollar trading in

terms of total value than NYSEterms of total value than NYSE


• OperationsOperations– Any stock may be traded as long as it has Any stock may be traded as long as it has

a willing market maker to act a dealera willing market maker to act a dealer– Nasdaq is a negotiated market with Nasdaq is a negotiated market with

investors potentially dealing directly with investors potentially dealing directly with dealersdealers


The Nasdaq SystemThe Nasdaq System• National Association of Security Dealers National Association of Security Dealers

Automated Quotation systemAutomated Quotation system• Dealers may elect to make markets in stocksDealers may elect to make markets in stocks• Average of about 8 dealers per stock in 2003Average of about 8 dealers per stock in 2003• Three levels of quotations available Three levels of quotations available

– Level 1 shows a median representative quoteLevel 1 shows a median representative quote– Level 2 shows quotes by all market makersLevel 2 shows quotes by all market makers– Level 3 is for Nasdaq market makers to change Level 3 is for Nasdaq market makers to change

their quotes showntheir quotes shown


Listing Requirements for NasdaqListing Requirements for Nasdaq• Two listsTwo lists

– National Market System (NMS)National Market System (NMS)– Regular NasdaqRegular Nasdaq

• Must meet at least one standard for initial and Must meet at least one standard for initial and continued listing continued listing – See Exhibit 6.6See Exhibit 6.6

Making tradesMaking trades• Broker determines which dealer has the best Broker determines which dealer has the best

price (lowest ask price/highest bid price)price (lowest ask price/highest bid price)

Primary Market Listings: Primary Market Listings: NasdaqNasdaq

• Other Nasdaq Market SegmentsOther Nasdaq Market Segments– The Nasdaq Small-Cap Market (SCM)The Nasdaq Small-Cap Market (SCM)

• More lenient listing requirementsMore lenient listing requirements

– The Nasdaq OTC Electronic Bulletin BoardThe Nasdaq OTC Electronic Bulletin Board• Report service for smaller stocksReport service for smaller stocks

– The National Quotation Bureau (NQB) Pink The National Quotation Bureau (NQB) Pink SheetsSheets• Price quotation sheets for smaller stocksPrice quotation sheets for smaller stocks

Regional ExchangesRegional Exchanges

• Provide secondary markets for stocks not Provide secondary markets for stocks not listed on a major exchangelisted on a major exchange– Listing requirements varyListing requirements vary

• Some regional exchanges list issues also Some regional exchanges list issues also listed on a national exchangelisted on a national exchange

• Regional Exchanges in United StatesRegional Exchanges in United States– Chicago, Boston, Pacific (San Francisco/Los Chicago, Boston, Pacific (San Francisco/Los

Angeles), Philadelphia, CincinnatiAngeles), Philadelphia, Cincinnati

Third MarketThird Market

• Dealer and broker trading of shares listed on Dealer and broker trading of shares listed on an exchange away from the exchangean exchange away from the exchange

• Mostly well known stocksMostly well known stocks• May be important to investors particularly May be important to investors particularly

when the exchange is closed or when trading when the exchange is closed or when trading is suspended on the exchangeis suspended on the exchange

• Success depends on relative costs of Success depends on relative costs of transactions compared to the exchangetransactions compared to the exchange

Alternative Trading Alternative Trading Systems (The Fourth Systems (The Fourth

Market)Market)• Area of great innovationArea of great innovation• Electronic Communication Networks Electronic Communication Networks

(ECNs)(ECNs)– Buy and sell orders are matched via Buy and sell orders are matched via

computer, mainly for retail and small computer, mainly for retail and small institutional tradinginstitutional trading

• Electronic Crossing Systems (ECSs)Electronic Crossing Systems (ECSs)– Electronic means for matching larger buy Electronic means for matching larger buy

and sell ordersand sell orders

Detailed Analysis of Detailed Analysis of Exchange MarketsExchange Markets

Listed exchange markets have evolved Listed exchange markets have evolved into rather unique institutions; they can into rather unique institutions; they can be described with a number of be described with a number of attributes:attributes:

• Exchange MembershipExchange Membership

• Major Types of OrdersMajor Types of Orders

• Exchange Market MakersExchange Market Makers

Exchange MembershipExchange Membership

Four categories of membership:Four categories of membership:• SpecialistsSpecialists

– Maintain an orderly market in a stockMaintain an orderly market in a stock

• Commission brokersCommission brokers– Member firm employees executing orders for Member firm employees executing orders for

clients of the firmclients of the firm

• Floor brokersFloor brokers– Independent brokers who work for other brokers Independent brokers who work for other brokers

• Registered tradersRegistered traders– Members who buy and sell for their own accountsMembers who buy and sell for their own accounts

Major Types of OrdersMajor Types of Orders

• Market ordersMarket orders– Buy or sell at the best current priceBuy or sell at the best current price

• Limit ordersLimit orders– Order specifies the buy or sell priceOrder specifies the buy or sell price– Time specifications for order may varyTime specifications for order may vary

• Instantaneous - “fill or kill”, part of a day, a full Instantaneous - “fill or kill”, part of a day, a full day, several days, a week, a month, or good day, several days, a week, a month, or good until canceled (GTC)until canceled (GTC)


• Short salesShort sales– Sell overpriced stock that you don’t own Sell overpriced stock that you don’t own

and purchase it back later (at a lower and purchase it back later (at a lower price)price)

– Borrow the stock from another investor Borrow the stock from another investor (through your broker)(through your broker)

– Can only be made on an uptick tradeCan only be made on an uptick trade– Must pay any dividends to lenderMust pay any dividends to lender– Margin requirements applyMargin requirements apply


• Special OrdersSpecial Orders– Stop lossStop loss

• Conditional order to sell stock if it drops to a Conditional order to sell stock if it drops to a given pricegiven price

• Does not guarantee price you will get upon Does not guarantee price you will get upon salesale

• Market disruptions can cancel such ordersMarket disruptions can cancel such orders

– Stop buy orderStop buy order• Investor who sold short may want to limit loss if Investor who sold short may want to limit loss if

stock increases in pricestock increases in price


Buying on Margin:Buying on Margin:• On any type order, instead of paying 100% On any type order, instead of paying 100%

cash, borrow a portion of the transaction, cash, borrow a portion of the transaction, using the stock as collateralusing the stock as collateral

• Interest rate is based on the call money rate Interest rate is based on the call money rate from a bankfrom a bank

• Regulations limit proportion borrowed and the Regulations limit proportion borrowed and the investor’s equity percentage (margin)investor’s equity percentage (margin)– Margin requirements are from 50% upMargin requirements are from 50% up

• Changes in price affect investor’s equityChanges in price affect investor’s equity


Margin Example:Margin Example:• Buy 100 shares at $60 = $6,000 positionBuy 100 shares at $60 = $6,000 position• Borrow 50%, investment of $3,000Borrow 50%, investment of $3,000

If price increases to $70, positionIf price increases to $70, positionValue is $7,000Value is $7,000

Less - $3,000 borrowed Less - $3,000 borrowed

Leaves $4,000 equity for aLeaves $4,000 equity for a

$4,000/$7,000 = 57% equity position $4,000/$7,000 = 57% equity position


Margin Example:Margin Example:• Buy 100 shares at $60 = $6,000 positionBuy 100 shares at $60 = $6,000 position• Borrow 50%, investment of $3,000Borrow 50%, investment of $3,000

If price decreases to $50, positionIf price decreases to $50, positionValue is $5,000Value is $5,000

Less - $3,000 borrowed Less - $3,000 borrowed

Leaves $2,000 equity for aLeaves $2,000 equity for a

$2,000/$5,000 = 40% equity position $2,000/$5,000 = 40% equity position


Margin Order DetailsMargin Order Details• Initial margin requirement at least 50%Initial margin requirement at least 50%

– Lower margin requirements allow you to buy moreLower margin requirements allow you to buy more

• Maintenance marginMaintenance margin– Required proportion of equity to stock valueRequired proportion of equity to stock value– Protects broker if stock price declinesProtects broker if stock price declines– Minimum requirement is at least 25%Minimum requirement is at least 25%– Margin call on undermargined account to meet Margin call on undermargined account to meet

margin requirementmargin requirement– If call not met, stock will be sold to pay off the loanIf call not met, stock will be sold to pay off the loan

Exchange Market MakersExchange Market Makers

A NYSE specialist is exchange member assigned A NYSE specialist is exchange member assigned to handle particular stocksto handle particular stocks

• Has two roles:Has two roles:– Broker: match buy and sell orders and to process Broker: match buy and sell orders and to process

any limit orders as prices changeany limit orders as prices change– Dealer: buy and sell from their own account to Dealer: buy and sell from their own account to

maintain fair, liquid, and orderly marketmaintain fair, liquid, and orderly market

• Specialist has two income sourcesSpecialist has two income sources– Broker commission, without riskBroker commission, without risk– Dealer trading income from profit, with risk, but also Dealer trading income from profit, with risk, but also

with significant information advantageswith significant information advantages

New Trading SystemsNew Trading Systems

As trading volume has grown, it has become As trading volume has grown, it has become increasingly necessary to seek new increasingly necessary to seek new technologies to assist the trading process.technologies to assist the trading process.

• Super DOTSuper DOT– Electronic order-routing systemElectronic order-routing system– Member firms transmit market and limit orders in Member firms transmit market and limit orders in

NYSE securities to trading posts or member firm’s NYSE securities to trading posts or member firm’s boothbooth

– Report of execution returned electronicallyReport of execution returned electronically– 85% of NYSE market orders enter through Super 85% of NYSE market orders enter through Super

DOT systemDOT system


• Display BookDisplay Book– Electronic workstation that keeps track of all limit Electronic workstation that keeps track of all limit

orders and incoming market ordersorders and incoming market orders

• Opening Automated Report Service (OARS)Opening Automated Report Service (OARS)– Pre-opening market orders for Super Dot systemPre-opening market orders for Super Dot system– OARS automatically and continuously pairs buy OARS automatically and continuously pairs buy

and sell ordersand sell orders– Presents imbalance to the specialist prior to the Presents imbalance to the specialist prior to the

opening of a stockopening of a stock– Helps determine opening priceHelps determine opening price


• Market Order ProcessingMarket Order Processing– Super Dot’s postopening market order systemSuper Dot’s postopening market order system– Rapid execution and reporting of market ordersRapid execution and reporting of market orders– In 2003, 94.5% of market orders executed in less In 2003, 94.5% of market orders executed in less

than thirty secondsthan thirty seconds

• Limit Order ProcessingLimit Order Processing– Electronically files orders to be executed when and Electronically files orders to be executed when and

if a specific price is reachedif a specific price is reached– Updates the Specialist’s Display BookUpdates the Specialist’s Display Book– Good-until-cancelled orders that are not executed Good-until-cancelled orders that are not executed

are stored until executed or canceledare stored until executed or canceled


• NasdaqNasdaq– Small-Order Execution System (SOES)Small-Order Execution System (SOES)

• Helps to ensure the execution of smaller orders Helps to ensure the execution of smaller orders (up to 1000 shares)(up to 1000 shares)

– SelectNetSelectNet• A computer order-routing and execution A computer order-routing and execution

service for institutional investors service for institutional investors

Innovations for Innovations for CompetitionCompetition

• Two competing modelsTwo competing models– Order-driven market (Exchanges)Order-driven market (Exchanges)– Quote-driven market (Nasdaq dealers)Quote-driven market (Nasdaq dealers)

• SEC has encouraged competitionSEC has encouraged competition– Consolidated Quotation System (CQS)Consolidated Quotation System (CQS)

• Allows subscribers to see quotations from both Allows subscribers to see quotations from both exchanges and dealers simultaneouslyexchanges and dealers simultaneously

– Intermarket Trading System (ITS)Intermarket Trading System (ITS)• Centralized quotation system between Nasdaq and Centralized quotation system between Nasdaq and

regional exchangesregional exchanges

Future DevelopmentsFuture Developments

• Continued competition of ECNs with the Continued competition of ECNs with the order-driven and quote-driven marketsorder-driven and quote-driven markets

• NYSE has sought to protect itself NYSE has sought to protect itself against such competition through against such competition through regulationsregulations– They argue that they offer many investors They argue that they offer many investors

the best price even if the other platforms the best price even if the other platforms offer better speed of executionoffer better speed of execution

Chapter 6_05.ppt

Business

Transcript of Chapter 6_05.ppt