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  1. 1. Lecture Presentation Software to accompany Investment Analysis and Portfolio Management Seventh Edition by Frank K. Reilly & Keith C. Brown Chapter 4
  2. 2. Chapter 4 Organization and Functioning of Securities Markets <ul><li>Questions to be answered: </li></ul><ul><li>What is the purpose and function of a market? </li></ul><ul><li>What are the characteristics that determine the quality of a market? </li></ul><ul><li>What is the difference between a primary and secondary capital market and how do these markets support each other? </li></ul>
  3. 3. Chapter 4 Organization and Functioning of Securities Markets <ul><li>What are the national exchanges and how are the major security markets becoming linked (what is meant by “passing the book”)? </li></ul><ul><li>What are the regional stock exchanges and the over-the-counter (OTC) market? </li></ul><ul><li>What are the alternative market-making arrangements available on the exchanges and the OCT market? </li></ul>
  4. 4. Chapter 4 Organization and Functioning of Securities Markets <ul><li>What are the major types of orders available to investors and market makers? </li></ul><ul><li>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? </li></ul><ul><li>What are the major factors that have caused the significant changes in markets around the world in the past 10 to 15 years? </li></ul>
  5. 5. Chapter 4 Organization and Functioning of Securities Markets <ul><li>What are some of the major changes in world capital markets expected over the next decade? </li></ul>
  6. 6. What is a market? <ul><li>Brings buyers and sellers together to aid in the transfer of goods and services </li></ul><ul><li>Does not require a physical location </li></ul><ul><li>Both buyers and sellers benefit from the market </li></ul>
  7. 7. Characteristics of a Good Market <ul><li>Availability of past transaction information </li></ul><ul><ul><li>must be timely and accurate </li></ul></ul><ul><li>Liquidity </li></ul><ul><ul><li>marketability </li></ul></ul><ul><ul><li>price continuity </li></ul></ul><ul><ul><li>depth </li></ul></ul><ul><li>Low Transaction costs </li></ul><ul><li>Rapid adjustment of prices to new information </li></ul>
  8. 8. Organization of the Securities Market <ul><li>Primary markets </li></ul><ul><ul><li>Market where new securities are sold and funds go to issuing unit </li></ul></ul><ul><li>Secondary markets </li></ul><ul><ul><li>Market where outstanding securities are bought and sold by investors. The issuing unit does not receive any funds in a secondary market transaction </li></ul></ul>
  9. 9. Government Bond Issues <ul><li>1. Treasury Bills – negotiable, non-interest bearing securities with original maturities of one year or less </li></ul><ul><li>2. Treasury Notes – original maturities of 2 to 10 years </li></ul><ul><li>3. Treasury Bonds – original maturities of more than 10 years </li></ul>
  10. 10. Municipal Bond Issues <ul><li>Sold by three methods </li></ul><ul><ul><li>Competitive bid </li></ul></ul><ul><ul><li>Negotiation </li></ul></ul><ul><ul><li>Private placement </li></ul></ul><ul><li>Underwriters sell the bonds to investors </li></ul><ul><ul><li>Origination </li></ul></ul><ul><ul><li>Risk-bearing </li></ul></ul><ul><ul><li>Distribution </li></ul></ul>
  11. 11. The Underwriting Function <ul><li>The investment banker purchases the entire issue from the issuer and resells the security to the investing public. </li></ul><ul><li>The firm charges a commission for providing this service. </li></ul><ul><li>For municipal bonds, the underwriting function is performed by both investment banking firms and commercial banks </li></ul>
  12. 12. Corporate Bond and Stock Issues <ul><li>New issues are divided into two groups </li></ul><ul><li>Seasoned new issues - new shares offered by firms that already have stock outstanding </li></ul><ul><li>Initial public offerings (IPOs) - a firm selling its common stock to the public for the first time </li></ul>
  13. 13. Underwriting Relationships with Investment Bankers <ul><li>1. Negotiated </li></ul><ul><ul><li>Most common </li></ul></ul><ul><ul><li>Full services of underwriter </li></ul></ul><ul><li>2. Competitive bids </li></ul><ul><ul><li>Corporation specifies securities offered </li></ul></ul><ul><ul><li>Lower costs </li></ul></ul><ul><ul><li>Reduced services of underwriter </li></ul></ul><ul><li>3. Best-efforts </li></ul><ul><ul><li>Investment banker acts as broker </li></ul></ul>
  14. 14. Introduction of Rule 415 <ul><li>Allows firms to register securities and sell them piecemeal over the next two years </li></ul><ul><li>Referred to as shelf registrations </li></ul><ul><li>Great flexibility </li></ul><ul><li>Reduces registration fees and expenses </li></ul><ul><li>Allows requesting competitive bids from several investment banking firms </li></ul><ul><li>Mostly used for bond sales </li></ul>
  15. 15. Private Placements and Rule 144A <ul><li>Firms sells to a small group of institutional investors without extensive registration </li></ul><ul><li>Lower issuing costs than public offering </li></ul>
  16. 16. Why Secondary Financial Markets Are Important <ul><li>Provides liquidity to investors who acquire securities in the primary market </li></ul><ul><li>Results in lower required returns than if issuers had to compensate for lower liquidity </li></ul><ul><li>Helps determine market pricing for new issues </li></ul>
  17. 17. Secondary Bond Market <ul><li>Secondary market for U.S. government and municipal bonds </li></ul><ul><ul><li>U.S. government bonds traded by bond dealers </li></ul></ul><ul><ul><li>Banks and investment firms make up municipal market makers </li></ul></ul><ul><li>Secondary corporate bond market </li></ul><ul><ul><li>Traded through an OTC market </li></ul></ul>
  18. 18. Financial Futures <ul><li>Bond futures are traded in </li></ul><ul><li>Chicago Board of Trade (CBOT) </li></ul><ul><li>Chicago Mercantile Exchange (CME) </li></ul>
  19. 19. Secondary Equity Markets <ul><li>1. Major national stock exchanges </li></ul><ul><ul><li>New York, American, Tokyo, and London stock exchanges </li></ul></ul><ul><li>2. Regional stock exchanges </li></ul><ul><ul><li>Chicago, San Francisco, Boston, Osaka, Nagoya, Dublin, Cincinnati </li></ul></ul><ul><li>3. Over-the-counter (OTC) market </li></ul><ul><ul><li>Stocks not listed on organized exchange </li></ul></ul>
  20. 20. Trading Systems <ul><li>Pure auction market </li></ul><ul><ul><li>Buyers and sellers are matched by a broker at a central location </li></ul></ul><ul><ul><li>Price-driven market </li></ul></ul><ul><li>Dealer market </li></ul><ul><ul><li>Dealers provide liquidity by buying and selling shares </li></ul></ul><ul><ul><li>Dealers may compete against other dealers </li></ul></ul>
  21. 21. Call Versus Continuous Markets <ul><li>Call markets trade individual stocks at specified times to gather all orders and determine a single price to satisfy the most orders </li></ul><ul><li>Used for opening prices on NYSE if orders build up overnight or after trading is suspended </li></ul><ul><li>In a continuous market, trades occur at any time the market is open </li></ul>
  22. 22. National Stock Exchanges <ul><li>Large number of listed securities </li></ul><ul><li>Prestige of firms listed </li></ul><ul><li>Wide geographic dispersion of listed firms </li></ul><ul><li>Diverse clientele of buyers and sellers </li></ul>
  23. 23. New York Stock Exchange (NYSE) <ul><li>Largest organized securities market in United States </li></ul><ul><li>Established in 1817, but dates back to the 1792 Buttonwood Agreement by 24 brokers </li></ul><ul><li>Over 3,000 companies with securities listed </li></ul><ul><li>Total market value over $13 trillion </li></ul>
  24. 24. American Stock Exchange (AMEX) <ul><li>Started by a group who traded unlisted stocks at the corner of Wall and Hanover Streets in New York as the Outdoor Curb Market </li></ul><ul><li>Emphasis on foreign securities </li></ul><ul><li>Doesn’t trade stocks listed on NYSE </li></ul><ul><li>Merged with the NASDAQ IN 1998 although they continued to operate as separate markets </li></ul><ul><li>Warrants traded on AMEX years before NYSE listed any </li></ul>
  25. 25. Tokyo Stock Exchange (TSE) <ul><li>Largest of the eight exchanges in Japan </li></ul><ul><li>Dominates the Japanese market </li></ul><ul><li>Established in 1878 and reorganized in 1943, 1947, and 1949 </li></ul><ul><li>Price-drive system </li></ul><ul><li>Domestic and foreign stocks listed </li></ul><ul><li>Approximately 1700 stocks listed with a total market value of $2.4 trillion </li></ul><ul><li>Most active 150 stocks are traded on floor, others by computer </li></ul>
  26. 26. London Stock Exchange (LSE) <ul><li>Largest securities market in the United Kingdom </li></ul><ul><li>Trades listed and unlisted securities </li></ul><ul><ul><li>More than 2,600 companies listed </li></ul></ul><ul><li>Largest listing of foreign stocks on any exchange </li></ul><ul><li>Total market value of more than $561billion </li></ul><ul><li>Pricing system by competing dealers via computers similar to NASDAQ system in U.S. </li></ul>
  27. 27. Trends <ul><li>New exchanges in emerging economies such as Russia, Poland, China, Hungary, Peru, Sri Lanka </li></ul><ul><li>Consolidation of existing exchanges in developed countries </li></ul><ul><li>Global twenty-four-hour market – made possible by advances in technology </li></ul>
  28. 28. Recent Consolidations <ul><li>In 1995, Germany’s three largest exchanges merged into the one in Frankfurt </li></ul><ul><li>NASD merged with AMEX </li></ul><ul><li>Philadelphia Stock Exchange merged with NASD/AMEX </li></ul><ul><li>CBOE merged with Pacific Exchange </li></ul><ul><li>The Amsterdam, Brussels and Paris exchanges formed an alliance </li></ul><ul><li>The Stockholm, Copenhagen, and Oslo exchanges formed an alliance called the Nordic Country Alliance </li></ul>
  29. 29. The Global Twenty-four Hour Market <ul><li>Investment firms “pass the book” around the world to maintain nearly continuous trading by utilizing markets at Tokyo, London, and New York </li></ul><ul><li>THE TRADING DAY </li></ul><ul><li> Local Time EST </li></ul><ul><li>TSE 09:00 - 11:00 23:00 - 01:00 </li></ul><ul><li>13:00 - 15:00 03:00 - 05:00 </li></ul><ul><li>LSE 08:15 - 16:15 02:15 - 10:15 </li></ul><ul><li>NYSE 09:30 - 16:00 09:30 - 16:00 </li></ul>
  30. 30. Regional Exchanges <ul><li>Stocks not listed on a formal exchange </li></ul><ul><ul><li>Listing requirements vary </li></ul></ul><ul><li>Listed stocks </li></ul><ul><ul><li>Allow brokers that are not members of a national exchange access to securities </li></ul></ul><ul><li>Regional Exchanges in United States </li></ul><ul><ul><li>Chicago, Boston, Cincinnati, Pacific, Philadelphia </li></ul></ul>
  31. 31. Over-the-Counter (OTC) Market <ul><li>Not a formal organization </li></ul><ul><li>Largest segment of the U.S. secondary market </li></ul><ul><li>Unlisted stocks and listed stocks (third market) </li></ul><ul><li>Lenient requirements for listing on OTC </li></ul><ul><li>5,000 issues actively traded on NASDAQ NMS (National Association of Securities Dealers Automated Quotations National Market System) </li></ul><ul><li>1,000 issues on NASDAQ apart from NMS </li></ul><ul><li>1,000 issues not on NASDAQ </li></ul>
  32. 32. Operation of the OTC <ul><li>Any stock may be traded as long as it has a willing market maker to act a dealer </li></ul><ul><li>OTC is a negotiated market </li></ul>
  33. 33. The NASDAQ System <ul><li>Automated electronic quotation system </li></ul><ul><li>Dealers may elect to make markets in stocks </li></ul><ul><li>All dealer quotes are available immediately </li></ul><ul><li>Three levels of quotations provided </li></ul><ul><ul><li>Level 1 provides a single median representative quote for the stocks on NASDAQ </li></ul></ul><ul><ul><li>Level 2 shows quotes by all market makers </li></ul></ul><ul><ul><li>Level 3 is for OTC market makers to change their quotes shown </li></ul></ul>
  34. 34. Listing Requirements for NASDAQ <ul><li>Two lists </li></ul><ul><ul><li>National Market System (NMS) </li></ul></ul><ul><ul><li>Regular NASDAQ </li></ul></ul><ul><li>Four sets of requirements </li></ul><ul><ul><li>Initial listing - least stringent </li></ul></ul><ul><ul><li>Automatic NMS inclusion - up to the minute </li></ul></ul><ul><ul><ul><li>Alternative 1 for profitable companies with limited assets </li></ul></ul></ul><ul><ul><ul><li>Alternative 2 for large but less profitable </li></ul></ul></ul>
  35. 35. Third Market <ul><li>OTC trading of shares listed on an exchange </li></ul><ul><li>Mostly well known stocks </li></ul><ul><ul><li>GM, IBM, AT&T, Xerox </li></ul></ul><ul><li>Competes with trades on exchange </li></ul><ul><li>May be open when exchange is closed or trading suspended </li></ul>
  36. 36. Fourth Market <ul><li>Direct trading of securities between two parties with no broker intermediary </li></ul><ul><li>Usually both parties are institutions </li></ul><ul><li>Can save transaction costs </li></ul><ul><li>No data are available regarding its specific size and growth </li></ul>
  37. 37. Detailed Analysis of Exchange Markets <ul><li>Exchange Membership </li></ul><ul><li>Major Types of Orders </li></ul><ul><li>Exchange Market Makers </li></ul>
  38. 38. Exchange Membership <ul><li>Specialist </li></ul><ul><li>Commission brokers </li></ul><ul><ul><li>Employees of a member firm who buy or sell for the customers of the firm </li></ul></ul><ul><li>Floor brokers </li></ul><ul><ul><li>Independent members of an exchange who act as broker for other members </li></ul></ul><ul><li>Registered traders </li></ul><ul><ul><li>Use their membership to buy and sell for their own accounts </li></ul></ul>
  39. 39. Major Types of Orders <ul><li>Market orders </li></ul><ul><ul><li>Buy or sell at the best current price </li></ul></ul><ul><ul><li>Provides immediate liquidity </li></ul></ul><ul><li>Limit orders </li></ul><ul><ul><li>Order specifies the buy or sell price </li></ul></ul><ul><ul><li>Time specifications for order may vary </li></ul></ul><ul><ul><ul><li>Instantaneous - “fill or kill”, part of a day, a full day, several days, a week, a month, or good until canceled (GTC) </li></ul></ul></ul>
  40. 40. Major Types of Orders <ul><li>Short sales </li></ul><ul><ul><li>Sell overpriced stock that you don’t own and purchase it back later (at a lower price) </li></ul></ul><ul><ul><li>Borrow the stock from another investor (through your broker) </li></ul></ul><ul><ul><li>Can only be made on an uptick trade </li></ul></ul><ul><ul><li>Must pay any dividends to lender </li></ul></ul><ul><ul><li>Margin requirements apply </li></ul></ul>
  41. 41. Major Types of Orders <ul><li>Special Orders </li></ul><ul><ul><li>Stop loss </li></ul></ul><ul><ul><ul><li>Conditional order to sell stock if it drops to a given price </li></ul></ul></ul><ul><ul><ul><li>Does not guarantee price you will get upon sale </li></ul></ul></ul><ul><ul><ul><li>Market disruptions can cancel such orders </li></ul></ul></ul><ul><ul><li>Stop buy order </li></ul></ul><ul><ul><ul><li>Investor who sold short may want to limit loss if stock increases in price </li></ul></ul></ul>
  42. 42. Margin Transactions <ul><li>On any type order, instead of paying 100% cash, borrow a portion of the transaction, using the stock as collateral </li></ul><ul><li>Interest rate on margin credit may be below prime rate </li></ul><ul><li>Regulations limit proportion borrowed </li></ul><ul><ul><li>Margin requirements are from 50% up </li></ul></ul><ul><li>Changes in price affect investor’s equity </li></ul>
  43. 43. Margin Transactions <ul><li>Buy 200 shares at $50 = $10,000 position </li></ul><ul><li>Borrow 50%, investment of $5,000 </li></ul><ul><li>If price increases to $60, position </li></ul><ul><ul><li>Value is $12,000 </li></ul></ul><ul><ul><li>Less - $5,000 borrowed </li></ul></ul><ul><ul><li>Leaves $7,000 equity for a </li></ul></ul><ul><ul><li>$7,000/$12,000 = 58% equity position </li></ul></ul>
  44. 44. Margin Transactions <ul><li>Buy 200 shares at $50 = $10,000 position </li></ul><ul><li>Borrow 50%, investment of $5,000 </li></ul><ul><li>If price decreases to $40, position </li></ul><ul><ul><li>Value is $8,000 </li></ul></ul><ul><ul><li>Less - $5,000 borrowed </li></ul></ul><ul><ul><li>Leaves $3,000 equity for a </li></ul></ul><ul><ul><li>$3,000/$8,000 = 37.5% equity position </li></ul></ul>
  45. 45. Margin Transactions <ul><li>Initial margin requirement at least 50%. Set up by the Fed. </li></ul><ul><li>Maintenance margin </li></ul><ul><ul><li>Requirement proportion of equity to stock </li></ul></ul><ul><ul><li>Protects broker if stock price declines </li></ul></ul><ul><ul><li>Minimum requirement is 25% </li></ul></ul><ul><ul><li>Margin call on undermargined account to meet margin requirement </li></ul></ul><ul><ul><li>If margin call not met, stock will be sold to pay off the loan </li></ul></ul>
  46. 46. Exchange Market Makers U.S. Markets <ul><li>Specialist is exchange member assigned to handle particular stocks </li></ul><ul><ul><li>Has two roles: </li></ul></ul><ul><ul><li>Broker to match buyers and sellers </li></ul></ul><ul><ul><li>Dealer to maintain fair and orderly market </li></ul></ul><ul><li>Specialist has two income sources </li></ul><ul><ul><li>Broker commission, without risk </li></ul></ul><ul><ul><li>Dealer trading income from profit, with risk </li></ul></ul>
  47. 47. Exchange Market Makers Tokyo Stock Exchange (TSE) <ul><li>Regular members </li></ul><ul><ul><li>Several employees allowed on trading floor </li></ul></ul><ul><ul><li>Trading clerks for customers accounts </li></ul></ul><ul><ul><li>Buy and sell for own accounts </li></ul></ul><ul><li>Saitori member </li></ul><ul><ul><li>Hundreds of employees on trading floor </li></ul></ul><ul><ul><li>Intermediary clerks </li></ul></ul><ul><ul><li>Brokers among members </li></ul></ul><ul><ul><li>Maintain limit orders </li></ul></ul>
  48. 48. TSE Membership <ul><li>Membership requires corporate license </li></ul><ul><li>Four types of license are available and may be combined </li></ul><ul><ul><li>1. Trade securities as a dealer </li></ul></ul><ul><ul><li>2. Trade as a broker </li></ul></ul><ul><ul><li>3. Underwrite new securities on secondary offerings </li></ul></ul><ul><ul><li>4. Handle retail distribution of securities </li></ul></ul><ul><li>Capital requirements vary by license </li></ul>
  49. 49. London Stock Exchange <ul><li>Brokers trade on behalf of their customers </li></ul><ul><li>Jobbers buy and sell as principals </li></ul><ul><li>Membership based on experience and competence </li></ul><ul><li>Membership fee 1% of gross revenues </li></ul>
  50. 50. Changes in the Securities Markets <ul><li>Since 1965, the growth of trading by large financial institutions has had many effects </li></ul><ul><ul><li>Negotiated (competitive) commission rates </li></ul></ul><ul><ul><li>Influence on block trades </li></ul></ul><ul><ul><li>Impact on stock price volatility </li></ul></ul><ul><ul><li>Development of National Market System (NMS) </li></ul></ul>
  51. 51. Negotiated Commission Rates <ul><li>NYSE minimum commission schedule prohibited price cutting since 1792 </li></ul><ul><li>No price break for large orders </li></ul><ul><ul><li>Initial reaction was “give-ups” paid to a designated firm - soft dollars paid for market research </li></ul></ul><ul><ul><li>Third market competed with flexible commissions and grew </li></ul></ul><ul><ul><li>Fostered development of the fourth market </li></ul></ul>
  52. 52. Negotiated Commission Rates <ul><li>In 1970 SEC began phasing in negotiated commissions </li></ul><ul><ul><li>Commission rates have fallen </li></ul></ul><ul><ul><li>Discount brokerage firms compete openly </li></ul></ul><ul><ul><li>Many brokerage and research firms have merged or liquidated </li></ul></ul>
  53. 53. The Impact of Block Trades <ul><li>Number and size of block trades has increased </li></ul><ul><li>This strains the exchange specialist system </li></ul><ul><ul><li>Capital - 10,000 share or larger blocks </li></ul></ul><ul><ul><li>Commitment - large risk with large blocks </li></ul></ul><ul><ul><li>Contacts - Rule 113 prohibited direct contact to offer blocks to another institution </li></ul></ul>
  54. 54. The Impact of Block Trades <ul><li>Block houses are investment firms that help institutions locate other institutions interested in buying or selling blocks of stock </li></ul><ul><li>A good block house has </li></ul><ul><li>The capital required to position a large block </li></ul><ul><li>The willingness to commit this capital to a block transaction, and </li></ul><ul><li>Contacts among institutions </li></ul>
  55. 55. Institutions and Stock Price Volatility <ul><li>Empirical studies have not supported the theory that institutional trading increases price volatility </li></ul><ul><li>Where trading is dominated by institutions, actively involved institutions may provide liquidity for one another and noninstitutional investors </li></ul>
  56. 56. National Market Systems (NMS) <ul><li>NMS has been advocated by financial institutions to provide greater efficiency, competition, and lower cost of transactions </li></ul><ul><li>NMS is expected to have: </li></ul><ul><ul><li>1. Centralized reporting of all transactions </li></ul></ul><ul><ul><li>2. Centralized quotation system </li></ul></ul><ul><ul><li>3. Centralized limit order book (CLOB) </li></ul></ul><ul><ul><li>4. Competition among all qualified market makers </li></ul></ul>
  57. 57. 1. Centralized Reporting <ul><li>Should record all transactions of a stock, regardless of location </li></ul><ul><li>NYSE started a central tape in June 1975 covering all NYSE stocks traded on other exchanges and OTC </li></ul>
  58. 58. 2. Centralized Quotation System <ul><li>List quotes for a stock from all market makers on the national exchanges, regional exchanges, and OTC </li></ul><ul><li>Brokers would complete trades on the market with the best quote </li></ul><ul><li>Intermarket Trading System (ITS) developed by American, Boston, Chicago, New York, Pacific, and Philadelphia Stock Exchanges and NASD </li></ul>
  59. 59. 3. Centralized Limit Order Book <ul><li>Should contain all limit orders from all markets </li></ul><ul><li>Should be visible to all traders </li></ul><ul><li>All market makers and traders could fill orders on it </li></ul><ul><li>Technology exists, but NYSE specialists fill most limit orders and oppose CLOB because they do not want to share this lucrative business </li></ul>
  60. 60. 4. Competition Among All Qualified Market Makers (Rule 390) <ul><li>Market makers compete on OTC market </li></ul><ul><li>Competition reduces bid-ask spread </li></ul><ul><li>NYSE opposes competition and argues that central auction results in best market and execution </li></ul><ul><li>NYSE Rule 390 requires members to obtain permission of the exchange before trading a listed stock off the exchange, forcing transactions to the exchange to create a central market </li></ul>
  61. 61. New Trading Systems <ul><li>Daily trading volume has increased from 5 million shares to over a billion shares </li></ul><ul><li>NYSE routinely handles days with volume over a billion shares </li></ul><ul><li>Technology has allowed the market process to keep pace </li></ul>
  62. 62. Super DOT <ul><li>Electronic order-routing system </li></ul><ul><li>Member firms transmit market and limit orders in NYSE securities to trading posts or member firm’s booth </li></ul><ul><li>Report of execution returned electronically </li></ul><ul><li>85% of NYSE market orders enter through Super DOT system </li></ul>
  63. 63. Display Book <ul><li>Electronic workstation that keeps track of all limit orders and incoming market orders, including incoming Super Dot limit orders </li></ul>
  64. 64. Opening Automated Report Service (OARS) <ul><li>Pre-opening market orders for Super Dot system </li></ul><ul><li>OARS automatically and continuously pairs buy and sell orders </li></ul><ul><li>Presents imbalance to the specialist prior to the opening of a stock </li></ul><ul><li>Helps determine opening price and potential need for preopening call market </li></ul>
  65. 65. Market Order Processing <ul><li>Super Dot’s postopening market order system is designed to accept member firms’ postopening market orders up to 3 million shares </li></ul><ul><li>Rapid execution and reporting of market orders </li></ul><ul><li>In 2000, orders executed and reported in 15-16 seconds on average </li></ul>
  66. 66. Limit Order Processing <ul><li>Electronically files orders to be executed when and if a specific price is reached </li></ul><ul><li>Updates the Specialist’s Display Book </li></ul><ul><li>Good-until-cancelled orders that are not executed are stored until executed or cancelled </li></ul>
  67. 67. Global Market Changes <ul><li>NYSE Off-hours trading </li></ul><ul><ul><li>Crossing Session I provides for trading stocks at NYSE closing prices after the regular session from 4:15 PM to 5:00 PM </li></ul></ul><ul><ul><li>Crossing Session II provides for trading a collection of at least 15 NYSE stocks with a market value of at least $1 million from 4:00 PM to 5:15 PM </li></ul></ul>
  68. 68. Global Market Changes <ul><li>Listing foreign stocks on the NYSE </li></ul><ul><ul><li>Future growth will be in foreign countries and hence listing foreign stocks is a priority for the NYSE </li></ul></ul><ul><ul><li>Problem: Foreign accounting standards are less stringent than SEC requirements for NYSE listing </li></ul></ul>
  69. 69. London Stock Exchange October 27, 1986 Big Bang <ul><li>Brokers can act as market makers </li></ul><ul><li>Jobbers can deal with the public and institutions </li></ul><ul><li>Commissions are negotiable </li></ul><ul><li>Gilt market was restructured like U.S. government securities market </li></ul><ul><li>Trades reported on Stock Exchange Automated Quotations ( SEAQ ) </li></ul>
  70. 70. Effects of the Big Bang <ul><li>Competitive market makers & SEAQ reduced number of people on the trading floor </li></ul><ul><li>More activity in the system, but profit margin has reduced from competition </li></ul><ul><li>Many firms have merged or been acquired by foreign firms </li></ul>
  71. 71. Tokyo Stock Exchange (TSE) <ul><li>1998 brought TSE its own Big Bang introducing more competition in trading commissions and competition among market participants </li></ul>
  72. 72. Paris Bourse <ul><li>The big brokerage house monopoly on stock trading has been opened up to French and foreign banks </li></ul><ul><li>Investment firms are merging with banks to acquire capital needed to trade in world market </li></ul><ul><li>Continuous auction market introduced to replace call market </li></ul>
  73. 73. Future Developments <ul><li>Continuing consolidation of security exchanges </li></ul><ul><li>More specialized investment companies </li></ul><ul><li>Changes in the financial services industry </li></ul><ul><ul><li>Financial supermarkets </li></ul></ul><ul><ul><li>Financial boutiques </li></ul></ul><ul><li>Advances in technology </li></ul><ul><ul><li>Computerized trading </li></ul></ul><ul><ul><li>24-hour market of the future may be floorless, global, and highly automated </li></ul></ul>
  74. 74. The Internet Investments Online <ul><li>www.quote.com </li></ul><ul><li>www.sec.gov </li></ul><ul><li>www.nyse.com </li></ul><ul><li>www.nasdaq-amex.com </li></ul><ul><li>www.etrade.com </li></ul><ul><li>www.schwab.com </li></ul><ul><li>www.ml.com </li></ul>
  75. 75. Future topics Chapter 5 <ul><li>Uses of security-market indexes </li></ul><ul><li>Stock market indicator series </li></ul><ul><li>Bond market indicator series </li></ul>
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