1.10 STOCK MARKETS
1.10 STOCK MARKETS
Stocks are traded on organized exchanges and also through networks of brokers and dealers (sometimes called "over-the-counter" markets). There are over a hundred stock markets in the world; some of the largest ones are described below.
Primary and Secondary Markets
When financial assets are first sold, they are traded in a primary market. For example, newly issued stock is placed by underwriters (typically investment banking firms), while government bonds are sold at Treasury auctions. The proceeds from the sale of new securities (net of underwriting costs) go to the issuer of the security, and the quantity issued determines the total supply of the security.
Subsequent to the initial placement, the securities are traded on secondary markets such as stock exchanges and in over-the-counter markets. These trades are among investors who wish to alter their portfolios. The original issuer does not receive any proceeds from secondary trades, and the total supply of the security is not altered.
The four largest stock exchanges are the New York Stock Exchange (NYSE), the market represented by the National Association of Security Dealers (NASD) (called the over-the-counter market), the London Stock Exchange (LSE), and the Tokyo Stock Exchange (TSE). Each exchange has specific rules by which trade takes place.
Other important markets, in terms of total market value, include the Hong Kong Stock Exchange, the American Stock Exchange, the Paris Bourse, and the Frankfurt Stock Exchange.
The New York Stock Exchange
The NYSE, located on Wall Street in New York City, is perhaps what jumps first to mind when one thinks about stock markets. It is the largest stock exchange in the world, and is where about 70% of U.S. equity trading takes place. More than 2,000 stocks trade on the exchange. The total value of the firms traded on the NYSE exceeds $4.5 trillion.
The NYSE has its roots in the Buttonwood Agreement, which was a document drawn up by 24 brokers under a buttonwood tree on Wall Street in 1792. The agreement laid the foundation for an exchange by establishing some rules of trade (including minimum commissions). The building that currently houses the exchange was opened in 1903.
The NYSE itself is a non-profit organization whose members can conduct profit-making activity. You can become a member either by buying a seat at the exchange or by paying a fee. About 95% of the members own a seat. A seat can be bought or sold. The current price of a seat is approximately $400,000.
A unique feature of the NYSE is the specialist. A specialist is a member of the exchange who maintains the market in one or more stocks. Maintaining the market means matching buy and sell orders, providing liquidity when needed, and also minimizing price volatility.
The specialist acts both as a broker (in arranging trades between buyers and sellers) and as a dealer (in buying and selling from an inventory).
The Over-the-Counter Market (Nasdaq)
Commonly known as the Nasdaq, the over-the-counter (OTC) market is composed of a group of dealers in stocks, and formally dates from 1971. The dealers post bids and asks for the securities they deal in, and arrange trades with other dealers on the Nasdaq.
NASDAQ stands for "National Association of Security Dealers Automated Quotation" (system). A broker can find out the best prices at which to buy or sell securities through the computerized quotation system that links the dealers. A separate inter-dealer quotation system allows dealers to trade with other dealers at prices that could differ from those posted to the public.
The London Stock Exchange
The origins of the London Stock Exchange can be traced back to the Muscovy Company, formed in 1553, for financing merchant vessels. The exchange underwent a major transformation in 1986 (following several allegations of unfair trade practices) in an act called the Big Bang.
The Big Bang virtually eliminated the old exchange, and transformed it into a highly competitive and open market. The exchange is composed of brokers and market makers, but it is not required that all trades take place through the market makers; brokers can trade among themselves. An automated display system shows all the quotes posted by the market makers; they can trade within these quotes if they want.
The Tokyo Stock Exchange
The TSE was established in 1878 as a private corporation. In 1943 it was merged with all other stock exchanges in Japan into the Japan Securities Exchange. The modern form of the TSE dates from 1949.
Stocks are divided into two groups. The 150 most active stocks fall into the First Topic, while the rest are in the Second Topic.
Buy, sell, and limit orders are transmitted either electronically (in the case of smaller orders) or by floor traders to a saitori, who matches the orders. Officials of the exchange ensure orderly trading and reporting of trades. The best bid and ask price, as well as the last five traded prices, are displayed publicly.
Orders are executed based on price and time priority; the highest buying prices (bids) and the lowest selling prices (asks) are executed first. If several people are willing to trade at the same price, the first order received is executed first.
One way to measure stock market performance is by a stock index. Some major indices are described in the topic Stock Indices.
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