SECURITY MARKETS

1
TYPES OF SECURITY MARKETS
CALL MARKETS
have posted hours for trading only
called securities are for sale to those buyers or
sellers
2
TYPES OF SECURITY MARKETS
CONTINUOUS MARKETS
trading may occur at any time during a regular
trading day
dealers (market makers)
provide liquidity to brokers who cannot find a suitable
buyer or seller
usually are temporary positions
3
MAJOR U.S. SECURITY MARKETS
THE NEW YORK STOCK EXCHANGE
(NYSE)
established as a corporation, with a charter and
regulations for membership
approximately 1,366 members
Board of Directors: 26 elected
4
MAJOR U.S. SECURITY MARKETS
NYSE SEATS:
purchased from a current member
give privileges to members to execute trades
held by individuals as well as brokerage firms
5
MAJOR U.S. SECURITY MARKETS
LISTED SECURITIES: Some criteria to list
the degree of national interest
relative position and stability in the industry
prospects of maintaining its relative position


6
TRADING HALTS
THE EXCHANGE MAY IMPOSE TRADING
HALTS AND CIRCUIT BREAKERS
Trading Halts:
are temporary suspensions of trading in a listed firms
shares
7
TRADING HALTS
Circuit Breakers: Rule 80A
rule states that if the Dow Jones Industrial Average
(DJIA) moves 50 or more points from a previous
closing price, all index arbitrage orders will be subject
to the tick test.

8
TRADING HALTS
Circuit breakers: Rule 80B
if a 350 point change before 3 PM occurs, the NYSE
shuts down for one-half hour

if a 550 point change (total) occurs after the reopen,
NYSE shuts down for 1 hour.
9
PLACING AN ORDER
4 TYPES OF NYSE MEMBERSHIPS:
commission brokers:
earn commission for their brokerage firms
floor brokers:
assist commission brokers during overload periods
floor traders:
trade only for themselves
specialists:
keep unfilled limit orders/act as market makers
10
PLACING AN ORDER
LARGE ORDERS:
Found in blocks of at least 10,000 shares
Usually placed by institutional investors
Handled mostly by upstairs dealer market
11
PLACING AN ORDER
SMALLER ORDERS:
in the past these orders were often overlooked in
favor of larger orders

12
PLACING AN ORDER
to correct this oversight the SuperDOT system
was created
stands for Super Designated Order
Turnaround:
handles smaller orders involving 30,999 or fewer
shares
orders sent directly to trading post specialist for
immediate exposure and execution
facilitates the trading technique known as program
trading

13
OTHER EXCHANGES
THE AMERICAN STOCK EXCHANGE:
Lists stocks of smaller-sized companies
14
OTHER EXCHANGES
REGIONAL EXCHANGES:
Boston
Cincinnati
Chicago
Pacific
Philadelphia
15
OTHER EXCHANGES
REGIONAL EXCHANGES:
Options
Chicago Board Options Exchange
one of the largest

Futures
The Chicago Mercantile Exchange
offers interest rate, commodities, and index futures contracts
16
OVER-THE-COUNTER MARKET
NASDAQ is an o-t-c market:
created by the National Association of Securities
Dealers (NASD)
the NASD created the NASD automated
quotation system (NASDA) to clear transactions
a nationwide communication network allows instant
access to all major dealers
17
OVER-THE-COUNTER MARKET
NASDAQ CLASSIFICATION OF STOCKS:
National Market System (NMS)
stocks with larger trading volumes
stocks that are eligible for margin and short
transactions
Small Cap Issues
18
OVER-THE-COUNTER MARKET
SMALL ORDER EXECUTION SYSTEM
electronic order-routing system
limit: 100 shares
19
THIRD AND FOURTH MARKETS
THIRD MARKET:
A name for a market where
any trading of NYSE security is permitted
trading hours are not fixed
trading is not bound by NYSE trading halts or circuit
breakers
20
THIRD AND FOURTH MARKETS
THE FOURTH MARKET:
Direct trading in exchange-listed securities
Between investors without the benefit of a broker
Trading facilitated by an automated system:
INSTINET
give quotations and executions information
immediately
21
OTHER METHODS OF ORDERING
THE GROSSING SYSTEM
PREFERENCING
INTERNALIZATION
22
FOREIGN MARKETS
LONDON STOCK EXCHANGE:
Significantly changed by the Big Bang of 1986:
ending fixed commissions
introduced SEAQ (Stock Exchange Automated
Quotations)
attracted trading in non-UK stock
23
FOREIGN MARKETS
TOKYO STOCK EXCHANGE:
Has introduced major reforms:
introduced CORES (Computer-Assisted Order
Routing and Execution System)
introduced FORES (Floor Order Routing and
Execution System)
Saitori System of Trading
follows IYATOSE Method at market open similar to a
call marekt
Zaraba used where orders are processed continuously
24
FOREIGN MARKETS
TORONTO STOCK EXCHANGE:
Uses CATS (Computer-Assisted Trading
System)
Similar to IYATOSE trading in Tokyo
25
INFORMATION- AND LIQUIDITY-MOTIVATED TRADERS
THE DEALERS DILEMMA: Adverse
Selection
Assume there are two types of traders that a
dealer may confront during the trading day:
informed traders whose information and identity are
unknown to the dealer
uninformed traders
26
INFORMATION- AND LIQUIDITY-MOTIVATED TRADERS
THE DILEMMA: How to quote the correct
price and make a profit?
Solution:
set the bid-ask spread wide enough so that the gains
from the uninformed traders offset the mistaken price
quotes to the informed traders.
27
REGULATION OF SECURITIES MARKETS
THE FOUR PILLARS OF SECURITY
REGULATION:
The Securities Act of 1933
The Securities Exchange Act of 1934
The Investment Company Act of 1940
The Investment Advisors Act of 1940
28
REGULATION OF SECURITIES MARKETS
Provisions of the Securities Act of 1933
known as the truth in securities law
requires registration of new issues
disclosure of relevant information by issuer
prohibits misrepresentation and fraud

29
REGULATION OF SECURITIES MARKETS
Provisions of the Securities Exchange Act of
1934
requires national exchanges, brokers, and dealers to
be registered
made possible creation of Self Regulatory
Organizations (SROs) to oversee the industry
established the Securities Exchange Commission
(SEC)
30
REGULATION OF SECURITIES MARKETS
Provisions of the Investment Company Act of
1940
extends disclosure and registration requirements to
investment companies
31
REGULATION OF SECURITIES MARKETS
Provisions of the Investment Advisors Act of
1940

required registration of those providing advice

32