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Chapter 17 – Markets for Common Stock

Chapter 17 – Markets for Common Stock. BA 543 Financial Markets and Institutions. Chapter 17 – Common Markets. Where Stocks Trade First Market – Trading on an Exchange Physical Floor and Membership Examples: NYSE and AMEX Second Market – Trading of non-listed Stocks Via Dealer Markets

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Chapter 17 – Markets for Common Stock

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  1. Chapter 17 – Markets for Common Stock BA 543 Financial Markets and Institutions

  2. Chapter 17 – Common Markets • Where Stocks Trade • First Market – Trading on an Exchange • Physical Floor and Membership • Examples: NYSE and AMEX • Second Market – Trading of non-listed Stocks • Via Dealer Markets • Third Market – Trading of listed stocks through OTC (over-the-counter) • Fourth Market – Direct Trading between buyers and sellers (Institutions)

  3. Chapter 17 – Common Markets • NYSE (New York Stock Exchange) • Founded in 1792 • Membership (Trade between Members Only) • 1,366 Seats • Buy and Sell like any asset • $2 million last transaction, record $2.65 million • 3,000 plus listed stocks • Listing Requirements • Specialist System for Trading • 17 Posts

  4. Chapter 17 – Common Markets • Trading Agents at the NYSE • Commission Brokers (largest group) • Execute customer orders • 500 Members • Floor Brokers • $2 Brokers – handle overflow of commission brokers • Floor Traders • Independent traders for their own accounts • Specialists – One assigned to each stock

  5. Chapter 17 – Common Markets • OTC – NASD or NASDAQ • Telecommunications Network • Links Market-Makers across the Nation • 4,700 different common shares • Tiers • NNM – NASDAQ National Market • Largest capitalized stocks • 3,800 stocks • Small Capitalization Market, 900 shares • OTHER OTCs – • Bulletin Board – 5,500 securities • Pink Sheets

  6. Chapter 17 – Common Markets • Mapping of a trade • NYSE • Market Order • Limit Order • NASDAQ • Three screens • Order Execution • Dealer Requirements • Which System is Better? • Specialist Charge to Maintain Orderly Market

  7. Chapter 17 – Common Markets • Trading at the NYSE • Market Order • Immediate execution at the best available price • Routed to Specialist (Post) • Auction Process • Limit Order • Execution only at requested or better price • Awaits execution at the Post in the Limit Order Book • Priority of Limit Order Book

  8. Chapter 17 – Common Markets • Third Market • Listed on both an Exchange and OTC market • Originally Dealers separate from NYSE • Allowed negotiation of commissions prior to 1975 • Specifically for Institutional Trading • Repeal of Rule 390 • Members of NYSE must trade with other members of NYSE • CQS (Consolidate Quotation System) • Via NASD

  9. Chapter 17 – Common Markets • The Fourth Market – ECNs and Crossing Networks • Electronic Trading Networks • Broker-dealer owned system • Anonymous way to enter trade requests • Postings for buying and selling (like e-Bay) • Subscription prices for trading • Crossing Networks • Batching networks (call market system) • Anonymous trading

  10. Chapter 17 – Common Markets • Trades • Buying on Margin • Broker Firm loans part of the cost to buy • Short Selling • Selling first, buying later • Block Trades • 10,000 shares or $200,000 (upstairs) • Program Trades • Simultaneous trading of different stocks

  11. Chapter 17 – Common Markets • Stock Market Indices • Price-Weighted • Value Weighted • Equally Weighted

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