ECON394Lecture2 1 OverviewofMarketStructure TheSecuritiesandExchangeCommission SEC wascreatedin1934 StockexchangesareregulatedbytheSEC buttheyareconsideredself regulatoryorganizations SROs withconsiderablelatitude ThemajornationalstockexchangesaretheNewYorkStockExchange NYSE andtheAmericanStockExchange AMEX In1998 theNationalAssociationofSecurityDealers NASD acquiredtheAMEX ItthensoldtheAMEXin2003toaprivateequitygroupforonly 110million TheNASDregulatesanelectronictradingnetworkcalledtheNASDAQ NASDAutomatedQuoteSystem TheNASDwentpublicin2001 tradesunderthesymbolNDAQandisnowcalledtheNasdaqStockMarketIncorporated Afunnynameforanexchangethatisnotastockmarket atleastaccordingtotheSEC ECON394Lecture2 2 TheNewYorkStockExchange StockmarketsliketheNewYorkStockExchangeprovidestrictcriteriaforsharestobetradedontheirexchange Forthisreason theyarestillcalledlistedsecurities NYSEFactsandFigures U S listingrequirements Dailytradingvolume Marketcapitalization 10LargestCompanies ECON394Lecture2 3 TheNYSETradingFloor Virtualtour ECON394Lecture2 4 NYSEParticipants Togainaccesstothefloor youmustbuyaseat Thenumberofseatshasremainedat1 366since1953 Theycurrentlysellforabout 1 5million EachstocklistedontheNYSEisallocatedtoaspecialist amarketmakerwhotradesonlyinspecificstocksatadesignatedlocation Allbuyingandsellingofastockoccursatthatlocation calledatradingpost Buyersandsellers representedbythefloorbrokers meetopenlytofindthebestpriceforasecurity ECON394Lecture2 5 TheNYSEAuctionProcess Specialistsorganizetheauctionprocessonthetradingfloor Theyprovideinformationaboutthecurrentstateofthemarket thepriceatwhichsharescanbebought bid orsold offerorask andthequantityofsharesavailableateachprice calleddepth Thedifferencebetweenthebidandofferiscalledthespread In2001 allU S equitymarketswenttodecimalswithaminimumspreadof 0 01 ECON394Lecture2 6 TheSpecialist Agent Principal Specialistsactasagents executingordersentrustedtothembythepublic Ininstanceswhenthereisatemporaryshortageofbuyersorsellers NYSEspecialistsactasagents buyingorsellingfortheirownaccounts Thespecialisthasanaffirmativeobligationtostabilizemarketsduringseveremarketdownturns likethemarketcrashofOctober19 1987 Thevastmajority 77 ofNYSEvolumeisaresultofpublicordermeetingpublicorder individuals institutionsandmemberfirmsinteractingdirectlywitheachother Non specialistshandle14 andspecialists10 Note Therecanbeaconflictbetweenthespecialistactingasbothprincipalandagent ECON394Lecture2 7 NYSESpecialistFirms ThelargestNYSEspecialistfirmisLaBrancheandCo whichhandlesmorethan500stocks Spear LeedsandKellog acquiredbyGoldmanSachsin2000for 6 5billion andFleetMeehanaresecondandthirdwith493and428stocks Together these3firmstradeabout2 3ofthedailyvolume Youcanfindacompletelistonthehere ECON394Lecture2 8 NYSEOrderBook ECON394Lecture2 9 TypesOfOrders NYSE Thesearefourkindsororders marketorders anordertobuyorsellafixedquantityatthecurrentmarketprice limitorders anordertobuyorsellafixedquantityatadesignatedprice stoporder anordertobuyorsellonceadesignated stop pricehasbeenhit stop limitorders acombinationofalimitandastoporderOntheNYSE stopordersbecomemarketordersonceatradehasbeenexecutedatthestopprice ECON394Lecture2 10 NYSEAutomatedExecutionSystems SuperDOTADotNYSEDirect Largeinstitutionalinvestorscanalsotradeinwhatisknownastheupstairsmarket ECON394Lecture2 11 RegulationNMS 1 Tradethroughrule 2 Accessrule 3 Sub pennyrule Theoverridingprincipalofanationalmarketsystemistoenabletraderstogetthebestpricesindependentoftradingvenue ECON394Lecture2 12 SpecialistInvestigations Background Sincedecimalsandwiththedeclineintradingvolumefollowingthebubble specialistprofitshavedeclined ThestockpriceofpubliclytradedspecialistfirmLaBranche LAB confirmsthis LABandothersbottomedoutinearly2004whenthe5majorspecialistfirmswerefined 240million Calpers amongmanyothers hassuedtheNYSEtorecoverinvestormoney Criminalcasesarepending ECON394Lecture2 13 ExampleOfInterpositioning ThiswasthestateofthelimitorderbookinonJanuary3 2003at11 04AM ThestockisVZandSpearLeadsandKellogg SLKS wasthespecialist Thebookalsoincludedmarketorderstobuy3 300sharesandmarketorderstosell2 100shares Thespecialistcouldhavepairedoffthemarketbuyandsellordersandsatisfiedtheremainingorderfromhisaccountoragainstthelimitordersat41 10and41 12 Instead thespecialistshorted3 300sharesat41 10 400sharesat41 04 200sharesat41 03 bringingthespreadto41 00X41 10 Atthatprice hecovered2 100sharesfromthemarketsellorders earningarisklessprofitonthatportionofthetrade ECON394Lecture2 14 Grasso sCompensation DuringhistenureaschairmanandCEOoftheNYSE RichardGrasso whohadstartedoutasaclerkofthefloor receivednearly 160millionincompensation TheWebbreporthasallthedetails EliotSpitzerhassuedGrassotorecoversomeofhispaypackage Thebottomline thespecialiststocksaredown tradingvolumeisdown electronicexchangesareerodingNYSEmarketshare NYSEseatpricesaredownto 1millionfroma1999peakof 2 5million MutualfundslikeFidelityareactivelyexploringalternativestotheNYSE Grassowasessentiallybeingpaidhushmo