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 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 firms shares

TRADING 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 arbitrage orders 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 makers
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PLACING AN ORDER
LARGE ORDERS:
Found in blocks of at least 10,000 shares Usually placed by institutional investors Handled mostly by upstairs dealer market

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PLACING AN ORDER
SMALLER ORDERS:
in the past these orders were often overlooked in favor of larger orders

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PLACING AN ORDER
to correct this oversight the SuperDOT system was created 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 trading
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OTHER EXCHANGES
THE AMERICAN STOCK EXCHANGE:
Lists stocks of smaller-sized companies

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OTHER EXCHANGES
REGIONAL EXCHANGES:
Boston Cincinnati Chicago Pacific Philadelphia

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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
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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 dealers
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OVER-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 Issues

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OVER-THE-COUNTER MARKET
SMALL ORDER EXECUTION SYSTEM
electronic order-routing system
limit: 100 shares

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THIRD 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 breakers

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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: INSTINET
give quotations and executions information immediately
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OTHER METHODS OF ORDERING

THE GROSSING SYSTEM PREFERENCING INTERNALIZATION

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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 stock

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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 processed continuously
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FOREIGN MARKETS
TORONTO STOCK EXCHANGE:
Uses CATS (Computer-Assisted Trading System) Similar to IYATOSE trading in Tokyo

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INFORMATION- AND LIQUIDITY-MOTIVATED TRADERS

THE DEALERS 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 traders

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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 offset the mistaken price quotes to the informed traders.

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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

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REGULATION OF SECURITIES MARKETS

Provisions of the Securities Act of 1933
known as the truth in securities law requires registration of new issues disclosure of relevant information by issuer prohibits misrepresentation and fraud

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REGULATION OF SECURITIES MARKETS

Provisions of the Securities Exchange Act of 1934
requires national exchanges, brokers, and dealers to be registered made possible creation of Self Regulatory Organizations (SROs) to oversee the industry established the Securities Exchange Commission (SEC)

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REGULATION OF SECURITIES MARKETS

Provisions of the Investment Company Act of 1940
extends disclosure and registration requirements to investment companies

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REGULATION OF SECURITIES MARKETS

Provisions of the Investment Advisors Act of 1940
required registration of those providing advice

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