The marketplace outline The Role of the Capital Markets

THE MARKETPLACE

Outline

• The Role of the Capital Markets

• Economic Function
• Continuous Pricing Function
• Fair Pricing Function

• The Exchanges

• National Exchanges
• Regional Exchanges
• Trading Systems
• The Specialist System
• SuperDOT and NYSE Direct+
• Marketmakers
• Circuit Breakers and Trading Curbs

Outline

• The Nasdaq Stock Market

• The Small Order Execution System (SOES)
• The Nasdaq National Market
• The Nasdaq Small Cap Market

• The Over-the-Counter Market

• Over-the-Counter Bulletin Board (OTCBB)
• Pink Sheet Stocks
• Third and Fourth Markets

Outline

• Regulation

• The Exchanges
• The SEC
• Background
• Primary Acts
• The NASD
• SIPC

• Ethics

• Illegal vs. Unethical
• The Chartered Financial Analyst Program
• History
• The CFA Program Exams
• AIMR Standards of Professional Conduct

The Role of the Capital Markets

• Continuous Pricing Function

• Fair Pricing Function

Economic Function

Economic Function

Economic Function: An Example

Economic Function: An Example

Economic Function

Economic Function

Continuous Pricing Function

Fair Pricing Function

The Role of the Capital Markets

The Exchanges

Trading Systems

• Specialists are charged with making a fair and orderly market in one or more assigned securities at posts on the exchange floor.

• SuperDot and NYSE Direct+ are electronic systems enabling NYSE firms to send market and limit orders directly to the specialists’ posts.

• Marketmakers are groups of competing individuals who maintain a fair and orderly market through open outcry trading in pits on the exchange floor.

Circuit Breakers and Trading Curbs

The Nasdaq Stock Market

• The Nasdaq (National Association of Securities Dealers Automated Quotations) market is a worldwide computerized linkup of brokerage firms, investment houses and large commercial banks.

• The Nasdaq market is sometimes still erroneously called the over-the-counter (OTC) market.

The Nasdaq Stock Market

• In Nasdaq trading, bids and offers for securities ranging from small unfamiliar firms to some of the largest companies in the world are posted to an electronic bulletin board.

• Trades of up to 1,000 shares can be executed in less than one minute via the Small Order Execution System (SOES).

The Nasdaq Stock Market

• The Nasdaq stock market comprises two distinct markets:

• The Nasdaq National Market. The largest and most established firms in the Nasdaq market are the national market issues.
• The Nasdaq Small Cap Market. These small-cap issues have a low level of capitalization.

The Over-the-Counter Market

• Today, the term OTC equity security refers to an equity security that is not traded on Nasdaq or a national or regional exchange.

• OTC securities trade in two ways:

• The OTC Bulletin Board (OTCBB) is a regulated quotation service providing real-time information.
• Data on the smallest and often most speculative pink sheet stocks can be accessed via the Internet.

Third and Fourth Markets

• The trading of listed securities in the Nasdaq market is known as the third market.

• Direct trades between large institutional investors comprise the fourth market.

The Over-the-Counter Market

The Markets

Regulation

• The Exchanges have rules regarding…

• the financial capacity of members serving as stock specialists
• the financial & market activity of listed firms
• the disclosure & annual reporting of listed firms

Regulation

• The Securities and Exchange Commission (SEC) was established …

• to ensure that investors have adequate information to make an informed investment decision
• to help prevent price manipulations and abuses like the Ponzi scheme

• Two primary acts influencing the investment industry today are the Securities Act of 1933 and the Securities Exchange Act of 1934.

Regulation

• The National Association of Security Dealers (NASD) is a self-regulatory body that licenses brokers and generally oversees the trading practices of OTC securities.

• The Securities Investor Protection Corporation (SIPC) protects investors from loss due to brokerage firm failure, fraud, natural disaster, or theft.

Ethics

• A wide range of investment activities may be legal but carry substantial ethical baggage.

• The Chartered Financial Analyst (CFA) program promotes investment education and ethical behavior among those involved in the investment business.

• The program is administered by the Association for Investment Management and Research (AIMR).

Ethics

• To earn a CFA designation, candidates must pass three separate exams taken at least a year apart.

• Persons who have earned the CFA designation must subscribe to the AIMR standards of professional conduct.

Review

• The Role of the Capital Markets

• Economic Function
• Continuous Pricing Function
• Fair Pricing Function

• The Exchanges

• National Exchanges
• Regional Exchanges
• Trading Systems
• The Specialist System
• SuperDOT and NYSE Direct+
• Marketmakers
• Circuit Breakers and Trading Curbs

Review

• The Nasdaq Stock Market

• The Small Order Execution System (SOES)
• The Nasdaq National Market
• The Nasdaq Small Cap Market

• The Over-the-Counter Market

• Over-the-Counter Bulletin Board (OTCBB)
• Pink Sheet Stocks
• Third and Fourth Markets

Review

• Regulation

• The Exchanges
• The SEC
• Background
• Primary Acts
• The NASD
• SIPC

• Ethics

• Illegal vs. Unethical
• The Chartered Financial Analyst Program
• History
• The CFA Program Exams
• AIMR Standards of Professional Conduct