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Zaky Zaljuhdi



3.1 How Firms Issue Securities

The term primary market refers to the market where new securities are issued and sold. The key
characteristic of this market is that the issuer receives the proceeds from the sale. In the secondary
market existing securities are traded among investors. The issuing firm doesn’t receive any proceeds
and is not directly involved.

If a primary market offering is made to the general public (a public offering) it must be registered
with the Securities Exchange Commission or SEC. SEC approval indicates the issuer has divulged
sufficient information for the public to evaluate the offering. Private offerings are not registered, and
may be sold to only a limited number of investors, with restrictions on resale.

• Primary

– New issue is created and sold

– Key factor: issuer receives the proceeds from the sale

– Public offerings: registered with the SEC and sale is made to the investing public

– Private offerings: not registered, and sold to only a limited number of investors,
with restrictions on resale

• Underwritten vs. “Best Efforts”

– Underwritten: banker makes a firm commitment on proceeds to the issuing

– Best Efforts: banker(s) helps sell but makes no firm commitment

• Negotiated vs. Competitive Bid

– Negotiated: issuing firm negotiates terms with investment banker
– Competitive bid: issuer structures the offering and secures bids

3.2 How Securities Are Traded

Functions of Financial Markets

Overall purpose: facilitate low cost investment

Bring together buyers and sellers at low cost 2. broke the hold that dealers once had on information about best-available bid and ask prices. 1. Provide adequate liquidity by minimizing time and cost to trade and promoting price continuity. forced integration of markets. New regulations allowed brokers to compete for business. Technology made it possible for traders to rapidly compare prices across markets and direct their trades to the markets with the best prices. 3. . and allowed securities to trade in ever-smaller price increments (called tick sizes ).3 The Rise Of Electronic Trading Nasdaq and NYSE both now are primarily electronic markets. Set & update prices of financial assets 4. Reduces information costs associated with investing Types Of Markets • Direct Search Markets – Buyers and sellers locate one another on their own • Brokered Markets – 3rd party assistance in location buyer or seller • Dealer Markets – 3rd party acts as intermediate buyer/seller • Auction Markets – Brokers & dealers trade in one location. These changes were driven by an interaction of new technologies and new regulations. trading is more or less continuous Types Of Orders • Market order: execute immediately at the best price • Limit order: Order to buy or sell at a specified price or better – On the exchange the limit order is placed in a limit order book kept by an exchange official or computer 3.

. trading today is overwhelmingly electronic. and so on. the NYSE lost its effective monopoly in trading its own listed stocks. bills. Dark Pools is a private forum for trading securities. This is usually in the form of bonds. Bond Trading is a financial market where participants can issue new debt. known as the secondary market. Electronic trading networks and the integration of markets in the wake of Reg NMS made it much easier for exchanges around the world to compete. 3. or buy and sell debt securities. traders view stock markets as networks that link them to other traders.S markets • Nasdaq : largest organized stock market for OTC trading. 3. And National Market System 3. at least for stocks. information system for individuals. and high order-to-trade ratios that leverages high-frequency financial data and electronic trading tools. While specialists still exist. its share in the trading of NYSE-listed stocks fell from about 75% to 25%. but it may include notes. brokers and dealers. To a growing extent.It is a type of algorithmic trading characterized by high speeds. and by the end of the decade.5 New Trading Strategies Algorithmic trading delegates trading decisions to computer programs. far faster than any human could process the information driving the trade. Much of this pressure is due to the impact of electronic trading. and there are increasingly fewer limits on the securities around the world that they can trade. • Organized Exchanges o Auction markets are markets with centralized order flow o Dealership function: can be competitive or assigned by the exchange (Specialists) – New York Stock Exchange – American Stock Exchange – Regionals • Electronic Communication Networks (ECNs). derivatives.4 U. high turnover rates. and other financial instruments.6 Globalization Of Stock Markets Securities markets have come under increasing pressure in recent years to make international alliances or mergers. High-frequency trading is a special class of algorithmic trading in which computer programs initiate orders in tiny fractions of a second. known as the primary market.

the remainder is borrowed from the broker. and that is all. 3. 3.8 Buying on Margin  borrowing money to purchase stock. Purchasing stocks on margin means the investor borrows part of the purchase price of the stock from a broker. Your broker must be paid a commission.10 Regulation Of Security Markets • Securities Acts of 1933 • Requires full disclosure of information by issuers of new securities • Securities Acts of 1934 • Established the SEC and require periodic disclosure of relevant financial information for firms with publicly traded securities • Gives authority to regulate exchanges and OTC trading/traders to the SEC . holding securities for safekeeping. The margin in the account is the portion of the purchase price contributed by the investor. – Besides carrying out the basic services of executing orders.  discount brokers – Discount brokers provide “no-frills” services.9 Short Sales The sale of shares not owned by the investor but borrowed through a broker and later purchased to replace the loan. When purchasing securities. The only information they provide about the securities they handle is price quotations. offer margin loans. They buy and sell securities. hold them for safekeeping. extending margin loans. Individuals may choose from two kinds of brokers:  full-service brokers – provide a variety of services often are referred to as account executives or financial consultants. facilitate short sales.7 Trading Cost Part of the cost of trading a security is obvious and explicit. A short sale allows investors to profit from a decline in a security’s price. investors have easy access to a source of debt financing called broker’s call loans. brokers routinely provide information and advice relating to investment alternatives.3. The act of taking advantage of broker’s call loans is called buying on margin. and facilitating short sales. An investor borrows a share of stock from a broker and sells it. 3.

private information held by officers. . and. or major stockholders that has not yet been divulged to the public. But the definition of insiders can be ambiguous. tainted securities research and recommendations put out to the public. promulgates trading practice rules and administers a dispute resolution forum for investors and firms. • The Sarbanes-Oxley Act  The scandals of 2000–2002 centered largely on three broad practices: allocations of shares in initial public offerings. probably most important. • CFTC retains authority over commodity futures and Federal Reserve sets margin requirements. • Examines securities firms. • Self-Regulation • Financial Industry Regulatory Authority (FINRA) • Formed in 2007 by consolidating regulatory arms of the NASD and the NYSE. directors. misleading financial statements and accounting practices. • Insider Trading  It is illegal for anyone to transact in securities to profit from inside information. that is.000 per customer). • Securities Investor Protection Act of 1970 • Protects investors from losses if a brokerage firm fails (up to $500.