Overview of Financial Markets in the US

1
Overview of Financial Markets in the US

• What makes a good market?
• Major equity markets NYSE and NASDAQ
• Auction markets and dealer markets Which is
  better?
• U.S. Market Indicies
• Types of Orders
• Margin Trading and Short Selling

2
What makes a good market?

• Availability of information
• Liquidity
• Price continuity (depth)
• Moderate transaction costs

3
Major U.S. Equity Markets

• Buttonwood Agreement - 1792
• gt New York Stock Exchange
• The Curb prior to 1910
• gt American Stock Exchange
• NASDAQ - 1971
• Regionals - Chicago, Pacific, Cincinnati, Boston,
  etc.

4
The NYSE

• Listing requirements

5
The NYSE

• Its an auction market
• 1366 members
• Commission Brokers
• Floor Brokers
• Registered Traders
• Specialists

6
The NYSE

• The Specialist
• Market maker, broker, and dealer
• Physical location
• All trades recorded
• Maintain order book
• Trade for themselves
• Monopolist?

7
The NASDAQ

• Listing requirements

8
The NASDAQ

• Its a dealers market
• No physical location
• Multiple dealers compete for trading volume
• Collusion? Preferencing?

9
Which is better? Auction or Dealer?

• Huang and Stoll (JFE, 1996)Dealer versus
  auction markets A paired comparison of
  execution costs on NASDAQ and the NYSE

10
Market Indicies

• Price Weighted (DJIA, Nikkei)
• Value Weighted (SP 500, FT100)
• Equally Weighted (Value Line, FT OSI)
• Does selection of an index matter?

11
Trading Types of Orders

• Market Order
• Buy/Sell at best available price
• Limit Order
• typically triggered if conditions improve
• Price trigger
• Time tag (FOK, day, GTC)
• Stop-Loss Order
• typically triggered if conditions worsen
• Used to close a position

12
Margin Trading

• Can borrow funds from broker and amplify
  position. Why?
• Margin Equity / MV (Assets -
  Liabilities) / MV
• How much can you borrow
• Initial Margin max 50 (Fed)
• Maintenance Margin min 25 (Fed)
• Examples

13
Short Selling

• Opposite of Long position
• Borrow and sell shares with expectation that
  their price will fall
• After price falls, buy shares, cover short
  position (repay loan of shares)
• Uptick rule
• All short sales are margin trades