ECON 394 Lecture 2,1,Overview of Market Structure,The Securities and Exchange Commission (SEC) was created in 1934. Stock exchanges are regulated by the SEC, but they are considered self-regulatory organizations (SROs) with considerable latitude. The major national stock exchanges are the New York Stock Exchange (NYSE) and the American Stock Exchange (AMEX). In 1998, the National Association of Security Dealers (NASD) acquired the AMEX. It then sold the AMEX in 2003 to a private equity group for only $110 million. The NASD regulates an electronic trading network called the NASDAQ (NASD Automated Quote System). The NASD went public in 2001, trades under the symbol NDAQ and is now called the Nasdaq Stock Market Incorporated. A funny name for an exchange that is not a stock market (at least according to the SEC).,ECON 394 Lecture 2,2,The New York Stock Exchange,Stock markets like the New York Stock Exchange provide strict criteria for shares to be traded on their exchange. For this reason, they are still called listed securities.,NYSE Facts and Figures:,U.S. listing requirements,Daily trading volume,Market capitalization,10 Largest Companies,ECON 394 Lecture 2,3,The NYSE Trading Floor,Virtual tour,ECON 394 Lecture 2,4,NYSE Participants,To gain access to the floor, you must buy a seat. The number of seats has remained at 1,366 since 1953. They currently sell for about $1.5 million. Each stock listed on the NYSE is allocated to a specialist, a market maker who trades only in specific stocks at a designated location. All buying and selling of a stock occurs at that location, called a trading post. Buyers and sellers -represented by the floor brokers - meet openly to find the best price for a security.,ECON 394 Lecture 2,5,The NYSE Auction Process,Specialists organize the auction process on the trading floor. They provide information about the current state of the market, the price at which shares can be bought (bid) or sold (offer or ask) and the quantity of shares available at each price, called depth. The difference between the bid and offer is called the spread. In 2001, all U.S. equity markets went to decimals with a minimum spread of $0.01.,ECON 394 Lecture 2,6,The Specialist Agent & Principal,Specialists act as agents, executing orders entrusted to them by the public.,In instances when there is a temporary shortage of buyers or sellers, NYSE specialists act as agents, buying or selling for their own accounts. The specialist has an affirmative obligation to stabilize markets during severe market downturns, like the market crash of October 19, 1987. The vast majority (77%) of NYSE volume is a result of public order meeting public order - individuals, institutions and member firms interacting directly with each other. Non-specialists handle 14% and specialists 10%.,Note: There can be a conflict between the specialist acting as both principal and agent.,ECON 394 Lecture 2,7,NYSE Specialist Firms,The largest NYSE specialist firm is LaBranche and Co. which handles more than 500 stocks. Spear, Leeds and Kellog (acquired by Goldman Sachs in 2000 for $6.5 billion) and Fleet Meehan are second and third with 493 and 428 stocks. Together, these 3 firms trade about 2/3 of the daily volume. You can find a complete list on the here.,ECON 394 Lecture 2,8,NYSE Order Book,ECON 394 Lecture 2,9,Types Of Orders - NYSE,These are four kinds or orders: market orders: an order to buy or sell a fixed quantity at the current market price; limit orders: an order to buy or sell a fixed quantity at a designated price; stop order: an order to buy or sell once a designated “stop” price has been hit. stop-limit orders: a combination of a limit and a stop order On the NYSE, stop orders become market orders once a trade has been executed at the stop price.,ECON 394 Lecture 2,10,NYSE Automated Execution Systems,SuperDOT ADot NYSE Direct+,Large institutional investors can also trade in what is known as the upstairs market.,ECON 394 Lecture 2,11,Regulation NMS,(1) Trade through rule (2) Access rule (3) Sub-penny rule,The overriding principal of a national market system is to enable traders to get the best prices independent of trading venue.,ECON 394 Lecture 2,12,Specialist Investigations,Background: Since decimals and with the decline in trading volume following the bubble, specialist profits have declined.,The stock price of publicly traded specialist firm LaBranche (LAB) confirms this.,LAB and others bottomed out in early 2004 when the 5 major specialist firms were fined $240 million.,Calpers (among many others) has sued the NYSE to recover investor money.,Criminal cases are pending.,ECON 394 Lecture 2,13,Example Of Interpositioning,This was the state of the limit order book in on January 3, 2003 at 11:04 AM. The stock is VZ and Spear Leads and Kellogg (SLKS) was the specialist.,The book also included market orders to buy 3,300 shares and market orders to sell 2,100 shares.,The specialist could have paired off the market buy and sell