Finance 431 - Grinder
Chapter 5
The Stock Market
  1. Primary and Secondary Markets
    1. The Primary Market for Common Stock
      1. Initial Public Offerings (IPOS)
      2. Underwriting
      3. Seasoned Offerings
    2. The Secondary Market for Common Stock
    3. Dealers and Brokers
  2. The New York Stock Exchange
    1. Trading Licenses - (1,366 seats)
    2. Types of Brokers
      1. Commission Brokers - "Agents who execute customer orders to buy and sell stock transmitted to the exchange floor."
      2. Specialists (Designated Market Makers)- "... a dealer on the floor of the exchange. Often called a market maker." Specialists are charged with making an orderly market in the stocks to which they are assigned.
      3. Floor Brokers - "NYSE members who execute orders for commission brokers on a fee basis."
      4. Floor Traders - "NYSE members who trade for their own accounts, trying to anticipate and profit from temporary price fluctuations.
    3. SuperDOT
    4. NYSE Listed Stocks
  3. Operation of the NYSE
    1. Floor Activity
    2. Order Types
      1. Market Order - This is an order that is executed as soon as possible at the prevailing market price.
      2. Limit Order - Specifies a price at which to buy or sell and a time limit (GTC-good till canceled; day order - expires at the end of the trading day). A limit order to buy will be executed at or below the limit price. A limit order to sell will be executed at or above the limit price.
        1. Buy Example:
 (AMZN) currently sells for $40.38. You think the price will fall and would like to buy Amazon at $37.50. You could place a limit order at 37.50 GTC. Then when and if AMZN falls to $37.50, your order might be filled. If the price drops briefly to $37.50 and then rebounds to say $37.90, your order might not have a chance to be executed.

          Consider a limit order to buy Bausch & Lomb at $46.20 or less:

        2. Sell example:
          Suppose you have just purchased Advanced Micro Devices Inc. (AMD) at $15.16 and expect the price to peak at about $19 over the next six weeks. You could place a limit sell order at $19. When the stock price of AMD moves to $19 or more, your order will be executed.
        The Order Book; BATS Exchange Order Book
      3. Stop Order - Again both price and time limits are specified with a stop order, but the order is only executed if the stop price is reached or passed. Once the stop price is reached, the stop order becomes a market order.
        1. Buy example: See Example 2 below
        2. Sell Example:
          The most common use of a stop order is known as a stop-loss. Suppose you had purchased Ionatron, Inc. (Ticker: IOTN) stock for about $0.56 a share a year ago . The stock now sells for about $7.13 and you are a little nervous about the price so you place a stop order at $6.80. Once reached $6.80, your stop order will change to a market order. If the stock is dropping quickly, you might get out at say $6.50. Or perhaps the price might go up a bit before your order is executed and you're able to close your position at $6.84 a share.
      4. Stop-Limit Order - The twist here is that once the stop price has been reached the order becomes a limit order instead of a market order.
      5. Limit Order and Stop Order examples - Both types of orders can be used in buy or sell situations. The key difference between the two is that a stop order becomes a market order once the trigger price is reached. A limit order does not.
        1. Example 1: Suppose a stock's current price is $50 and you wish to sell it for $60 or more. Here you would want to place a limit order to sell at $60. Remember, even if the price hits $60, you might not get your order filled if there is another order ahead of yours in the limit order book. If you placed a stop sell order at $60, once the price hit $60 the stop sell order now becomes a market order. The stock could now sell for $60, or $59, or...
        2. Example 2: Suppose a stock's current price was $50 and you want to buy it if it reaches $60. (You might believe that if it reaches $60, the stock breaks out of a resistance level.) You would want to place a stop-buy order at $60. A limit-buy order would be executed at $60 or less so you wouldn't want to use limit orders in this instance since it would be executed even if the price never hit $60.
        3. Example 3: Suppose a stock's current price is $50 and you want to sell at $45 in order to minimize losses. Use a stop-sell order at $45. If you use a limit-sell order it would sell at $45 or more so you would virtually be assured of selling even if the price didn't fall. A crawling stop would also fit this scenario.
        4. Example 4: Suppose a stock's current price is $50 and you want to buy at $45. A limit-buy order at $45 would fill your order at $45 or less. A stop-buy order would become a market order once $45 was reached and you might buy it at $40, or $40.25, or ...
        5. Example 5: You short a stock at $100 a share, and the stock price drops to $95. You think you should cover the short position but think the price might fall lower so you wait. As a precaution, you place a stop-buy order at $96. This protects your profits against a possible upswing in the stock. Since a limit-buy order would be executed at $96 or less you wouldn't want to use it since it would close out your short position.
  4. Nasdaq
    1. Nasdaq Operations
    2. Nasdaq Participants
    3. ECNs
      1. An ECN is "An electronic system that brings buyers and sellers together for the electronic execution of trades. It disseminates information to interested parties about the orders entered into the network and allows these orders to be executed. Electronic Communications Networks (ECNs) represent orders in NASDAQ stocks; they internally match buy and sell orders or represent the highest bid prices and lowest ask prices on the open market. The benefits an investor gets from trading with an ECN include after-hours trading, avoiding market makers (and their spreads), and anonymity (which is often important for large trades). " (Source

        ECN's Handle 35-40 percent of all Nasdaq Trades

      2. Archipelago was founded in 1997 as an SEC approved ECN. It was backed by a number of prominent Wall Street firms. In 2000, Archipelago and the Pacific Exchange began a partnership that created the a totally electronic stock market known as the Archipelago Exchange (ArcaEx). The Pacific Exchange closed its San Francisco equities floor on Thursday, March 21, 2002 and moved all of its equities trading to ArcaEx. It is the first ECN to achieve SEC approved Exchange status.
      3. Island/Instinet: Instinet was founded in 1969, and was purchased by Reuters in 1987. Instinet was originally developed for institutional traders who wished to make block trades in the 4th market. (See page 47 of your text for more about the 4th market.) Island was developed by "rogue" daytraders (also known as SOES Bandits) who took advantage of the Nasdaq Small Order Execution System (SOES) to profit from mispricings in the Nasdaq system. It became the largest ECN by the beginning of 2002. Island and Instinet merged in September of 2002.
    4. Level II Quotes About $50/month (Nasdaq Live Quotes has a free 1-month trial)- free with some online brokerage accounts.
    5. NYSE Open Book $500/month give access to specialist limit order books
  5. Competitors
    1. Third Market - The "off-exchange market for securities listed on an organized exchange." It was originally developed to help large traders avoid large fixed commissions.
    2. Fourth Market - "Market for exchange-listed securities in which investors trade directly with other investors, usually through a computer network" like Instinet.
  6. Stock Market Information
    1. The Dow Jones Industrial Average
    2. Stock Market Indexes
      1. S & P 500 Index
      2. Price-weighted index
      3. Value-weighted index