Professional Documents
Culture Documents
to accompany
Chapter 4
Chapter 4
Organization and Functioning of
Securities Markets
Questions to be answered:
• What is the purpose and function of a
market?
• What are the characteristics that determine
the quality of a market?
• What is the difference between a primary
and secondary capital market and how do
these markets support each other?
Chapter 4
Organization and Functioning of
Securities Markets
• What are the national exchanges and how
are the major security markets becoming
linked (what is meant by “passing the
book”)?
• What are the regional stock exchanges and
the over-the-counter (OTC) market?
• What are the alternative market-making
arrangements available on the exchanges
and the OCT market?
Chapter 4
Organization and Functioning of
Securities Markets
• What are the major types of orders
available to investors and market makers?
• What are the major functions of a specialist
on the NYSE and how does the specialist
differ from the central market maker on
other exchanges?
• What are the major factors that have caused
the significant changes in markets around
the world in the past 10 to 15 years?
What is a market?
• Brings buyers and sellers together to aid in
the transfer of goods and services
• Does not require a physical location
• Both buyers and sellers benefit from the
market
Characteristics of a Good Market
• Availability of past transaction information
– must be timely and accurate
• Liquidity
– marketability
– price continuity
– depth
• Low Transaction costs
• Rapid adjustment of prices to new information
Organization of the Securities Market
• Primary markets
– Market where new securities are sold and funds
go to issuing unit
• Secondary markets
– Market where outstanding securities are bought
and sold by investors. The issuing unit does not
receive any funds in a secondary market
transaction
Corporate Bond and Stock Issues
New issues are divided into two groups
1. Seasoned new issues - new shares offered
by firms that already have stock
outstanding
2. Initial public offerings (IPOs) - a firm
selling its common stock to the public for
the first time
Underwriting Relationships with
Investment Bankers
1. Negotiated
– Most common
– Full services of underwriter
2. Competitive bids
– Corporation specifies securities offered
– Lower costs
– Reduced services of underwriter
3. Best-efforts
– Investment banker acts as broker
Why Secondary Financial
Markets Are Important
• Provides liquidity to investors who
acquire securities in the primary
market
• Results in lower required returns than
if issuers had to compensate for lower
liquidity
• Helps determine market pricing for
new issues
Secondary Equity Markets
1. Major national stock exchanges
– New York, American, Tokyo, and London stock
exchanges
2. Regional stock exchanges
– Chicago, San Francisco, Boston, Osaka,
Nagoya, Dublin, Cincinnati
3. Over-the-counter (OTC) market
– Stocks not listed on organized exchange
Trading Systems
• Pure auction market
– Buyers and sellers are matched by a broker at a
central location
– Price-driven market
• Dealer market
– Dealers provide liquidity by buying and selling
shares
– Dealers may compete against other dealers
Call Versus Continuous Markets
• Call markets trade individual stocks at
specified times to gather all orders and
determine a single price to satisfy the most
orders
• Used for opening prices on NYSE if orders
build up overnight or after trading is
suspended
• In a continuous market, trades occur at any
time the market is open
National Stock Exchanges
• Large number of listed securities
• Prestige of firms listed
• Wide geographic dispersion of listed
firms
• Diverse clientele of buyers and sellers
Regional Exchanges
• Stocks not listed on a formal exchange
– Listing requirements vary
• Listed stocks
– Allow brokers that are not members of a
national exchange access to securities
• Regional Exchanges in United States
– Chicago, Boston, Cincinnati, Pacific,
Philadelphia
Over-the-Counter (OTC) Market
• Not a formal organization
• Largest segment of the U.S. secondary market
• Unlisted stocks and listed stocks (third market)
• Lenient requirements for listing on OTC
• 5,000 issues actively traded on NASDAQ NMS
(National Association of Securities Dealers Automated
Quotations National Market System)
• 1,000 issues on NASDAQ apart from NMS
• 1,000 issues not on NASDAQ
Operation of the OTC