CHAPTER THREE SECURITY MARKETS. TYPES OF SECURITY MARKETS n CALL MARKETS have posted hours for...
-
date post
21-Dec-2015 -
Category
Documents
-
view
215 -
download
1
Transcript of CHAPTER THREE SECURITY MARKETS. TYPES OF SECURITY MARKETS n CALL MARKETS have posted hours for...
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
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
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