The Stock Market 5-6
Ask price: The price at which a dealer is willing to sell. Also called the
offer or offering price.
Spread: The difference between the bid and ask prices.
A dealer maintains an inventory and stands ready to buy and sell at any time.
The dealer maintains an inventory to accommodate order imbalances. The
dealer is willing to pay the bid price and will sell at the ask price. The difference is
the bid-ask spread. The dealer profits through strategically setting the spread.
The broker brings together buyers and sellers, but does not maintain an
inventory. The broker facilitates trades by others.
The largest secondary market by market capitalization is the NYSE. By number
of companies listed and shares traded it is the Nasdaq.
Lecture Tip: It is useful to point out to students that the bid-ask spread is not
fixed, but changes frequently. Two important factors in determining the spread
are the perceived risk and the volume. Dealers will typically increase the spread
when the perceived risk is higher, and decrease the spread when the risk is
5.2 The New York Stock Exchange
The NYSE was 200 years old in 1992. For more than 200 years, the NYSE
operated as a not-for-profit corporation owned by its members, the securities
firms and brokerage companies. On March 8, 2006, the NYSE went public
(ticker NYX) and became a publicly traded for-profit corporation. On April 4,
2007, NYSE Holdings merged with Euronext N.V. and launched NYSE Euronext.
NYSE Euronext was, at the time, the world’s largest exchange. In 2013, NYSE
Euronext was acquired by Intercontinental Exchange (ICE).
A. NYSE Membership History
NYSE exchange member: As of 2006, the owner of a trading license on
the NYSE is an exchange member.
Historically, the NYSE had 1,366 members who fiowned” seats on the exchange.
Seat owners could buy and sell securities on the exchange floor with no
commission. Since 1929, the lowest seat price paid was $55,000 (1977). In 2005,
a seat sold for a record price of about $4 million. In 2006, all of this changed
when the NYSE became a publicly owned corporation called NYSE Group, Inc.
Its stock listed on the NYSE. Now, instead of purchasing seats, exchange
members must purchase trading licenses, the number of which is limited to
1,366. In 2012, a license would set you back $50,000 per year. Before the NYSE
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