Chapter 5 ORGANIZATION OF THE FINANCIAL MARKETS

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Chapter 5 ORGANIZATION OF THE FINANCIAL MARKETS

  1. 1. Chapter 5 ORGANIZATION OF THE FINANCIAL MARKETS <ul><li>What are the different types of financial markets? </li></ul><ul><li>How do the primary financial markets function? </li></ul><ul><li>Why are secondary financial markets important? </li></ul><ul><li>How are the secondary financial markets organized? </li></ul><ul><li>How are financial markets evolving ? </li></ul>
  2. 2. What is a financial market <ul><li>A general definition </li></ul><ul><li>Characteristics of a good market </li></ul><ul><li>Liquidity </li></ul><ul><li>Sufficient information is available </li></ul><ul><li>Trading takes place in full view of all participants </li></ul>
  3. 3. What is a financial market – Cont. <ul><li>Price continuity </li></ul><ul><li>Low transactions costs </li></ul><ul><li>Equal access to the market </li></ul><ul><li>Price adjust quickly to new information </li></ul>
  4. 4. Classification of financial markets <ul><li>Primary and secondary markets </li></ul><ul><li>Money and capital markets </li></ul><ul><li>Debt and equity markets </li></ul><ul><li>Organized versus over-the-counter markets </li></ul><ul><li>Global versus regional markets </li></ul>
  5. 5. Primary financial markets <ul><li>Open auctions </li></ul><ul><li>US Treasury security auctions </li></ul><ul><li>Federal agency security auctions </li></ul><ul><li>Mortgage backed security auctions </li></ul>
  6. 6. Figure 5.1 – Example of an IPO
  7. 7. Underwriting and investment banking <ul><li>Role of the investment banker </li></ul><ul><li>The underwriting process </li></ul><ul><li>Underwriting discount </li></ul><ul><li>Competitive versus negotiated arrangements </li></ul><ul><li>Syndication </li></ul><ul><li>Private placements </li></ul>
  8. 8. The importance of secondary markets <ul><li>Liquidity </li></ul><ul><li>Price discovery </li></ul><ul><li>Why some securities develop better secondary markets than others </li></ul><ul><li>Bid-ask spread as an indication of the depth of the market </li></ul><ul><li>Trading volume </li></ul><ul><li>Size of the issue </li></ul>
  9. 9. Secondary bond markets <ul><li>U.S. government securities </li></ul><ul><li>Municipal bonds </li></ul><ul><li>Corporate debt securities </li></ul><ul><li>International bond markets </li></ul>
  10. 10. Domestic stock markets <ul><li>Distribution of trading activity </li></ul><ul><li>NYSE – largest by dollar value of shares traded </li></ul><ul><li>Nasdaq – largest by number of shares traded </li></ul><ul><li>Stock market indexes </li></ul>
  11. 11. The New York Stock Exchange <ul><li>Listing requirements </li></ul><ul><li>Trading practices </li></ul><ul><li>Auction market </li></ul><ul><li>The role of the specialist </li></ul>
  12. 12. The Nasdaq stock market <ul><li>Listing requirements </li></ul><ul><li>Trading practices </li></ul><ul><li>Electronic market </li></ul><ul><li>Role of the market maker </li></ul>
  13. 13. Other domestic stock markets <ul><li>The American Stock Exchange </li></ul><ul><li>Regional exchanges </li></ul><ul><li>Third and fourth markets </li></ul><ul><li>Third market </li></ul><ul><li>Fourth market </li></ul><ul><li>Electronic Communications Network (ECN) </li></ul><ul><li>In house networks </li></ul>
  14. 14. International stock markets <ul><li>The London Stock Exchange </li></ul><ul><li>The Tokyo Stock Exchange </li></ul><ul><li>Emerging markets </li></ul>
  15. 15. Figure 5.2 – Growth in Trading Volume in International Stock Issues on the London Stock Exchange
  16. 16. Figure 5.3 – Month-to-Month Volatility in the Brazilian Stock Market Index
  17. 17. The future of the financial markets <ul><li>Growing importance of institutional investors </li></ul><ul><li>Globalization </li></ul><ul><li>Advances in technology </li></ul><ul><li>Will 24 hour trading every become a reality? </li></ul>

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