II: Equities II 7: Secondary Equity Markets. Chapter 7: Secondary Equity Markets © Oltheten & Waspi...

II: Equities II

7: Secondary Equity Markets

Chapter 7: Secondary Equity Markets © Oltheten & Waspi 2012

Stock Exchanges

Exists to bring buyer and seller together in a two sided auction.


Auction

Buyers Bid . . . . . 10 @ $50.40 1 @ $50.35 10 @ $50.30 90 @ $50.25 120 @ $50.20

Sellers Ask 60 @ $50.65 10 @ $50.60 95 @ $50.55 50 @ $50.50 . . . . . .

Bid Ask Spread =10₵

Tick =5 ₵


Discovery Café

Over The Counter NASDAQ NYSE


OTC: Over The Counter

Stocks not listed on an exchange trade over-the-counter.

OTC stocks are generally smaller companies that trade infrequently


OTC

John Q. Investor goes to his broker to buy 1000 shares of Discovery Café.


OTC: Pink Sheets


OTC

The Pink Sheets brings buyers and sellers together by providing a contact of the dealers in the stock.

http://www.OTCmarkets.com/home

http://www.otcmarkets.com/home


NASD

National Association of Securities Dealers self regulating organization oversees the OTC market administers rules of fair practice and governs

the rules of how securities are traded, delivered, and settled.


NASDAQ

National Association of Securities Dealers Automated Quotation

Began as a computerized network to link traders of OTC issues that traded more frequently.

Filed for status as an exchange under the name NASDAQ


NASDAQ

Has no trading floor network of computer and telephone lines

that link the members of the NASD Works through a system of competing

Market Makers


Brokers, Dealers, Market Makers

Suppose that Bill Gates writes a book entitled "The Secrets of My Success - The Microsoft Story".

Bill is a good friend* and I can get copies of this book autographed by the author.

*Actually, Bill doesn’t know me from Eve


Broker

Agent When you want to buy a book I can buy it for

you. I charge you what I paid for the book (plus commission).

When you want to sell a book I can sell it for you. I give you what I get for the book (minus commission).


Dealer

Manages an Inventory When you want to buy a book I sell it to you

from my inventory of books. I charge you my quoted ask price plus a small markup for handling.

When you want to sell a book I buy it from you for my inventory of books. I pay you my quoted bid price less a small markup for handling.


Market Maker

Must always stand ready to buy/sell When you want to buy a book, whenever you

want to buy a book, I must sell you one from my inventory of books.

When you want to sell a book, whenever you want to sell a book, I must buy it from you.


Market Maker

Bid $50 If you want to sell a

book, I will buy it from you for $50

Ask $53 If you want to buy a

book, I will sell it to you for $53


Market Maker

Bid $40 Discourage book

sellers by lowering the price to $40

Ask $42 Encourage book

buying by lowering the price at which I sell to $42


NASDAQ: Example

Discovery Café applies for listing in NASDAQ Assigned the ticker symbol CAFE (all

NASDAQ stocks have 4 character symbols – or they used to anyway.)


NASDAQ

John Q. Investor goes to his broker to buy 1000 shares of Discovery Café


NASDAQ: Example


NASDAQ

NASDAQ does not bring buyers and sellers together; it uses a system of wholesellers to ensure that you can always buy and sell


New York Stock Exchange


NYSE

Has a trading floor Uses a specialist system

Specialist: one and only market maker for a particular stock.

The specialist is situated at one of the seventeen specialist posts on the floor of the exchange. There are 482 Specialists employed by 21 firms.


NYSE: Example

Discovery Café decides to list its shares on the NYSE

Our ticker symbol must change DVC


NYSE

John Q. Investor goes to his broker to buy 1000 shares of Discovery Café


NYSE: Example

Specialist Bid $50 Broker Joe gets $1 per share more for his shares

Specialist Ask $52 John’s broker can buy

directly from the specialist at $52ohn pays $1 per share less


NYSE:

The specialist system brings buyers and sellers together by bringing everyone to the same place on the floor of the exchange

If there is an insufficiency of buyers then there is a market maker at hand

Specialist keeps the limit order book

Gosh, I can hardly wait to find out what a limit order is…. maybe I’ll read chapter 8

II: Equity Markets II

II: Equities II 7: Secondary Equity Markets. Chapter 7: Secondary Equity Markets © Oltheten & Waspi...

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