CHAPTER 8 Flashcards
(46 cards)
Primary Market
Issuers sell to people
Secondary Market
Investors buy and sell among themselves
What is the secondary market regulated by?
Securities Exchanges Act of 1934, which created the SEC and gave it authority to regulate exchange and the OTC market, both of with are market centers
Market Center
Location where buyers and sellers connect to trade
Exchanges
OTC
Third Market
Fourth Market
Rules with exchanges (NYSE)
Most maintain a trading floor with some exceptions (most of the trading happens on electronically)
Trading is done between members (support staff but do not make the trades)
Exchange member firms have employees called floor brokers who execute trades
Exchange has designated market makers DMMs which are assigned a group of stock (several hundred) to maintain inventory, facilitate trades, and maintain a fair and orderly market - DMMs will buy into and sell from their inventory to keep markets balanced
Exchanges are called double auction markets
Floor traders and two-dollar brokers help keep the trading moving smoothly
Stock that is trading on an exchange is called listed stock
OTC Market
Criteria needs to be met for companies
Market center for smaller companies
Securities that trade OTC are called non-listed or unlisted securities, most debt securities trade OTC
No floor, decentralized market
Specialized broker dealers called market makers
Multiple market makers for a given stock
Market makers maintain an inventory
MMs post their prices electronically
When investor buys from OTC, they are buying from MM and when they are selling they are selling to a MM
BD may assist by identifying a MM, this is an agent relationship where they charge a commission
BD that makes a profit on the spread or markup (markdown) is the principal
Third Market (Nasdaq)
OTC MMs make a market in exchange-listed stocks in the third market
Fourth Market (ECNs)
Institutional Investors trade in large blocks with other institutions without the help of BDs.
Trade through electronic communication networks (ECNs) which are open 24 hours a day and protects institutional investors from revealing trades because they are large
Trades are not make public until after it is complete, sometimes called dark pools
Day Traders
Retail investor that trades rapidly in and out of positions throughout the day
Fiduciaries
Manages assets for another person with a legal and moral obligation to act in the interest of the beneficiary.
Custodian and trustees are fiduciaries
Custodians, Trustees, Guardians, and executors
Investment Advisors
ABC
A- Give advice
B- In the business of giving advice
C- get compensated for it
Must register under Investment Advisers Act of 1940 or Uniform Securities Act
BDs who provide advice for a fee need to register, IAs must pass 65
IAs are fiduciaries
Broker-Dealers
Perform securities transactions for their own account or customers
Main revenue is transaction fees (commissions and loads)
Each member operates under a membership agreement with FINRA and self-regulatory organization
Some BDs offer investment products while some limit what they offer. BDs can also offer proprietary trading, or trading their own capital. These are market makers while others are service retail customers
BDs Agent vs Principal
Agent just help them find a MM and charge commission
Principal are market makers and actually sell with the spread as their profit
Three Types of BDs
Carrying Firms (clearing firm)
Fully disclosed (introducing firm)
Prime brokers
Carrying Firms
Carries customers accounts and accepts funds from customers
Larger BDs that have ability to do trade executions, clear, and settle trades, take custody, and handle back office stuff
Must segregate customer and firm assets
Fully disclosed firms
Introduces customer to clearing firm. Clearing firm holds the funds and performs related functions (back office stuff)
Introducing firms take orders and pass those to clearing firm for execution, but introducing firms do have the ability to trade for customer but the settlement goes to the clearing firm
Prime Brokers
Prime account allows a customer (institution usually) to select a member firm to provide custody and other services while calling on other firms to handle trades.
Prime broker holds custody and executing broker actually trades (prime can trade but has option to send to executing)
Must sign agreement with customer that spells out term of the business and names all executing brokers customer has contracted with. Customer receives info from prime broker who does clearance and settlement
Key advantage to this is that it provides a client with ability to trade with multiple brokerage houses with a centralized account (specialized offerings here)
Transfer Agents vs Registars
Transfer and registration has to be two separate processes by law (not in the same department)
Transfer Agents
Maintains total number of shares that are authorized and outstanding and is responsible for
ensuring securities are in the right name
cancel old and issue new
maintain records
handling problems
ensuring shares are properly registered
Registrars
Separate from issuer and transfer agent
Licensed by states and provide audit and oversight for transfer
Clearing agents and depositories
Clearing agency is an intermediary between the buy and sell side. Ensures trades are correctly settled and securities are properly transferred
Receives and delivers payment and securities
Commercials banks, BDs, can act as clearing agencies as can corporations
Depository Trust and Clearing Corporation DTCC is the world’s largest depository
OCC is the clearing agent for options
Bull
Stock will increase
Bear
Stock will decrease
Bid vs Ask
Bid is the highest someone is willing to pay for a security
the bid is the price a normal seller receives
Ask if the lowest someone is willing to sell a security for
the ask is the price a normal buyer pays
