Trading Locations Stock Exchanges trading floors

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Trading Locations Stock Exchanges trading floors

  1. 1. Trading Locations <ul><li>Stock Exchanges </li></ul><ul><ul><li>trading floors </li></ul></ul><ul><ul><li>auction system </li></ul></ul><ul><ul><li>central auction specialist system </li></ul></ul><ul><li>Over-The-Counter Market </li></ul><ul><ul><li>no trading floor </li></ul></ul><ul><ul><li>negotiated system </li></ul></ul><ul><ul><li>multiple market maker system </li></ul></ul><ul><li>Independent Electronic Trading Systems </li></ul>
  2. 2. Stock Exchanges in The US <ul><li>Major National Stock Exchanges </li></ul><ul><ul><li>NYSE or Big Board </li></ul></ul><ul><ul><li>AMEX or ASE or Curb </li></ul></ul><ul><li>Regional Stock Exchanges </li></ul><ul><ul><li>Boston, Chicago, Cincinnati, San Francisco, Philadelphia </li></ul></ul><ul><li>OTC Market </li></ul><ul><ul><li>NASDAQ </li></ul></ul><ul><ul><li>NASD </li></ul></ul>
  3. 3. Types of Markets <ul><li>First Market </li></ul><ul><ul><li>trading on exchanges of stocks listed on an exchange </li></ul></ul><ul><li>Second Market </li></ul><ul><ul><li>trading in OTC market of stocks not listed on an exchange </li></ul></ul><ul><li>Third Market </li></ul><ul><ul><li>trading in OTC market of stocks listed on an exchange </li></ul></ul><ul><li>Fourth Market </li></ul><ul><ul><li>private transactions between institutional investors </li></ul></ul>
  4. 4. International Stock Exchanges <ul><li>Japan – Tokyo plus 7 others </li></ul><ul><li>United Kingdom – London </li></ul><ul><li>Germany – Frankfurt </li></ul><ul><li>France – Paris </li></ul><ul><li>Hong Kong </li></ul><ul><li>Canada – Toronto </li></ul>
  5. 5. Functions of Brokers <ul><li>Receive and track orders </li></ul><ul><li>Find other parties </li></ul><ul><li>Negotiate prices </li></ul><ul><li>Server as focal point trading </li></ul><ul><li>Execute orders </li></ul>
  6. 6. Functions of Dealers (Market Makers) <ul><li>Smooth out temporary supply/demand imbalances </li></ul><ul><ul><li>Supplies “immediacy” </li></ul></ul><ul><li>Provide better price information </li></ul><ul><ul><li>Privileged access to order flow and limit order information </li></ul></ul><ul><li>Act as auctioneer </li></ul>
  7. 7. Short Selling <ul><li>A way to “bet” that a security will fall in value </li></ul><ul><ul><li>Borrow the security and sell it </li></ul></ul><ul><li>Economic value of short selling </li></ul><ul><ul><li>Limit upward bias </li></ul></ul><ul><li>Limits on short selling </li></ul><ul><ul><li>“Tick” rules </li></ul></ul>
  8. 8. Margin Transactions <ul><li>Borrow funds using securities as collateral </li></ul><ul><li>Margin Requirements </li></ul><ul><ul><li>Initial margin </li></ul></ul><ul><ul><li>Maintenance margin </li></ul></ul><ul><ul><li>Margin call </li></ul></ul>
  9. 9. Transactions Costs <ul><li>Commissions </li></ul><ul><li>Other Fees </li></ul><ul><ul><li>Custodial fees </li></ul></ul><ul><ul><li>Transfer fees </li></ul></ul><ul><li>Execution Costs </li></ul><ul><ul><li>market impact </li></ul></ul><ul><ul><li>market timing </li></ul></ul><ul><li>Opportunity Costs </li></ul>
  10. 10. Trading Arrangements for Institutional Investors <ul><li>Block Trading Trades of 10,000 shares or more of a given stock or trades with a market value of $200,000 or more. </li></ul><ul><li>Program Trading Simultaneous purchase or sale of shares in a large number of different stocks, which is computer-assisted. </li></ul>
  11. 11. Price Limits and Collars <ul><li>Put in Place after the Stock Market Crash of 1987 </li></ul><ul><li>Trading or Price Limits </li></ul><ul><ul><li>Rule 80B or Circuit Breakers </li></ul></ul><ul><ul><li>Rule 80A or Trading Collar </li></ul></ul>
  12. 12. US Stock Market Indices <ul><li>Dow Jones Industrial Average </li></ul><ul><li>S&P 500 </li></ul><ul><li>NYSE Composite </li></ul><ul><li>AMEX </li></ul><ul><li>NASDAQ Composite </li></ul><ul><li>Value Line Composite Average </li></ul>
  13. 13. Major International Indices <ul><li>World </li></ul><ul><ul><li>Morgan Stanley (EAFE) </li></ul></ul><ul><li>Country </li></ul><ul><ul><li>Japan – Nikkei 225, Nikkei 300, Topix </li></ul></ul><ul><ul><li>UK – FTSE 100, FTSE 250 </li></ul></ul><ul><ul><li>Germany – DAX </li></ul></ul><ul><ul><li>France – CAC </li></ul></ul><ul><ul><li>Hong Kong – Hang Seng </li></ul></ul><ul><ul><li>Canada – Toronto 300 Composite </li></ul></ul>
  14. 14. Stock Market Indices <ul><li>Issues in Construction </li></ul><ul><ul><li>Universe of stocks in index </li></ul></ul><ul><ul><li>Relative weights </li></ul></ul><ul><ul><ul><li>Price weighted </li></ul></ul></ul><ul><ul><ul><li>Equally-weighted </li></ul></ul></ul><ul><ul><ul><li>Market value weighted </li></ul></ul></ul><ul><ul><li>Averaging method </li></ul></ul><ul><ul><ul><li>Arithmetic </li></ul></ul></ul><ul><ul><ul><li>Geometric </li></ul></ul></ul>
  15. 15. Efficient Market Hypothesis: Summary <ul><li>Three forms of market efficiency </li></ul><ul><ul><li>Weak form (random walk) </li></ul></ul><ul><ul><ul><li>Current prices reflect past prices and volume </li></ul></ul></ul><ul><ul><ul><li>Technical analysis is useless </li></ul></ul></ul><ul><ul><li>Semi-strong form </li></ul></ul><ul><ul><ul><li>Prices reflect all public information </li></ul></ul></ul><ul><ul><ul><li>Most financial analysis is useless </li></ul></ul></ul><ul><ul><li>Strong form </li></ul></ul><ul><ul><ul><li>Prices reflect all that is knowable </li></ul></ul></ul><ul><ul><ul><li>Nobody consistently makes superior profits </li></ul></ul></ul>
  16. 16. Relationship among Three Different Information Sets Information set of past prices Information set of publicly available information All information relevant to a stock
  17. 17. Market Efficiency “Nuclear Weapons” <ul><li>Argument for Efficiency: </li></ul><ul><ul><li>Performance of mutual funds – actively managed mutual funds don’t beat the market </li></ul></ul><ul><li>Argument against Efficiency </li></ul><ul><ul><li>Asset bubbles – Prices depart from fundamental value on the high side for an extended period </li></ul></ul>
  18. 18. Efficient Market Hypothesis: Summary <ul><li>Does Not Say: </li></ul><ul><ul><li>Prices are uncaused </li></ul></ul><ul><ul><li>Investors are foolish and too stupid to be in the market </li></ul></ul><ul><ul><li>All shares of stock have the same expected returns </li></ul></ul><ul><ul><li>Investors should throw darts to select stocks </li></ul></ul><ul><ul><li>There is no upward trend in stock prices </li></ul></ul><ul><li>Does Say </li></ul><ul><ul><li>Prices reflect underlying value </li></ul></ul><ul><ul><li>Financial managers cannot time stock and bond sales </li></ul></ul><ul><ul><li>Sales of stock and bonds will not depress prices </li></ul></ul><ul><ul><li>You cannot cook the books </li></ul></ul>
  19. 19. Market Anomalies <ul><li>Small firm </li></ul><ul><li>Price to book (earnings) </li></ul><ul><li>Neglected firm </li></ul><ul><li>Calendar effects </li></ul><ul><ul><li>January </li></ul></ul><ul><ul><li>Turn of the month </li></ul></ul><ul><ul><li>Weekend </li></ul></ul><ul><li>Weather </li></ul>
  20. 20. Efficient Market Hypothesis: Summary <ul><li>Why Doesn’t Everyone Believe It? </li></ul><ul><ul><li>There are optical illusions, mirages and apparent patterns in charts of stock and market returns </li></ul></ul><ul><ul><li>The truth is less interesting </li></ul></ul><ul><ul><li>There is some evidence against efficiency </li></ul></ul><ul><ul><ul><li>Seasonality </li></ul></ul></ul><ul><ul><ul><li>Small vs large stocks </li></ul></ul></ul><ul><ul><ul><li>Value vs growth stocks </li></ul></ul></ul><ul><ul><li>Tests of market efficiency are weak </li></ul></ul>
  21. 21. Pricing Efficiency of the Stock Market <ul><li>Forms of Efficiency </li></ul><ul><ul><li>Weak form </li></ul></ul><ul><ul><li>Semistrong form </li></ul></ul><ul><ul><li>Strong form </li></ul></ul><ul><li>Implications for Investing in Common Stock </li></ul><ul><ul><li>Active strategies </li></ul></ul><ul><ul><li>Passive strategies </li></ul></ul>

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