1. CHAPTER THREE SECURITY MARKETS

2. TYPES OF SECURITY MARKETS n CALL MARKETS have posted hours for trading only “called” securities are for sale to those buyers or sellers

3. TYPES OF SECURITY MARKETS n CONTINUOUS MARKETS trading may occur at any time during a regular trading day dealers (market makers) 3 provide liquidity to brokers who cannot find a suitable buyer or seller 3 usually are temporary positions

4. MAJOR U.S. SECURITY MARKETS n 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

5. MAJOR U.S. SECURITY MARKETS n NYSE SEATS: purchased from a current member give privileges to members to execute trades held by individuals as well as brokerage firms

6. MAJOR U.S. SECURITY MARKETS n LISTED SECURITIES: Some criteria to list the degree of national interest relative position and stability in the industry prospects of maintaining its relative position

7. TRADING HALTS n THE EXCHANGE MAY IMPOSE TRADING HALTS AND CIRCUIT BREAKERS Trading Halts: 3 are temporary suspensions of trading in a listed firm’s shares

8. TRADING HALTS Circuit Breakers: Rule 80A 3 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.”

9. TRADING HALTS Circuit breakers: Rule 80B 3 if a 350 point change before 3 PM occurs, the NYSE shuts down for one-half hour 3 if a 550 point change (total) occurs after the reopen, NYSE shuts down for 1 hour.

10. PLACING AN ORDER n 4 TYPES OF NYSE MEMBERSHIPS: commission brokers: 3 earn commission for their brokerage firms floor brokers: 3 assist commission brokers during overload periods floor traders: 3 trade only for themselves specialists: 3 keep unfilled limit orders/act as market makers

11. PLACING AN ORDER n LARGE ORDERS: Found in blocks of at least 10,000 shares Usually place by institutional investors Handled mostly by upstairs dealer market

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

13. PLACING AN ORDER to correct this oversight the SuperDOT system was create stands for Super Designated Order Turnaround: 3 handles smaller orders involving 30,999 or fewer shares 3 orders sent directly to trading post specialist for immediate exposure and execution 3 facilitates the trading technique known as program trading

14. OTHER EXCHANGES n THE AMERICAN STOCK EXCHANGE: Lists stocks of smaller-sized companies

15. OTHER EXCHANGES n REGIONAL EXCHANGES: Boston Cincinnati Chicago Pacific Philadelphia

16. OTHER EXCHANGES n REGIONAL EXCHANGES: Options 3 Chicago Board Options Exchange – one of the largest Futures 3 The Chicago Mercantile Exchange – offers interest rate, commodities, and index futures contracts

17. OVER-THE-COUNTER MARKET n 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 3 a nationwide communication network allows instant access to all major dealers

18. OVER-THE-COUNTER MARKET n NASDAQ CLASSIFICATION OF STOCKS: National Market System (NMS) 3 stocks with larger trading volumes 3 stocks that are eligible for margin and short transactions 3 Small Cap Issues

19. OVER-THE-COUNTER MARKET n SMALL ORDER EXECUTION SYSTEM electronic order-routing system 3 limit: 100 shares

20. THIRD AND FOURTH MARKETS n THIRD MARKET: A name for a market where 3 any trading of NYSE security is permitted 3 trading hours are not fixed 3 trading is not bound by NYSE trading halts or circuit breakers

21. THIRD AND FOURTH MARKETS n THE FOURTH MARKET: Direct trading in exchange-listed securities Between investors without the benefit of a broker Trading facilitated by an automated system: INSTINET 3 give quotations and executions information immediately

22. OTHER METHODS OF ORDERING n THE GROSSING SYSTEM n PREFERENCING n INTERNALIZATION

23. FOREIGN MARKETS n LONDON STOCK EXCHANGE: Significantly changed by the “Big Bang” of 1986: 3 ending fixed commissions 3 introduced SEAQ (Stock Exchange Automated Quotations) 3 attracted trading in non-UK stock

24. FOREIGN MARKETS n TOKYO STOCK EXCHANGE: Has introduced major reforms: 3 introduced CORES (Computer-Assisted Order Routing and Execution System) 3 introduced FORES (Floor Order Routing and Execution System) 3 Saitori System of Trading 3 follows IYATOSE Method at market open similar to a call marekt – Zaraba used where orders are process continuously

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

26. INFORMATION- AND LIQUIDITY- MOTIVATED TRADERS n THE DEALER’S DILEMMA: Adverse Selection Assume there are two types of traders that a dealer may confront during the trading day: 3 informed traders whose information and identity are unknown to the dealer 3 uninformed (liquidity) traders

27. INFORMATION- AND LIQUIDITY- MOTIVATED TRADERS n THE DILEMMA: How to quote the correct price and make a profit? Solution: 3 set the bid-ask spread wide enough so that the gains from the uninformed traders offsets the mistaken price quotes to the informed traders.

28. REGULATION OF SECURITIES MARKETS n 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

29. REGULATION OF SECURITIES MARKETS Provisions of the Securities Act of 1933 3 known as the “truth in securities” law 3 requires registration of new issues 3 disclosure of relevant information by issuer 3 prohibits misrepresentation and fraud

30. REGULATION OF SECURITIES MARKETS Provisions of the Securities Exchange Act of 1934 3 requires national exchanges, brokers, and dealers to be registered 3 made possible creation of Self Regulatory Organizations (SROs) to oversee the industry 3 established the Securities Exchange Commission (SEC)

31. REGULATION OF SECURITIES MARKETS Provisions of the Investment Company Act of 1940 3 extends disclosure and registration requirements to investment companies

32. REGULATION OF SECURITIES MARKETS Provisions of the Investment Advisors Act of 1940 3 required registration of those providing advice

33. END OF CHAPTER 3