3.8% Trading Securities Flashcards
Who composes the exchange market?
NYSE and other listed security exchanges
Describe the market for securities
The market is primary in which the proceeds of sales go to the issuer of the security sold and secondary where previously issued securities are bought and sold
What does a listed security refer to?
Any security listed for exchange trade.
Corporate barriers to stock exchange list for trading (requirements by the exchange)
Requires a Location, pricing system, and designated marketmaker or specialist.
An example of a listed (central) market location (and trading floor)
NYSE and CHX
Describe a listed markets pricing system operation
auction markets where floor brokers compete to execute trades at the most favorable prices
Describe a designated marketmaker or specialists chief and additional functions
Chief function is to maintain a fair and orderly market
Additional function is to provide price continuity
The designated marketmaker or specialist does this by filling or buying or selling limit and market orders as a dealer for the public and trading his own stock accounts to stabilize or facilitate trading when imbalances and supply and demand occur.
OTC functions as an interdealer and trades (un…)
…listed securities
How are OTC security dealers connected?
Computer and telephone
OTC location
No central marketplace, phone, computer networks, trading rooms.
OTC pricing system
Interdealer network, marketmakers compete to post the best bid and ask prices in a negotiated market
What exactly are marketmakers?
Marketmakers/broker-dealers buy and sell at minimum trading unit 100 shares stock which they have published Bid and ask quotes.
Marketmakers acting in a dealer principal capacity sell from their inventory at their asking price and buy for their inventory at the bid price.
OTC versus NYSE
OTC negotiate security prices regulated by FINRA traded at many locations
NYSE security prices are auctioned and regulated on the NYSE floor by the NYSE
Exchange prices are listed therefore determined by auction
OTC security prices are unlisted therefore determined by negotiation
OTC trades government and municipal bonds and unlisted corporate stocks and bonds
The role of brokers
Brokers - agents, arrange client trades to charge commissions and only facilitate trades between buyers and sellers.
Securities firms never act as brokers and dealers in the same transaction.
The role of dealers or principals
Dealers or principles ‘position trade’ - buy and sell securities for personal accounts.
When selling inventory, dealers charge their customers a ‘mark up ‘difference between the price the dealer would have to pay now (not what the dealer paid for it sometime ago) and the client charged price.
