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Understanding Security Markets and Trading Orders

Explore various types of security markets, trading hours, order placement, market classifications, trading halts, and different trading methods in the financial realm.

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Understanding Security Markets and Trading Orders

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  1. CHAPTERTHREE SECURITY MARKETS

  2. TYPES OF SECURITY MARKETS • CALL MARKETS • have posted hours for trading only • “called” securities are for sale to those buyers or sellers

  3. 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

  4. 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

  5. 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

  6. 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

  7. TRADING HALTS • THE EXCHANGE MAY IMPOSE TRADING HALTS AND CIRCUIT BREAKERS • Trading Halts: • are temporary suspensions of trading in a listed firm’s shares

  8. 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.”

  9. 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.

  10. 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

  11. 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

  12. PLACING AN ORDER • SMALLER ORDERS: • in the past these orders were often overlooked in favor of larger orders

  13. 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

  14. OTHER EXCHANGES • THE AMERICAN STOCK EXCHANGE: • Lists stocks of smaller-sized companies

  15. OTHER EXCHANGES • REGIONAL EXCHANGES: • Boston • Cincinnati • Chicago • Pacific • Philadelphia

  16. 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

  17. 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

  18. 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

  19. OVER-THE-COUNTER MARKET • SMALL ORDER EXECUTION SYSTEM • electronic order-routing system • limit: 100 shares

  20. 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

  21. 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

  22. OTHER METHODS OF ORDERING • THE GROSSING SYSTEM • PREFERENCING • INTERNALIZATION

  23. 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

  24. 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

  25. FOREIGN MARKETS • TORONTO STOCK EXCHANGE: • Uses CATS (Computer-Assisted Trading System) • Similar to IYATOSE trading in Tokyo

  26. INFORMATION- AND LIQUIDITY-MOTIVATED TRADERS • THE DEALER’S 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

  27. 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.

  28. 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

  29. 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

  30. 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)

  31. REGULATION OF SECURITIES MARKETS • Provisions of the Investment Company Act of 1940 • extends disclosure and registration requirements to investment companies

  32. REGULATION OF SECURITIES MARKETS • Provisions of the Investment Advisors Act of 1940 • required registration of those providing advice

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