Chapter 9 study notes Flashcards
Market center
Market center is a place in which orders are sent for execution. The
NYSE and Nasdaq are examples of market centers
bd acting as agent
One way is to act as the agent for the buyer
or seller. In this capacity, the firm attempts to locate another investor (the counterparty) to take the
other side of the trade. The firm then attempts to arrange the best price for its customer. Once the
trade is completed (settled), the brokerage firm receives a commission as the fee for its services. When
acting in this manner, the firm acts as a broker (agent).
BD acting as principal
Compensation for these types of transactions is built directly into the execution price
by adjustments from the dealers’ published quotes. The broker-dealers will usually charge a slightly
higher price called a markup (if they are selling and the client is buying) or pay a lower price called a
markdown (if they are buying and the client is selling). Since the firm is one of the parties to the
transaction, it is acting as a dealer or principal by trading for its proprietary (own) account.
Auction Markets
Many floor-based exchanges are auction markets, but it is
important to note that a national securities exchange is not required to have a traditional physical
trading floor providing an auction market
Sell Stop Order
A sell stop order is placed below the current market price of the security. It is
typically used to limit a loss or protect a profit on a long stock position.
Buy Stop Order
A buy stop order is placed above the current market price. It is typically used to
limit a loss or protect a profit on a short sale.
Sell Stop-Limit Order
A sell stop-limit order is placed below the current market price of the
security. It is used to limit a loss (or protect a profit) on a long position. Once activated, it becomes a
sell limit order.
Buy Stop-Limit Order
A buy stop-limit order is placed above the current market price of the
security. It is used to limit a loss (or protect a profit) on a short position. Once activated, it becomes
a buy limit order.
Nasdaq Capital Market Standards
Nasdaq Capital Market stocks must meet minimum requirements for financial strength, public
float, market value, and number of shareholders. In addition, the stock must have a bid price of at
least $4 per share to qualify for listing, and must have at least three market makers. After listing, the
issue must continue to meet standards that are somewhat lower than the initial requirements, such
as a continuing bid test requirement of at least $1 per share. An issue that fails to meet maintenance
standards is subject to delisting. An issue may voluntarily delist at any time.
Nasdaq Global Market Standards
Global Market issuers may qualify for initial listing on Nasdaq by meeting one of three alternative
sets of standards. However, these standards have more stringent quantitative criteria than those for
Capital Market securities. For example, the minimum initial bid price must be at least $4 per share.
The NGM continuing listing standards are also more stringent than those for Capital Market issues.
On balance, NGM issues are more widely known, have more volume, and have more market makers
Nasdaq Global Select Market Standards
Nasdaq Global Select Market securities represent the top tier in the ranking of Nasdaq securities
and, therefore, have the most stringent listing and maintenance requirements.
There are three standards that can be used when applying for Nasdaq Global Select listing. Of the
seven requirements, only three must be satisfied under all three standards in order for a security to
be listed. These include:
1. A $4 minimum bid price
2. 3 or 4 market makers
3. Subject to corporate governance
The following four requirements may not be applicable, depending on which of the three standards
is used in the issuer’s application:
1. Pretax earnings
2. Cash flow
3. Market capitalization
4. Revenue
Nasdaq Level 1 Service
Level 1 service provides subscribers with the inside market for each Nasdaq
security, as well as last sale and running volume information. It does not list the quote from each
market maker, as Level 2 does. Level 1 service is used mainly by individual investors and their
registered representatives
Nasdaq Level 2 Service
Level 2 Nasdaq service provides subscribers with the names and quotes of all
registered market makers in each Nasdaq security. This service also displays the inside market for
that security. This feature is useful since some Nasdaq stocks have a large number of market makers.Many financial institutions use Level 2 to monitor the value of their Nasdaq holdings and to make
trading decisions. However, this level is especially important to traders at Nasdaq firms. A trader can
easily determine which market maker has the best price for a particular security. Since all Nasdaq
quotes are firm, the trader needs only to contact the market maker and indicate the intent to execute the
trade at the price and size shown. A trader can also try to negotiate a better price than the quote listed on
the screen. Traders can also use the Nasdaq Market Center Execution System
Nasdaq Level 3 Service
Level 3 service is available only to the market makers registered in a particular
security. Although it displays the same information as Level 2, it is also interactive. Market makers
can update their quotations through the Level 3 screen for their stocks, as well as make trade and
volume reports to Nasdaq
TotalView
Nasdaq TotalView is a quotation display service available to professional and non-professional
traders that shows the entire Nasdaq book for a particular security. Subscribers pay a monthly fee
for access. TotalView displays the quote size and price of a specific stock that is available from every
market participant including Nasdaq market makers, the NYSE, the American Stock Exchange, and
the regional exchanges. In addition to price and size, TotalView displays the depth (aggregate number of
shares) of the market at each of the best five price levels, giving traders a greater perception of market
liquidity.
