Securities Markets

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Securities Markets

• Riccardo Colacito

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Roadmap

• Type of markets
• Primary markets
• Secondary markets
• Types of Orders
• Trading mechanisms
• US securities markets

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Primary vs. Secondary Security Sales

• Primary
• New issue Initial Public Offering (IPO)
• Key factor issuer receives the proceeds from the
  sale
• Secondary
• Existing owner sells to another party
• Issuing firm doesnt receive proceeds and is not
  directly involved

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Initial Public Offering (IPO)

1. What is an IPO?
2. Who are the agents in an IPO?
3. What kind of paperwork is involved in an IPO?

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The agents in an IPO
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A Tombstone Advertisement
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Investment Banking Arrangements

• Who bears the risk of the IPO?
• Firm commitment
• Best Efforts

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Paperwork

• Preliminary registration with SEC
• Red herring
• Prospectus
• Shelf Registration Rule 415

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IPO (contd)

• Process
• Road shows
• Bookbuilding
• Underpricing
• Post sale returns
• Cost to the issuing firm

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VA Linux a dramatic example

• IPO price 30
• First day closing price 239.25
• Todays price 5.28
• Replicate this picture using finance.yahoo.com
  (LNUX)

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Figure 3.3 Average Initial Returns for IPOs in
Various Countries
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Private placements

• Private placement sale to a limited
• number of sophisticated investors not
• requiring the protection of registration
• Allowed under Rule 144A
• Dominated by institutions
• Very active market for debt securities
• Not active for stock offerings

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Roadmap

• Type of markets
• Primary markets
• Secondary markets
• Types of Orders
• Trading mechanisms
• US securities markets

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Types of Secondary Markets

• Direct search
• Brokered
• Dealer
• Auction

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Roadmap

• Type of markets
• Primary markets
• Secondary markets
• Types of Orders
• Trading mechanisms
• US securities markets

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Types of Orders

• Instructions to the brokers on how to
• complete the order
• Market
• Limit
• Stop loss

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Figure 3.6 Price-Contingent Orders
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Figure 3.5 Limit Order Book for Intel on
Archipelago
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Roadmap

• Type of markets
• Primary markets
• Secondary markets
• Types of Orders
• Trading mechanisms
• US securities markets

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Trading Mechanisms

• Over the Counter markets
• Electronic communication networks (ECNs)
• Specialists markets

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Roadmap

• Type of markets
• Primary markets
• Secondary markets
• Types of Orders
• Trading mechanisms
• US securities markets

22
U.S. Security Markets

• Nasdaq (National Association of Security Dealers
  Automated Quotation System)
• Levels of subscribers
• Level 1 inside quotes
• Level 2 receives all quotes but they cant
  enter quotes
• Level 3 dealers making markets
• SuperMontage
• Organized Exchanges
• New York Stock Exchange
• American Stock Exchange
• Regionals (e.g. Boston Stock Exchange)

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Market Structures in Other Countries

• London - predominately electronic trading
• Euronext market formed by combination of the
  Paris, Amsterdam and Brussels exchanges
• Tokyo Stock Exchange