Securities Markets
Terms
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- underwriting
- process of how securities are issued to the public
- secondary market
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-the aftermarket
-the resale of outstanding securities
-this is what occurs every day on the exchanges and in the OTC market
-provides liquidity to individuals who acquired securities in the primary market - Securities Exchange Act of 1934
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-SEC created
-outlines the powers of the SEC to interpret, supervise, & enforce the securities laws - listed exchanges
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-stock exchange
-national stock exchanges
-regional stock exchanges - What is a stock exchange?
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-private association of brokers
-provides a central meeting place for its member - brokers called the floor - What comprises the national stock exchange?
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-New York Stock Exchange (NYSE)
-American Stock Exchange (AMEX) - What comprises the regional stock exchange?
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-Philadelphia Exchange
-Chicago Exchange
-Pacific Exchange
-Boston Exchange
-Cincinnati Exchange - listed stock
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-stock of a company traded on a securities exchange and for which a listing application & registration statement have been filed with the SEC and the exchange itself
-stocks that are traded on an exchange - specialist
- individual employed by a member firm that conducts the auction that determines the price of stocks
- How is the price of stock determined on the stock exchange?
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-price is determined in a free & open auction type of trading
-price depends on the supply & demand relationship of that security at a particular time - over-the-counter market
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-handles any transaction that does not take place on the floor of an exchange
-national negotiated market without a central marketplace, without a trading floor, composed of a network of thousands of brokers & dealers who make securities transactions for themselves & their customers
-professional buyers & sellers seek each other out electronically & by telephone to negotiate prices
-largest market in terms of numbers of securities issues traded - In an over-the-counter market, how do buyers & sellers seek each other out to negotiate prices?
- Electronically & by telephone
- What are the 5 types of securities traded exclusively on the OTC?
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-government bonds
-municipal bonds
-mutual funds
-new issues (primary distributions)
-variable annuities - market makers
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-an NASD broker/dealer ready to provide continuing bids & offers for a given security in the secondary market
-main player in the OTC
-act as principals in a securities transaction & buy & sell securities for their own account & risk
-do not receive any commission for their services - How do dealers make a profit on a security?
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-buy at one price & sell at a higher price making a profit from mark-up on the seucity price
-has a position in a stock when he purchases & holds a security in inventory
-assumes risk that market price of the security he holds may decline in value - NASDAQ system (National Association of Securities Dealers Automated Quotation System)
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-NASD regulates trading in the OTC
-an electronic data terminal device furnishing subscribers with instant identification of market-makers & their current quotations, updated continuously
-transactions are reported within 90 seconds of the trade
-utilizes a quotation machine
-scans all of the market maker bids & all of hte market maker asks (offers) & automatically displays the inside market - pink sheets
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-used in the 1960's
-contain a listing, alphabetically, of OTC stocks
-underneath each issue is listed the name of one or more market makers, securities firms willing to trade that stock
-lists bid & ask price
-location of relatively inactive stock no on the Nasdaq system
-prices found not firm quotes
-prices are subject quotes or subject market - bid & ask price
- approximate price representing what the dealer is asking & bidding for the stock
- How does a quotation machine work?
- -push a few buttons & instantaneously see the best bid & best offer that exists right now on over 5,000 of the most active OTC stocks
- Nasdaq National Market List (NNM securities))
- the investor gets virtually the same detailed trading information as on a NYSE listed stock
- inside market
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-normally the highest bid and the lowest asked prices and is displayed on Level One of Nasdaq
-quote machine display shows market maker & their current bid & ask price
-prices shown are firm quotes - inside of the spread
- highest of bid prices (best bid or inside bid) & the lowest of the ask prices (best ask or inside ask) are referred to as the inside market, that is, the bid & ask price which reflects the narrowest spread
- Nasdaq Level 1
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-available on the representative's desk top
-provides price information only on the highest bid & lowest offer (the inside market)
-no market makers are identified
-since inside quote, may not be used for giving firm quotes
-can only give a subject quote - Nasdaq Level 2
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-provides a large CRT with price information & quotation sizes of all participating registered market makers
-sees who's making a market, their firm bid & ask right now, & the size of their market
-can give firm quotes - Nasdaq Level 3
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-allows registered market makers to enter bid & ask prices (quotes) & quotation sizes into the Nasdaq system & to report their trades
-this is the level of service maintained by market makers - Nasdaq Intermarket
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-OTC transactions in listed stocks
-3rd market
-when a trade of a listed stock occurs in the OTC - Fourth Market
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-one institution swapping securities in its portfolio with another large institution
-no broker/dealer is involved
-no representative is involved
-these trades reporte don a system called Instinct - broker/dealer
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-securities firm
-brokers act on behalf of others as their agent for which they earn a commission
-dealers act for self as a principal for which they charge a markup
-under certain conditions the firm will as a broker; and in others as a dealer
-securities firm can never act as a broker & a dealer in the same transaction
-only a dealer maintains an inventory - What is a dealer maintained inventory?
- firm has an inventory in a particular security, i.e., they own it, the firm is prepared to sell those securities to customers from their own invesntory & act in the capacity of a dealer or principal
- Why can't a broker/dealer act in both capacities for the same transaction?
- Cannot make a commission and a mark up on the same trade