Securities Markets Outline

Securities Markets

1. Markets and Investors

   1. The Structure of the Trading Markets

      1. Securities not listed on an exchange are a part of the over-the-counter market

      2. Exchanges

         • Can be either National or Regional

           • National: NYSE is the largest U.S. equity market followed by the Nasdaq

             • BUT approximately 60% of the orders for NYSE stocks are executed on regional exchanges or Electronic Communications Networks (ECNs) of which are outside of the exchange

           • Regional: There are six regional exchanges

         • Exchanges are Self-Regulated

      3. Over-the-Counter Market

         • Securities not listed on an exchange are referred to as over-the-counter securities

         • The core of the over-the-counter market is the "market-maker"

           • A broker who does not own the security the investor requests can purchase the security from a market-maker

           • The market-maker is an individual who maintains an inventory in the traded security

         • FINRA operates an electronic filing bulletin board (the OTCBB) for non-Nasdaq over-the-counter stocks

           • Price quotes are available

         • Where a stock is not listed on the OTCBB, the stock is traded in a paper-base market called the "Pink Sheet Market"

      4. How Exchanges Function (The Order Process)

         • Market Order: Where the customer instructs his broker to purchase or sell a security at the best available market price OR

         • Limit Order: Where the customer instructs his broker to purchase the security at a particular price.

         • The broker will first try to match the order with that of another customer in the firm

           • If not, the order will be routed to a Floor Broker who represents buyers and sellers in the crowd.

           • If the Floor Broker cannot fulfill the order, he will invoke the services of a Specialist, who can trade for his own account

             • The Specialist intervenes in order to smooth imbalances between the supply and demand for a particular security.

             • The NYSE rules require specialists to address short-term imbalances between buy and sell orders by using their own capital or inventory to fill gaps that might arise.

             • An alternative function of the Specialist is to maintain a limit order book in which unfulfilled orders are recorded and later filled by the specialist as market conditions permit.

             • Specialists make their money because of the spread between the buy price and the selling price

         • BUT Today, much of the matching of buyers and sellers is done by computers

      5. Block Trading: Trades of 10,000 or more shares customarily occurring directly between institutional investors without the use of brokers

      6. Bond Markets

         • Bond markets are almost totally dealer markets.

         • Bond dealers are linked by computers, and most of the liquidity of the bond markets is provided by a few of the trading desks of large investment banking firms.

         • Bond markets are almost exclusively an institutional investor medium.

   2. Globalization

      1. There is a major trend towards the globalization of securities markets

   3. Institutionalization

      1. Fifty years ago, individuals held 90% of U.S. equities.

      2. As of 2005, institutional investors held 61.2% of total U.S....

Buy the full version of these notes or essay plans and more in our Securities Regulation Outlines.