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Chapter 14 – Secondary Markets for Equity

Chapter 14 – Secondary Markets for Equity. BA 543 Financial Markets and Institutions. Chapter 14 – Secondary Markets. Trading of Financial Assets after Initial Sale Property Rights (Claims to Real Assets) bought and sold without money going to the original issuer of financial asset

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Chapter 14 – Secondary Markets for Equity

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  1. Chapter 14 – Secondary Markets for Equity BA 543 Financial Markets and Institutions

  2. Chapter 14 – Secondary Markets • Trading of Financial Assets after Initial Sale • Property Rights (Claims to Real Assets) bought and sold without money going to the original issuer of financial asset • Used Cars, Previously Owned Homes, Garage Sales • One of the developments necessary for economic development of “third world” countries • Provides current value of financial assets

  3. Chapter 14 – Secondary Markets • Trading Locations – U.S. • Big Board – NYSE • AMEX • Regional Exchanges • Chicago (Midwest – Cincinnati), Philadelphia, Boston, San Francisco-Los Angeles • Trading Locations – Outside U.S. • London, Hong Kong, Tokyo, Frankfurt, Toronto, Paris, etc. • OTC – Over the Counter • NASDAQ

  4. Chapter 14 – Secondary Markets • Market Structures • Call Markets • Batching of orders for processing at one time • Initial way stocks and bonds sold on NYSE • All trades clear at one time (once a day, twice a day) • Continuous Markets • Orders processed as received • Market orders clear through auction process • Limit orders clear as bids or asks

  5. Chapter 14 – Secondary Markets • Market Frictions • Perfect Market • Many traders and all traders are price takers • Price is determined where supply and demand cross • Frictions • Transaction Costs • Spreads, order handling, commissions, taxes, restrictions on trading (up-tick rule), halts to trading (suspensions of trading, curbs) • Closed Markets (trading 9:30 to 4:00 only)

  6. Chapter 14 – Secondary Markets • Brokers, Dealers, Market Makers • Brokers • Match Buyers and Sellers • Receive a commission for service • Dealers • Buy “Inventory” at one price • Sell “Inventory” at a second price • Market Makers • Typically dealers that stand ready to buy or sell • Quotes to buy (bids) and Quotes to sell (asks)

  7. Chapter 14 – Secondary Markets • Market Efficiencies • Operational Efficiencies • Low transaction costs • Quick transactions • Price Efficiencies • Prices reflect available information • Weak • Semi-strong • Strong • Electronic Trading – No Physical Market

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