I
Secondary Market
Stock Exchange
formal organization
approved and regulated
by SEC
listed stocks --
stocks that are traded in an exchange
since August 1976, listing
of a common stock on more than one exchange permitted (dual listing is
OK)
seat -- member of
Exchange (example : NYSE had 1366 seats with the latest price for the seat
is $2 Million in March)
Each stock is traded at
a specific location -- Post
Employee work in the first
floor and businessmen can watch it from second floor through big windows
specialist -- market
maker (single market maker) vs. OTC (multiple market maker)
traditional floor based
trading system
first market
Major National Stock Exchanges
NYSE (Big board)
largest exchange (equity)
in USA and world
market capital : over 12
trillion
establish in 1972
number of firms listed
3044
AMEX (American Stock Exchange)
second largest national
stock exchange in New York, Manhattan
small to medium size companies
equities and derivatives
(options)
Regional Exchanges
Midwest (Chicago), Pacific
(LA), Philadelphia, Boston, Cincinnati
2 kind of stocks listed
(i) stocks of companies that could not qualify for
listing on National Exchange
(ii) stocks of companies that are also listed or
one of the two National Exchanges (dual listing)
OTC (Over the Counter)
market for unlisted stocks
second market (Note NASDAQ
listed 5412 companies)
stocks maybe both listed
on an exchange and traded in the OTC vs. Third Market
trading listed stocks in
the OTC market
Dependent Electronic Trading Systems
Fourth Market
Direct trading of stocks
between two transactors without the use of a broker
2 major system
(a) instinet (by Reuter in 1987)
(b) POSIT (portfolio system for institution investors)
Automated Order Routing
Exchanges have systems
for routing orders of a specific size that are submitted by brokers via
computer directly to a
specialist post
(a) NYSE
Super DOT (Super Designated
Order turnaround)
Largest market order :
30,099 shares
¾ of all orders
(10-20% or trading volume)
(b) AMEX
Post Execution Reporting
System (up to 2000 shares)
Role of dealers
(a) Exchange : only one dealer per stock -- specialist
exchange determine designation
of who will be a specialist for a stock
minimum capital requirement
is $1 Million
Act as brokers and dealers
maintain current bid and
ask price
buy or sell in their own
account
agent and catalyst
(b) OTC
more than one dealer for
a stock (multiple dealer)
II
Trading Arrangements for Institutional Investors
1. Block Trade
2. Program Trade
Block Trade
Trade of a large member of shares of a given stocks (10,000 shares
or market value $200,000)
(a) Directed to the “upstairs market” where a block broker facilitates
the trading process by locating counter parties to the
trade
The upstairs market operates
as a search-brokerage mechanism where prices are determine through negotiation
(b) Downstairs market is the ability to prosecute immediate execution
of quoted price
Program Trade
Trade for a large number
of different stocks simultaneously (basket trade)
wide range of portfolio
trading strategies involving purchase or sale of a basket of at least 15
stocks with total value of
$1 Million or more
send order to
(a) downstairs market (exchange floor)
(b) upstairs market (network)
(c) OTC
III
Stock Market Indicators
serve as benchmark
most common indicator
(a) DJIA
(b) S & P 500
(c) Value Line Composite Average (VLCA)
3 factors differentiate
stock market indicator
(a) universe of stocks represented by the indicators
(b) relative weights assigned to the market
(c) method of averaging
Weighting system
Universe of Stocks
1. By exchange
NYSE composite index --
all listed firms -- market capital
AMEX market value index
reflect market value of
all stocks traded on exchange
2. Subjectly selected stocks
by organizations
popular indications fall
into this group
example DJIA : 30 of the
largest blue chip industrial companies traded on NYSE
3. S&P 500
2 international stock exchange
and NASDAQ (Mostly NYSE)
benchmark for portfolio
managers’ performance
80% of market value of
NYSE
market value weighted
4. Value Line (VLCA)
equally weighted geometric
average of approximately 1700 NYSE, AMEX OTC
By Objective measuring (Market Capitalization)
example
. Wilshire 5000 (Largest
is General Electric)
Wilshire 4500 (excluding
S&P 500)
. Russell 3000 (Largest
is General Electric)
Russell 1000 (the first
1000 largest market capitalization companies)
Russell 2000 (all Russell
listed companies except Russell 1000)
IV
1. Active Strategies
attempt to outperform the
market
ways
(a) timing the selection of transacting
(b) identify undervalue or overvalued stocks
(c) select stocks based on market anomaly (Monday,
January, small firm effects anomaly)
2. Passive Strategies
if market efficient, with
respect to pricing stocks, attemptive outperform market, cannot be successful
systematically
a portfolio characteristics
similar to market portfolio will capture the pricing efficiency of the
market
indexing --
index fund ($55 billion invested)
example Vanguard’s and S&P 500 index fund
V
Non United State Equity Market
shares of some foreign
companies can be traded through ADR (American Depository Receipts)
Issued by banks as evidence
of ownership of the underlying stock of a foreign corporation that the
United States banks hold
1. Euroequities (International Market)
issued simultaneously in several national markets by an international syndicate
2. Motivation for listing on a foreign market
(a) increase visibility (awareness, name recognition,
exposure)
(b) broaden share holders base (diversify ownership)
(c) increase access to financial market
(d) provide future market for product
3. National Market Structure
(a) Stock exchange (privately owned)
USA, Japan, United Kingdom, Canada, Australia
essentially self regulated
(b) Stock exchange (public institute)
government selects broker and fix commission rates
France, Spain, Italy
(c) Majority of trading (through banks)
universal banks dominates securities transactions
Germany, Switzerland
4. Stock Market Indexes
(a) Japan Nikkei 225
(b) United Kingdom FTSE 100
(c) Germany DAX (Deutscher Aktienindex) --
30 most actively traded shares by Frankfurt Stock Exchange)
(d) France CAC 40 index (Paris Bourse)
(e) International equity Index (Morgan Stanley Capital
Market)
MSCI EAFE -- more than 200 companies in 21 countries in Europe, Australia,
Far East
5. Motivation for Global Investing
(a) diversification benefit
(b) International capital market : less than perfectly
correlated