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04/12/01 GS: Equity Module, Session 6 Copyright 1997-2001 Marshall, Tucker & Associates, LLC Goldman Sachs & Co. Controllers Training Equity Markets Module.

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Presentation on theme: "04/12/01 GS: Equity Module, Session 6 Copyright 1997-2001 Marshall, Tucker & Associates, LLC Goldman Sachs & Co. Controllers Training Equity Markets Module."— Presentation transcript:

1 04/12/01 GS: Equity Module, Session 6 Copyright 1997-2001 Marshall, Tucker & Associates, LLC Goldman Sachs & Co. Controllers Training Equity Markets Module - Session 6 Comparison of Equity Markets -- NYSE, NASDAQ, ECNs Alan L. Tucker, Ph.D. 631-331-8024 (voice) 631-331-8044 (fax) tucker@mtaglobal.com Copyright © 1997-2001 Marshall, Tucker & Associates, LLC All Rights Reserved

2 04/12/01 GS: Equity Module, Session 6 Copyright 1997-2001 Marshall, Tucker & Associates, LLC Comparison of Equity Markets Primary & Secondary Markets The NYSE Operation of the NYSE NASDAQ Competitors Stock Market Information Tour of the NYSE and NASDAQ Web Sites Compaq Case Study

3 04/12/01 GS: Equity Module, Session 6 Copyright 1997-2001 Marshall, Tucker & Associates, LLC The Primary Market Who owns stocks? 50 million individuals directly/ mutual funds About 56% of the total Primary markets IPO’S Investment Banker- underwrites Fixed commitment Best efforts Netscape

4 04/12/01 GS: Equity Module, Session 6 Copyright 1997-2001 Marshall, Tucker & Associates, LLC The Primary Market (cont.) SEC Prospectus Red Herring Tombstone Shelf Registration

5

6 04/12/01 GS: Equity Module, Session 6 Copyright 1997-2001 Marshall, Tucker & Associates, LLC Secondary Markets Channels Directly with other investors Indirectly through a broker Directly with a dealer Dealers and Brokers Bid/Ask prices - spread Exchanges NYSE, AMEX, the “regionals” Nasdaq

7 04/12/01 GS: Equity Module, Session 6 Copyright 1997-2001 Marshall, Tucker & Associates, LLC NYSE (founded 1792) Membership 1,366 members -- “own seats” Member firms Buying/leasing a seat $55,000 - $2,000,000 Ownership/governance

8 04/12/01 GS: Equity Module, Session 6 Copyright 1997-2001 Marshall, Tucker & Associates, LLC NYSE (cont.) Member Types (in order by size) Commission brokers (~500) Specialists (~400) Specialist firms Floor / $2 brokers Floor traders

9 04/12/01 GS: Equity Module, Session 6 Copyright 1997-2001 Marshall, Tucker & Associates, LLC NYSE Operations Listing 3,356 companies in 2001 Listing requirements/ fees Order Flow Floor Activity Specialist’s post Order execution SuperDOT (designated order turnaround) “Stopping” and price improvement

10 04/12/01 GS: Equity Module, Session 6 Copyright 1997-2001 Marshall, Tucker & Associates, LLC NYSE Minimum Listing Requirements 2,200 shareholders Six month average trading at 100,000 shares a month 1.1 million shares in public Public shares at minimum $40 million in market value Annual earnings of $2.5 million before taxes in recent years ($2 million in two preceding years) Tangible assets of $40 million

11 04/12/01 GS: Equity Module, Session 6 Copyright 1997-2001 Marshall, Tucker & Associates, LLC Minimum Listing Requirements

12 04/12/01 GS: Equity Module, Session 6 Copyright 1997-2001 Marshall, Tucker & Associates, LLC Order Types Role of specialist The spread Market orders Limit orders/order book Stop orders Others (brokerage firms) Fill or kill/ all or none Day/ Good-till-cancelled At open/ at close NYSE uptick rule

13 04/12/01 GS: Equity Module, Session 6 Copyright 1997-2001 Marshall, Tucker & Associates, LLC Stock Market Order Types

14 04/12/01 GS: Equity Module, Session 6 Copyright 1997-2001 Marshall, Tucker & Associates, LLC Nasdaq (founded 1971) National Association of Security Dealers Automated Quotation system Organization Electronic Network Multiple Dealers or “market makers” OTC market Size ~5,000 members >800 million shares/day Dollar Volume

15 04/12/01 GS: Equity Module, Session 6 Copyright 1997-2001 Marshall, Tucker & Associates, LLC Nasdaq Operations Managed by NASD Level I: registered rep’s - median quotes Level II: brokers - inside quotes Level III: market makers - change quotes Nasdaq National Market (NNM) Founded 1982 ~4,300 securities in 1997 Last trade info The Nasdaq controversy…

16 04/12/01 GS: Equity Module, Session 6 Copyright 1997-2001 Marshall, Tucker & Associates, LLC NYSE / Nasdaq Competitors Third market OTC trades in listed securities off exchange Payment for order flow Fourth market Direct trading -- no brokers Instinet Regional exchanges

17 04/12/01 GS: Equity Module, Session 6 Copyright 1997-2001 Marshall, Tucker & Associates, LLC Index Correlations

18 04/12/01 GS: Equity Module, Session 6 Copyright 1997-2001 Marshall, Tucker & Associates, LLC Stock Market Indexes Many different averages Dow averages (DJIA) S&P indexes (500) Russell indexes Four differences What market? What types of stock? How many stocks? How computed?

19 04/12/01 GS: Equity Module, Session 6 Copyright 1997-2001 Marshall, Tucker & Associates, LLC Stock Market Indexes (cont’d) Price-weighted index Stocks held in proportion to share price DJIA Value-weighted index Stocks held in proportion to total company market value S&P 500 Index staleness

20 04/12/01 GS: Equity Module, Session 6 Copyright 1997-2001 Marshall, Tucker & Associates, LLC Major Stock Indexes

21 04/12/01 GS: Equity Module, Session 6 Copyright 1997-2001 Marshall, Tucker & Associates, LLC Price vs. value weighting Suppose we have the following Price per share # shares outstanding Beg. Year End Year Worf Co.100 million $10$ 9 Dax Inc.10 million $20$25 How did the market do for the year? Price weighted: $15 to $17, or 13.33% Beg.= (10+20) / 2 = $15; End = (9+25) / 2 = $17 Value weighted: $1.2B to $1.15B, or -4.17% Beg. = [(100 M x 10) + (10 M x 20)] / 2 = $600 M End = [(100 M x 9) + (10 M x 25)] / 2 = $575 M

22 04/12/01 GS: Equity Module, Session 6 Copyright 1997-2001 Marshall, Tucker & Associates, LLC More on price weighting A splitting headache……… Suppose Dax splits 4-for-1 Price falls to $5 Shares go to $40 million Value weighted index not affected Finding the new divisor ($10 +$5)/d = $15, so d=1, down from 2. DJIA divisor at 0.19740463 in 1999 Which is better: price or value?

23 04/12/01 GS: Equity Module, Session 6 Copyright 1997-2001 Marshall, Tucker & Associates, LLC Problem Suppose there are only two stocks in the market and the following information is given: Price weighted = (30 + 80) / 2 = $55 at beginning of year Price weighted = (39 + 140) / 2 = $89.50 at end of year Change = (89.50 - 55) / 55 = 62.73% increase Value weighted = [(200 x 30) + (50 x 80)] / 2 = $5,000 M Value weighted = [(200 x 39) + (50 x 140)] / 2 = $7,400 M Change = (7,400 - 5,000) / 5,000 = 48% increase

24 04/12/01 GS: Equity Module, Session 6 Copyright 1997-2001 Marshall, Tucker & Associates, LLC Problem Suppose the following 3 defense stocks are to be combined into a stock index in January 1998 (perhaps a portfolio manager believes these stocks are an appropriate benchmark for his or her performance): a. Calculate the initial value of the index if a price-weighting scheme is used. b. what is the rate of return on this index for the year ending 12/31/98? For the year ending 12/31/99? c. What is the total return on this index over the 2-year period 1998 and 1999?

25 04/12/01 GS: Equity Module, Session 6 Copyright 1997-2001 Marshall, Tucker & Associates, LLC Problem Solution A. 1/1/98: Index value = (60 + 20 + 40) / 3 = 40 B. 1/1/99: Index value = (75 + 25 + 35) / 3 =45 1998 return = (45 - 40) / 40 = 12.5% 1/1/00: Index value (60 + 40 +35) / 3 = 45 1999 return = (45 - 45) / 45 = 0% C. Total 2-year index return = (45 - 40) / 40 = 12.5%

26 04/12/01 GS: Equity Module, Session 6 Copyright 1997-2001 Marshall, Tucker & Associates, LLC Problem In this problem, suppose that DM shareholders approve a 5 for 1 stock split on 1/1/99. What is the new divisor for the index? Calculate the rate of return on the index for the year ending 12/31/99. If DM’s share price on 1/1/00 is $12 per share. What is the total 2 year return on the index now?

27 04/12/01 GS: Equity Module, Session 6 Copyright 1997-2001 Marshall, Tucker & Associates, LLC Problem Solution Share price after split = $75 / 5 = $15 Index value on 1/1/99, without the split is Index = (75 + 25 + 35) / 3 = 45 New divisor: (15 + 25 + 35) / d = 45 so d = 1.667 Index value on 1/1/00 = (12 + 40 + 35) / 1.667 = 52.2 1999 return = (52.2 - 45) / 45 = 16.0% Total 2-yr return = (52.2 - 40) / 40 = 30.5% based on 1/1/98 index of (60+20+40)/3 = 40

28 04/12/01 GS: Equity Module, Session 6 Copyright 1997-2001 Marshall, Tucker & Associates, LLC NYSE & NASDAQ Web Tours Compaq Case Study www.nyse.com www.nasdaq.com www.nextrade.org Compaq Case Study

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