ORDERS and TRADES: Going to market

ORDER features

ORDER features 1) DAY: °If a day order hasn't been filled by the end of the trading day, it's canceled ° all priced specific orders (stop and limit) Are assumed to be day orders unless marked to the contrary 2) GOOD till canceled (GTC) ° a.k.a. open orders ° open until executed or canceled ° regardless of when an open order is placed, a designated market maker clears it out of his book at the end of April or October, and the order has to be re-entered NOTE: an investor may specify that she wants the order canceled at a specific time. HOWEVER, the designated market maker only enters the orders as GTC, so it is UP TO THE BROKER DEALER who excepted the order to cancel the order with the designated market maker on the correct date if not already executed. 3) NOT HELD (NH) ° gives the broker discretion about when to execute the trade ° typically, investors use not held orders when the broker believes she can get the customer a better price later in the day NOTE: NH Not held orders deal ONLY with TIMING. For Registered reps to choose the security, number of shares, and/or whether to buy or sell, the customer needs to open a discretionary account, which requires a written power of attorney 4) FILL or KILL (FOK) ° instructs a floor broker EITHER to immediately execute an entire order at the limit price or better OR cancel it 5) IMMEDIATE or CANCEL (IOC): ° limit orders similar to FOK except that the order may be partially filled. ° any portion of the order that's not completed is canceled 6) ALL or NONE (AON) ° these limit orders have to be executed either in their entirety or not at all. ° AON orders DON'T have to be filled IMEDIATELY (several attempts to fill the order completely are allowed) ° may be day orders or good till canceled orders ° as of 2005 the NYSE does not except AON orders 7) AT THE OPEN (market on open) ° executed at the securities opening price ° at the open orders can be MARKET for LIMIT orders but if they aren't executed at the opening price, they are canceled ° allow for partial execution 8) AT THE CLOSE(market on close) ° to be executed at the closing price (or as near as possible) ° If this order is not completed, it's canceled 9) DO NOT REDUCE (DNR) ° not to reduce the price of a stop or limit order in a response to a dividend ° EX: say QRS stock is currently trading at $50 on the day prior to the ex dividend date. If QRS previously announced a $.50 dividend the next days opening price would be $49.50 . If a customer had placed a DNR limit order to buy thousand shares of QRS at $45 the order wouldn't be reduced by the $.50 dividend. 10) ALTERNATIVE: ° a.k.a. one cancels the other order ° a.k.a. either/or water ° instructs the broker to execute one of two orders and then cancel the other ° for example, Mr. Smith owns stock at $60 per share. He enters a sell stop order at 55 for protection and a sell limit order at $70 in the event of the stock price increases. If one of the orders is executed, the other order is canceled immediately 11) BID WANTED ° an indication or notice that and investor or broker-dealer WANTS TO SELL a security at a specific price. ° bid wanted is used most often when no current buyers of a security are available 12) OFFER WANTED: ° an indication or notice that in investor or broker-dealer WANTS TO BY a particular security at a specific price. ° offer wanted is used to particularly when no current sellers of a security are available

Taking a look inside the designated market maker's (DMMs) book:

- A designated market maker a.k.a. a specialist or DMM is a member of a stock exchange who is responsible for maintaining a fair and orderly market on a particular security. - A DMM maintains an inventory of stock -posts bid and ask prices - execute trades for other broker dealers -a DMM acts as both a broker executing trades for others, AND dealer buying and selling securities for her own inventory - and tries to keep trading as active as possible A DMM execute orders by priority, parity, and precedents: 1) PRIORITY: the highest bid and lowest asking price or executed first 2) PARITY: if more than one order is at the highest bid and/or lowest asking price, the orders that come in first is/are executed first 3) PRECEDENTS: If the priority and parity are equal, larger orders are executed first - Because DMM is our market makers in a particular security, they may guarantee a price for a floor broker on a trade of securities for a particular period of time. - this guarantee allows the floor broker to go to the trading floor to see whether she can get a better price for her customer -in the event that she can't, she can go back to the DMM and do the trade for the guaranteed price. - stopping stock can only be done for public orders REMEMBER: °a DMM's main function is to maintain fair and orderly market for a particular security. ° A DMM can not compete with a public order: she can only narrow the gap between the bed and ask prices if it gets too wide by placing a buy or sell order in between the highest bid in lowest ask price. ° DMM's used books to keep track of these orders ° DMM's books aren't written documents like they used to be: now they've gone Electronic but there still called "specialists books ", "Order books", "market makers books", "display books", or just "books" ° the book receives and displays orders to DMM's and allows them to execute and then publish orders to the consolidated (ticker) tape TIP:See table 14-1 to see how a designated market maker's book works

OTC over the counter trades

- Unlike exchanges, OTC market is a negotiated market. Instead of yelling out bid and ask prices, traders buy and sell securities by way of telephone or computer transactions. - no central location - thousands of securities - both listed and unlisted traded this way - "Unlisted securities": are not listed on any exchange - can ONLY trade over the counter OTC Equities market is divided into NASDAQ issues (issues that meet the NASDAQ listing requirements) and non-NASDAQ issues REMEMBER: US government and municipal bonds trade ONLY over the counter NASDAQ: - The NASD automated quotation service(NASDAQ ) Is and electronic quotation system that displays bid and ask prices of The most actively traded over the counter stocks. - additionally, NASDAQ also includes quotes of preferred stock, convertible bonds, and warrants. The NASDAQ market is divided into 3 tiers: 1) NASDAQ global select market: - include the largest and most actively traded stocks trading OTC 2) NASDAQ global market: actively traded, BUT don't meet the financial and the quiddity requirements of NASDAQ global select markets stocks. 3) NASDAQ capital market: - formally called NASDAQ small-cap stocks - these stocks trade over the counter BUT don't meet the financial and liquidity requirements of NASDAQ global market stocks To make trades, people need accurate, current information on bid and ask prices. Not everyone can get the same amount of information. Here are accessed levels of NASDAQ (the computer displays the NASDAQ information) 1) Level I: - most basic level of NASDAQ - Quotation screen displays up to the minute inside bid and ask prices for several hundred OTC stocks - registered reps likely have this on their computer screen - most basic level of NASDAQ and include quotes that are subject to change (subject quotes) 2) Level II: - Provides up to the minute A firm bid and ask prices (firm quotes) - each market maker (dealers or principles) for a security - most brokerage firm traders use this level 3) Level III: - most complete level of NASDAQ - shows the bid and ask prices of all market makers - FIRM quote - ALSO allows a market maker to enter and change quotes

Shopping at primary (buying new) and secondary markets (Buying Used)

1) PRIMARY MARKET ° NEW issue market ° broken down into two categories (depending on whether the company has ever issued securities before) ° bulk of the sales proceeds go to because you were, balance goes to underwriter A) INITIAL PUBLIC OFFERING (IPO): ° first time a company ever sells stock " GOING PUBLIC" B) PRIMARY OFFERING: ° When a company initially offers securities, It USUALLY HOLDS SOME BACK for future use. ° it later polls those securities out of storage and sells them in a PRIMARY OFFERING. EX; Company may be authorized to sell 2 million shares of common stock, but in its initial public offering, it may sell only 800,000. At this point, 1,200,000 new shares remain that have never been offered to the public. One year later, when the company needs to raise additional capital to build a new warehouse, he can sell the remaining 1.2 million shares in a PRIMARY OFFERING SECONDARY MARKET 1) FIRST market: trading of LISTED securities on the exchange floor such as the New York Stock Exchange 2) SECONDARY market: trading of UNLISTED securities over the counter (by phone or computer) 3) THIRD market: EXCHANGE - LISTED securities trading over the counter. Traders are calling in their orders or ordering online. All NYSE and NYSE AMEX equities and most of the securities listed on other exchanges can be traded over the counter 4) FOURTH market: trading of securities between INSTITUTIONS without the use of a brokerage firm. Fourth market trades take place through ELECTRONIC COMMUNICATIONS NETWORKS (ECNs)

Order types (market, stop, limit, stop limit) 1) Market

A MARKET ORDER is for IMMEDIATE EXECUTION at the best price available. - majority of orders that you received will be market orders. Following are varieties they come in: 1) BUY ORDER: - When investor places a market order to BUY, she's NOT PRICE SPECIFIC: investor purchases the security at the LOWEST ASK PRICE (The lowest price at which someone's willing to sell the security) - and investor who purchases a security wants the price to increase after the sale and is establishing a BULLISH position 2) SELL order: - when in investor place is a market order to SELL: She's not price specific: she sells the security at the highest bid price (the highest price someone's willing to pay for the security) 3) SELLING SHORT: - selling short occurs when investor sells securities she does not own -investor borrows securities from a lender to sell - say an investor Burroughs 100 shares of ABC stock and sells them SHORT at $40 per share that's receiving $4000 - The borrower doesn't owe the lender $4000: she owes the lender 100 shares of ABC stock - after a month or two, one ABC is trading at $20 per share, the borrower can purchase the 100 chairs for $2000 in return them to the lender making a profit $2000 (excluding commission costs) - A short seller is Bearish (wants the price of the security to drop) - if the price increases instead, the short seller has to buy the stock in the market at a higher price this losing money. - all short sales must be executed in a margin account - short sales are subject to short sale regulations under regulation SHO REGULATION SHO and short sales; - all order tickets must be marked as short sale rather than long sale (long - selling securities she owns) - all brokerage firm must establish rules to locate, borrow, and deliver securities that are to be sold short - brokerage firm must be sure that the security can be located and delivered on the date of delivery is due before executing the short sale NOTE: Investors may sell short for: 1) SPECULATION (believing the price of the security will decrease) 2) HEDGING (protecting a security or several securities in the event of a market decline) 3) ARBITRAGE ( taking advantage of price disparity on the security in different markets) REMEMBER: - When you purchase a security, the most you can lose the Amount you invest - Man you are short a security, your maximum loss potential is unlimited because the price of the stock could keep climbing, in which case you'd have to spend more money to cover your short position - because the additional risk, all short sales must be executed in a margin account

Difference between broker and dealer

BROKER: ( A.k.a. broker or agent) / (think Real estate broker/agent) - Does not use own inventory - charges commission (sales charge) - acts as a middleman between buyer and seller DEALER (A.k.a. dealer, principal, market maker)/(thank used car dealer) -uses its own inventory - when dealer SELLS it charges a MARKUP (sales charge) - Dealer BUYS it charges a MARKDOWN (sales charge) - firm becomes a dealer in hopes securities in inventory will increase in price so they can benefit from appreciation CAPACITY: -refers to whether a firm is acting as broker or dealer - must always disclose on "confirmation" (receipt of trade) -if firm is acting as broker the commission ALWAYS needs to be disclosed -if firm is acting as DEALER markup or markdown DOES NOT always have to be disclosed Note; Firm cannot act as both broker and dealer for the same trade. Cannot charge mark up or Mark down and commission on the same trade it is a violation Thank real estate agent acts as An intermediary between seller and buyer does not use on inventory and charges commission Thank of used car dealer, cells from his own inventory, chargers mark up, and buys in hopes of making a profit on that inventory

Handling limit and stop orders

Because stop and limit orders are price specific, they may or may not be executed. Additionally, even if limit order to do reach or surpass the limit price, the order may not be executed if more orders were placed ahead of the investors. TIP: You may have to determine the price at which a limit order is executed or stop order is triggered. REMEMBER: A STOP LIMIT order is 1st a stop order TRIGGERED 2nd a limit order DIRECTIVE Using the BLISS and SLOBS acronyms can help you out tremendously when you're trying to keep the prices straight: 1) BLiSS (buy limit or sell stop) BL = buy limit SS = Sell Stop - all bliss orders are entered AT or BELOW the market price of the security - they get reduced on the ex dividend date The BL = can help you remember orders places BELOW the market price 2) SLoBS (sell limit or buy stop) SL = Sell limit BS = buy stop -all slobs orders are entered AT or ABOVE the market price of the security - slobs orders remain the same on the ex dividend date REMEMBER: slobs remain unchanged On the ex dividend date so think "once a slob always a slob"

Auctioning securities at SECURITIES EXCHANGES

EXCHANGES: ° are auction markets, where bidders and sellers get together to execute trades ° ALL exchanges have a trading floor we're all trades are executed ° each security listed on an exchange has its own "trading post"(location) on the floor where the auction takes place ° brokers looking to PURCHASE shout out and/or make hand signals to indicate the price they're willing to spend to buy particular security. ° SELLERS, in turn, shout out the Price they are willing to SELL a security for ° if buyers and sellers can come to an agreement, a trade is made. THE MAIN EXCHANGE that the series 7 tests on is NYSE, but need to be aware of others: 1) NEW YORK STOCK EXCHANGE (NYSE): which includes; A) NYSE Arca equities B) NYSE Arca options C) NYSE AMEX options D) NYSE MKT E) NYSE bonds 2) NASDAQ OMX PHLX 3) Chicago Board Options Exchange (CBOE) LISTED SECURITIES: • are ones that satisfy minimum requirements and are traded on a regional or national exchange like the NYSE. • listed securities may trade on the exchange or in the over-the-counter market ALL PEOPLE ON TRADING FLOOR fall into one of three categories; 1) FLOOR BROKERS -individuals act as AGENTS in EXECUTING buy or sell orders on behalf of their firms customers - facilitate buying and selling for her firm -receive buy or sell orders from their firms - either transfer the orders to a specialist OR trade with another floor broker. 2) TWO- DOLLAR BROKERS (Independent brokers); - ASSIST floor brokers In getting their orders executed on a busy day - (Called two dollar brokers because many many years ago, they used to receive $2 per trade) 3) DESIGNATED MARKET MAKERS (specialists) - A.k.a. DMM - market professionals manage the auction market trading for a PARTICULAR SECURITY (or for a few securities, if not actively traded)

Order types (market, stop, limit, stop limit) 3) Limit

LIMIT order: customer is SPECIFIC about price wants to spend or receive ° says customer doesn't want to pay more than a certain amount for sell for less A) BUY limit order: wants to BUY a security ° a DIRECTIVE to buy a security at the LIMIT price or LOWER B) SELL limit order: wants to sell a security ° a DIRECTIVE to sell a security at the LIMIT price or HIGHER

Order types (market, stop, limit, stop limit) 4) Stop limit

STOP LIMIT order: combination of stop and limit ° it is a "buy stop" or "sell stop" that BECOMES a LIMIT order AFTER the stop Price is reached ° order is TRIGGERED at the stop price (or higher if selling) or (lower if buying) ° then becomes in LIMIT order. When the stock price hits the limit price it becomes a DIRECTIVE to sell at the limit (or higher if selling) (or lower if buying) First a stop order then a limit order EX: An order reads: SELL 1000 HIJ at 41 stop, 40.75 limit 1st sell stop order will be TRIGGERED when it hits 41 or below (sell stop.. so below) 2nd Becomes a LIMIT and is a DIRECTIVE to sell at $40.75 for above

Order types (market, stop, limit, stop limit) 2) Stop

Stop water is used for protection: to limit how much investor can lose A) BUY stop Order: SHORT position (sells borrowed) °Tells you to BUY the security if market price touches a particular price or HIGHER ° investors of SHORT, make money with the strike price DECREASES / Price INCREASES lose money ° order is TRIGGERED at stop price then becomes a MARKET ORDER for iMMEDIATE EXECUTION at next price B) SELL stop order: LONG position (owns stock) ° tells you to SELL if market price touches particular price or LOWER ° LONG investors make money when stock increases/stock decreases loses money ° order is TRIGGERED at stop price then becomes MARKET order For IMMEDIATE EXECUTION at next price

Reading the tickertape

Tickertape a.k.a. consolidated tape. Delivers real time within 90 seconds reports of securities transactions as they occur on different exchanges Broken down into: Network A = reports transactions in NYSE (NYSE Euronext) listed securities Network B = reports transactions of NYSE Arca, NYSE MMT, And other original exchange listed securities Example of a quote shown on a typical tickertape: MSFT 2K = 29.76 ^ 0.16 1) the ticker symbol: MSFT Each symbol represents a particular company 2) The number of shares traded: 2K ° in this case, 2000 shares were treated. If you were than 1000 shares are treated, the full volume is shown. For example 400 shares would appear as 400, without any letter next to it. The abbreviation for kilos (A), millions (M), and billions (B) equal to the following amounts: K = 1000 M = 1000,000 B = 1,000,000,00 3) The price for the last trade: 29.76 The last trade took place at $29.76 4) the change in direction from the previous days closing price: ^ In this case the triangle is pointing up so the price is higher. If the triangle points down, price of the stock is lower than the previous days closing price 5) the difference in price from previous days closing price: 0.16 In this case the stock is trading $.16 higher than previous days closing price REMEMBER: it used to be easy to tell where the security traded by looking at symbol. NYSE listed securities used to be three letters or less, and Amax listed securities used to be 4 letters. Today, the waters have become somewhat muddied: for example, companies that move from one market to another are able to keep the same symbols, and markets of combined(For example, NYSE Euronext and NASDAQ OMX PHLX), and you can no longer tell where security is listed strictly by the number of letters in it's symbol Although you're not likely to see extra letters tacked onto the standard stock symbols on the series 7 exam, you should be where of some of them. A ticker symbol maybe followed by a period and then an extra letter to provide the following information: .X = mutual funds .W =warrants .our = rights .P = preferred stock