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Learning Objectives

Learning Objectives. Outline the organization of the securities markets. (LO 4 ) Assess the concept of market efficiency and its benefits to the economic system. (LO 5 ) Examine the changing financial regulatory environment. (LO 6 ). LO4. The Organization of the Security Markets.

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Learning Objectives

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  1. Learning Objectives • Outline the organization of the securities markets. (LO4) • Assess the concept of market efficiency and its benefits to the economic system. (LO5) • Examine the changing financial regulatory environment. (LO6)

  2. LO4 The Organization of the Security Markets • Security markets exist to facilitate the direct transfer of capital among households, corporations, and governments. • After a security is sold initially as an original offering, it then trades among investors, a process known as secondary trading. • Secondary trading is vitally important as it provides liquidity for investors. • Secondary market trading activity is divided between organized exchangesand over-the-counter (OTC) markets.

  3. LO4 Organized Exchanges • Regulated marketplace where buyers and sellers of securities come together to trade securities in a single location • Exchanges are auction markets where there is a price offering and acceptance between buyers and sellers • Key components of organized exchanges are fair prices, transparency, liquidity and integrity

  4. LO4 Organized Stock Exchanges • Toronto Stock Exchange (TSX) • largest and most important market for stocks in Canada • strict requirements in order for a firm to be traded on that exchange • smaller and less significant globally than the NYSE • New York Stock Exchange (NYSE) • largest and most important market for stocks in the world • Alternative trading systems (ATS) • also known as Electronic Communication Networks (ECN) use the Internet to electronically match buyers and sellers

  5. LO4 Figure 14-11 Secondary Market: Annual Value of Trading Source: Investment Industry Association of Canada (ILAC) Reports, 2010 www.iiac.com. Reprinted with permission.

  6. LO4 Figure 14-12World equity markets: Annual value traded, 2010 Source: World Federation of Exchanges, 2010

  7. LO4 The Over-the-Counter (OTC) Markets • Have no central location • Networks of dealers connected by computer terminals and telephones • Buy and sell securities which are not listed on a stock exchange • Historically, the bulk of all bond trading was done OTC • CanDeal has been established to report real time pricing on debt inventories

  8. LO4 Challenges for Canadian Exchanges • The extremely liquid markets in the US have tended to attract business away from Canadian exchanges. • Another threat is the “upstairs rooms” practice, that is, dealers matching large trades in shares through their own trading floors. • Internet trading systems such as Alternative Trading Systems (ATS) are also competing for business. • Over the next decade, it is expected that securities market will become more competitive as more computer systems are used.

  9. LO4 Figure 14-13Money and capital market investments, 2011 Source: Adapted from Statistics Canada, “Canada’s International Investment Position,” Catalogue No. 67-202, 2011, and Statistics Canada, CANSIM Database, Table 376-0037.

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