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Goldman Sachs & Co. Controllers Training Equity Markets Module - Session 6 Comparison of Equity Markets -- NYSE, NASDAQ, ECNs Alan L. Tucker, Ph.D.

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Presentation on theme: "Goldman Sachs & Co. Controllers Training Equity Markets Module - Session 6 Comparison of Equity Markets -- NYSE, NASDAQ, ECNs Alan L. Tucker, Ph.D."— Presentation transcript:

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

2 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 04/12/01 GS: Equity Module, Session 6 Copyright Marshall, Tucker & Associates, LLC

3 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 04/12/01 GS: Equity Module, Session 6 Copyright Marshall, Tucker & Associates, LLC

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

5

6 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 04/12/01 GS: Equity Module, Session 6 Copyright Marshall, Tucker & Associates, LLC

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

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

9 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 04/12/01 GS: Equity Module, Session 6 Copyright Marshall, Tucker & Associates, LLC

10 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 04/12/01 GS: Equity Module, Session 6 Copyright Marshall, Tucker & Associates, LLC

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

12 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 04/12/01 GS: Equity Module, Session 6 Copyright Marshall, Tucker & Associates, LLC

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

14 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 04/12/01 GS: Equity Module, Session 6 Copyright Marshall, Tucker & Associates, LLC

15 Nasdaq Operations Managed by NASD Nasdaq National Market (NNM)
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… 04/12/01 GS: Equity Module, Session 6 Copyright Marshall, Tucker & Associates, LLC

16 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 04/12/01 GS: Equity Module, Session 6 Copyright Marshall, Tucker & Associates, LLC

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

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

19 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 04/12/01 GS: Equity Module, Session 6 Copyright Marshall, Tucker & Associates, LLC

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

21 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 04/12/01 GS: Equity Module, Session 6 Copyright Marshall, Tucker & Associates, LLC

22 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 in 1999 Which is better: price or value? 04/12/01 GS: Equity Module, Session 6 Copyright Marshall, Tucker & Associates, LLC

23 Problem Suppose there are only two stocks in the market and the following information is given: Price weighted = ( ) / 2 = $55 at beginning of year Price weighted = ( ) / 2 = $89.50 at end of year Change = ( ) / 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, ,000) / 5,000 = 48% increase 04/12/01 GS: Equity Module, Session 6 Copyright Marshall, Tucker & Associates, LLC

24 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? 04/12/01 GS: Equity Module, Session 6 Copyright Marshall, Tucker & Associates, LLC

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

26 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? 04/12/01 GS: Equity Module, Session 6 Copyright Marshall, Tucker & Associates, LLC

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

28 NYSE & NASDAQ Web Tours Compaq Case Study
Compaq Case Study 04/12/01 GS: Equity Module, Session 6 Copyright Marshall, Tucker & Associates, LLC

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