CHAPTER 3
ORGANIZATION AND FUNCTIONING OF SECURITIES MARKETS
3.1 What is a Market?
3.1.1 Characteristics of a Good Market
▪ Timely and accurate information on volume and prices of past transactions and all
currently outstanding bids and offers
3.1.2 Decimal Pricing
▪ Now U.S. equities are quoted in decimals (cents) rather than in fractions.
3.1.3 Organization of the Securities Market
3.2 Primary Capital Markets
3.2.1 Government Bond Issues
– Treasury Bills – negotiable, non-interest bearing securities with original maturities of
3.2.2 Municipal Bond Issues
▪ Method of sale
– Competitive bid – usually involves sealed bids
– Negotiated sales – involves contractual arrangements between underwriters and issuers
3 –
2
3.2.3 Corporate Bond Issues
3.2.4 Corporate Stock Issues
▪ Types of new issues
1. Introduction of Rule 415
3.2.5 Private Placements and Rule 144A
3.3 Secondary Financial Markets
3.3.1 Why Secondary Markets Are Important
▪ Enhances liquidity of the securities and enables price discovery
3.3.2 Secondary Bond Markets (Exhibit 3.2)
1. Secondary Markets for U.S. Government and Municipal Bonds
– U.S. government bonds are traded by bond dealers that specialize in either
2. Secondary Corporate Bond Markets
3.3.3 Financial Futures
▪ Allow the holder to buy or sell a specified amount of a given bond issue at a stipulated price
3.3.4 Secondary Equity Markets
1. Basic Trading Systems
2. Call versus Continuous Markets
3.4 Classification of U.S. Secondary Equity Markets
3.4.1 Primary Listing Markets
1. New York Stock Exchange (NYSE)
2. American Stock Exchange (AMEX)
– Was acquired by the NYSE in 2007 and is now known as the NYSE AMEX
3. Global Stock Exchanges
4. The Global 24-Hour Market
5. The NASDAQ Market
6. Listing Requirements for NASDAQ
3.4.2 The Significant Transition of the U.S. Equity Markets (Exhibit 3.2)
2. The Transition Begins
4. Stock Exchanges
6. Dark Pools
8. Algorithmic Trading (AT)
10. AT/HFT and the Flash Crash
3.5 Alternative Types of Orders Available
3.5.2 Limit Orders
▪ Specifies the buy or sell price
3.5.3 Special Orders
3.5.4 Margin Transactions
3.5.5 Short Sales
3.5.6 Exchange Merger Mania
1. Why Merger Mania?
2. Some Past Mergers
– In early 2006, NYSE acquired Archipelago Holdings Co., and renamed itself as
3. The Present and Future