CH 7A (2) Flashcards
What is secondary markets and 3 facts about it
- Transactions of already traded securities
- Trading between investors
- Issuing firm: not involved
- Issuing form earns nothing
What does the issuing firm cares about and why?
- They care about market capitalization
- Because the easier for the company to raise capital and expand
What are the roles of the secondary market?
- Provides liquidity so stocks can be traded
- Continuous pricing mechanism
What are Brokers? what are they also known as?
- Individuals or firms who provide a service
- Facilitators
What are dealers? and what are some facts?
- They are active participants in transactions
- They hold inventories from which they buy/sell
what is Security Exchanges?
- Forums where security buyers and sellers are brought together to trade
What is delisting?
- Is when a security is no longer allowed to trade in an exchange
What are the three mayor trading mechanisms in the US
- Over the counter (OTC) dealer markets
- Exchange Trading with Designated Market Makers (DMM)
- Electronic Communication Networks (ECNs)
What is an example of the OTC and a fact about it
- Nasdaq exchange, bulletin boards, Pink sheets
- It is the oldest trading mechanism
What is an example of the DMM
- NYSE
What is an example of the ENCs
- Alternative Markets
What is the order execution for the OTC? it went from what to what
- Investor -> Broker -> dealer (order execution)
- Quotes went from recorded to computerized
What was created in 1971? and what did it evolve? and what happened in 2006?
- The NASDAQ system is born
- It evolved from quote display to automatic order execution
- The SEC designated NASDAQ an exchange
NASDAQ is divided into 3 tiers. explain a little about each
- top tier is where the largest ana the most traded securities reside
- middle tier and bottom tier are smaller firms less frequently traded
What is a feature of OTC market? and some facts about dealers
- Dealers are market makers: they create the market for firms
- They buy/sell offers, they keep trading going
- buyers and sellers font come together
How does a dealer make money?
- Bid/Ask spread (buy price vs sell price)
What is a negative aspect of a bid-ask spread for the investor? and what keeps the bid-ask spread small?
- It is a transaction cost
- Dealer competition keep bid-ask spread small
What are some advantages of the NYSE?
- Negotiation: all parties/representatives present
- Better pricing than fragmented markets
- Centralized trading: fastest and most info
To what name did specialist change in the NYSE?
- DMM designated market makers
What is the purpose of a DMM?
- They are design to trade individual stocks on behalf of their customers
What is a difference between OTC vs DMM?
- OTC have multiple dealers and the DMM has a single market maker
What are DMM’s obligated to maintain? and what are they required to have? Do they negotiate large or small trades?
- A fair and orderly market
- Stock inventory
- Large trades
What are some alternative trading Systems? some facts about ENC’s?
- They use ENC’s (electronic communication network)
- ENC’s Trade electronically and require subscription
What are Crossed orders? and what is eliminated through the ECN’s? and how do they make profit?
- They are orders that can be directed without a dealer and a broker
- It eliminates the bid-ask spread
- a very small fee per stock share traded
Why don’t all investors trade through ECN’s?
- they don’t allow individual investors to join
- It is normally used by institutions for large trades
What are some advantages of ECN’s?
- Lower Costs (large amounts)
- Speed
- Anonymity (avoids free-riding)
- 24 hr access
What is a block trade?
- A trade greater than 10,000 shares
- in reality is around 100,000 shares
