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SECURITIES MARKETS
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
– 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
2. Provide adequate liquidity by minimizing time and cost to trade and promoting price
continuity.
Types Of Markets
• Brokered Markets
• Dealer Markets
• Auction Markets
– Brokers & dealers trade in one location, trading is more or less continuous
Types Of Orders
– On the exchange the limit order is placed in a limit order book kept by an
exchange official or computer
Nasdaq and NYSE both now are primarily electronic markets. These changes were driven by an
interaction of new technologies and new regulations. New regulations allowed brokers to compete for
business, broke the hold that dealers once had on information about best-available bid and ask prices,
forced integration of markets, and allowed securities to trade in ever-smaller price increments (called
tick sizes ). Technology made it possible for traders to rapidly compare prices across markets and direct
their trades to the markets with the best prices.
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; the NYSE lost its effective monopoly in trading its
own listed stocks, and by the end of the decade, its share in the trading of NYSE-listed stocks fell from
about 75% to 25%. While specialists still exist, trading today is overwhelmingly electronic, at least for
stocks.
• Nasdaq : largest organized stock market for OTC trading; information system for
individuals, brokers and dealers.
• Organized Exchanges
o Auction markets are markets with centralized order flow
o Dealership function: can be competitive or assigned by the exchange
(Specialists)
– Regionals
High-frequency trading is a special class of algorithmic trading in which computer programs initiate
orders in tiny fractions of a second, far faster than any human could process the information driving the
trade.It is a type of algorithmic trading characterized by high speeds, high turnover rates, and high
order-to-trade ratios that leverages high-frequency financial data and electronic trading tools.
Dark Pools is a private forum for trading securities, derivatives, and other financial instruments.
Bond Trading is a financial market where participants can issue new debt, known as the primary
market, or buy and sell debt securities, known as the secondary market. This is usually in the form of
bonds, but it may include notes, bills, and so on.
Securities markets have come under increasing pressure in recent years to make international
alliances or mergers. Much of this pressure is due to the impact of electronic trading. To a growing
extent, traders view stock markets as networks that link them to other traders, and there are
increasingly fewer limits on the securities around the world that they can trade.
3.7 Trading Cost
Part of the cost of trading a security is obvious and explicit. Your broker must be paid a commission.
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.
– Besides carrying out the basic services of executing orders, holding securities for
safekeeping, extending margin loans, and facilitating short sales, brokers routinely
provide information and advice relating to investment alternatives.
discount brokers
– Discount brokers provide “no-frills” services. They buy and sell securities, hold them for
safekeeping, offer margin loans, facilitate short sales, and that is all. The only
information they provide about the securities they handle is price quotations.
When purchasing securities, investors have easy access to a source of debt financing called broker’s
call loans. The act of taking advantage of broker’s call loans is called buying on margin. Purchasing
stocks on margin means the investor borrows part of the purchase price of the stock from a broker. The
margin in the account is the portion of the purchase price contributed by the investor; the remainder is
borrowed from the broker.
The sale of shares not owned by the investor but borrowed through a broker and later purchased to
replace the loan. A short sale allows investors to profit from a decline in a security’s price. An investor
borrows a share of stock from a broker and sells it.
• Established the SEC and require periodic disclosure of relevant financial information for
firms with publicly traded securities
• Protects investors from losses if a brokerage firm fails (up to $500,000 per customer).
• Self-Regulation
• Formed in 2007 by consolidating regulatory arms of the NASD and the NYSE.
• Insider Trading
It is illegal for anyone to transact in securities to profit from inside information, that is,
private information held by officers, directors, or major stockholders that has not yet
been divulged to the public. But the definition of insiders can be ambiguous.