Session 14
Was stock is give the greatest weight in computing the DJIA? A) Walmart B) IBM C) Exxon Mobil D) Goldman sachs E) Apple
D
What is the largest options exchange in the world? A) BATS Global Markets B) New York Stock Exchange C) NASDAQ D) Chicago Board Options Exchange E) Chicago Board of Trade
D
What is true of the Dow Jones Industrial Average? A) It includes 500 stocks B) It is market value weighted C) It measures performance of technology stocks D) It is price weighted E) A % increase in two stocks would have the same impact on the DJIA regardless of price
D
What sector is given the greatest weight in the S&P 500? A) Energy B) Healthcare C) Financials D) Information Technology E) Consumer Staples
D
Which would you NOT expect when markets are functioning well? A) More innovation B) Stronger economic growth C) Better Liquidity D) Dissatisfied consumers E) Better products
D
Stock Brokers
Full Service Brokers - provide personal investment consulting services - 1% of assets Discount Brokers - Execute Trades - $29.95 per trade Online Brokers - Execute Trades Online - $5-7.00 per trade
The Chimp vs. Frank Curzio
Initially the chimp is better but eventually year 4 or 5, Curzio's stock becomes better watch video If the Chimp (uses no information- picks out of a hat) picks stocks as well as Curzio (uses fundamental information and do analysis), it says that the stock market is price efficient - public information is reflected in the stock prices
Why Financial markets matter?
It affects us in our ever day lives Housing- housing market Retirement- investment purposes to retire Jobs- ability for companies to make jobs Government- biggest borrower in the world Food- agricultural market (Price of corn is coming down- affecting food prices) Insurance Price of corn, gold (measure of fear), energy, and currencies market participants--> trading risks Price discovery Liquidity Which markets are biggest? - foreign exchange market
Measures of the stock market
The Dow Jones Industrials Average (DJIA) - 30 stocks - price-weighted index (divisor) - being price weighted does not make a lot of sense The S&P 500 - 500 stocks - market-value weighted - broader - Model of the US economy - 10 economic sectors: Information technology, financials, healthcare, customer discretionary, energy, industrials, consumer staples, materials, utilities, telecommunication services Others - NYSE, AMEX, & NASDAQ - Russell 2000 and Wilshire 5000
The end of the American stock exchange
- 100 year old AMEX closed its doors on May 10, 2012 - Once one of the lending exchanges in the world - traced its roots to the curb stone brokers of the 1800s - Now will be NYSE Market
The role of capital markets
- capitalism-markets allocate capital - what is the role of government? - regulator- investor- market control - economic freedom - the importance of market efficiency - stock price reflect stock values - operating efficiency - information/price efficiency - creating shareholder value - manage for value-attract capital - current market issues - financial crisis, insider trading, high frequency trading
Current Issues
- electric markets and the speed of execution - competition for orders - orderly markets and the dominance of big traders - high frequency traders
Electronic Communication Networks (ECN)
- electronics markets that match buy and sell orders - provide for extremely fast and low cost trade execution - allow trader anonymity -major players: REDIBook, Instinet, Nextrade
Traditional floor broker -auction system
- orders wired to broker's booth at exchange - floor broker takes order to specialists' trading post - floor broker either executes trade with: - another floor broker or the stock's DMM - floor broker reports trade Less than 5% of trading
Capital markets
- organized exchange: actual physical place for trading securities - E.g. NYSE and American stock exchange (AMEX does not exist anymore) - over-the counter markets: no physical location - dealers linked by computer network (all done by computer) - E.g. NASDAQ - dominate in terms of size includes bond and foreign exchange markets
Which of the following is true about a broker? A) Facilitate trades between buyers and sellers B) Serves as an agent to bring together buyers and sellers C) Earns the spread between Bid and Ask price D) Primary regulator of insider trading E) Raises capital for a company's IPO
B
NASDAQ- the Anatomy of a trade
Broker obtains bid/ask quotes on stock from NASDAQ system Broker directs order to dealer offering the best price - buy order- lowest ask price - sell order- highest bid price broker confirms trade
The Chimp vs. Frank Curzio What does this video say about the stock market? A) The stock Market is irrational B) Evolution theory is wrong- chimps are smarter than humans C) Curzio's data and analysis are already reflected in stock prices D) The chimp has better information that Curzio E) Curzio is a poor investment manager
C
The type of market that combines automated electronic trading with a traditional floor brokerage system is known as a A) Traditional market B) Modern market C) Hybrid arket D) Combined market E) Stock exchange
C
Which of the following is true about Electronic Communication Networks (ECNs)? A) They are open during the same time as the NYSE B) They execute trades slower than brokers on the floor C) They have no impact on the market D) They are more expensive than going through a broker
C
Which of the following is true about a dealer? A) Facilitate trades between buyers and sellers B) Serves as an agent to bring together buyers and sellers C) Earns the spread between Bid and Ask price D) Primary regulator of insider trading E) Syndicates formation, underwriting and price stabilization
C
well functioning financial markets
- secure property rights - contracts easily enforceable - transparent financial statements - accountability of borrowers and investors - market players bear consequences of their decisions Financial functions - mobilize savings and allocate resources - risk transfer - liquidity and valuation consequences - better projects - more innovations - managerial accountability results - stronger economic growth - greater customer satisfaction
High frequency trading (HFT)
- use of sophisticated technical tools to trade securities like stocks or options - it is highly qualitative, employing computerized algorithms to analyze incoming market data and implement proprietary trading strategies - positions are very short term - sensitive to processing speed of markets (colocation) -provide liquidity and price discovery - accounts for 50% of trading in stocks - may cause new types of serious risks to the financial systems - found to have contributed to volatility in a flash crash - technology breakdown book: Flash Boys by Michael Lewis - HFT are taking advantage to trades so individual investors stand no chance - now SEC is invetigating
How does auction system operate?
1. Order arrives (sent to a floor broker who represents that broker firm) 2. Broker to DMM Post (go to post where that firm is traded) 3. Brokers seeks best price in crowd 4. Brokers report trade
NYSE (New York Stock Exchange)
1792- the NYSE begins - the button agreement initiated trading - a tree where trading took place 1960s- brokers trade face to face - seats (1366 total) on the exchange sale price of $4 million in the 1990s - trading floor 2014- the train for is now mostly empty - over 95% of trades take place electronically IN 2012 NYSE was caught by Intercontintial Exchange making them one of the biggest stock exchanges Less than 40% if NYSE listen stock is now traded on the NYSE floor - moves to electronic markets (hybrid market)
True or False: Functions of the financial markets include transferring risk, providing liquidity and valuation and allocating resources. A) True B) False
A
True or False: The S&P 500 is a market value weighted index. A) True B) False
A
What is the primary difference between Over the Counter markets and Organized Exchanges? A) Over the Counter markets operate a competitive market maker model B) Organized exchanges operate a competitive market maker model C) Trading volume on Over the Counter markets is significantly greater D) Trading volume on Organized Exchanges is significantly greater E) High tech companies are mostly traded on organized exchanges
A
What is the role of a designated market maker? A) To ensure that there is a continuous market for shares B) To ensure that investors make a return C) To facilitate all trading D) Ensure electronic trading runs smoothly E) Monitor for fraud at the exchange
A
True or False: An over-the-counter market is a physical location where you can trade securities, hence the term - over the counter. A) True B) False
B
True or False: Investment bankers operate within the domain of secondary securities market, while brokerages and organized exchanges deal with primary securities. A) True B) False
B
True or False: The majority of transactions take place in primary markets. A) True B) False
B
Which is NOT one of the advantages of trading via Electronic Communications Networks? A) There is no market impact B) Higher Trading Volumes C) Lower Commissions D) Faster Trading E) After Hours Trading
B
Which of the following is an element of debt capital markets? A) Raising capital by issuing stock B) Correlate with interest rates C) Strongly correlated with stock price D) Are reflected by indices such as the S&P 500 and Dow Jones E) None of the above
B
The following statement would be considered which of the following choices? Sell 1000 shares of Ford stock at $20 A) Market order B) Limit order C) Dealer order D) Brokerage order E) Bid order
B
True or False: A customer buying stock from a dealer will buy at the bid and sell at the ask. A) True B) False
B
True or False: An order to buy or sell at the best available price as soon as the order reaches the exchange is known as a limit order. A) True B) False
B
The secondary securities markets (organized exchanges)
DMM (designated market makers)- specialist - a trader who MAKES a market in one of more securities and is charged with maintaining a fair and orderly market hold inventory buy/sell stock maintain limit order Trading post - position on floor where DMM (specialist) make markets in securities Supplemental liquidity providers - high-volume trading members who add liquidity to markets - financially incentivized exchanges to add liquidity Open Auction system: DMM is in the middle and every one can my orders all around it DMM involved in < 10% of trades Most of trades happen electronically and happens in milliseconds NYSE Display book: ordered wired and executes at market price 95% of trades
Dealers vs. Brokers
Dealer Markets: - individuals or firms facilitate trades between buyers and sellers - earn spread between bid and ask prices Brokered Markets: - brokers serve as agents to bring buyers and sellers together - earn a commission or a fee for brokering trades
The Uniqueness of capital markets (Debt vs. Equity capital markets)
Debt capital markets - rating capital ($) by issuing bonds - interest rates reflects the base cost of capital in economy Equity capital markets - raising capital by issuing stock - allocator of risk capital in economy - essential to finance economic growth - barometer of economic health source of capital
Was stock is give the greatest weight in computing the S&P 500? A) Walmart B) IBM C) Exxon Mobil D) 3M E) Apple
E
Which of the following industries is NOT affected by the financial markets? A) Housing B) Government C) Insurance D) Retirement E) They are all affected by the financial markets
E
Capital Markets- Over the counter market
Links together brokers and dealers in a computer network known as the competitive market maker system Security dealer: security firms who makes a market in one or more securities known as market makers NASDAQ: automated quotation system which provides dealer bid and ask quotes Bid prices: price at which dealer will buy Ask price: price at which dealer will sell ask price is always above bid price
Types of orders
Market order: an order to buy/sell a the best price when the order reaches the exchange (buy 1000 shares at the market) Limit order; an order to buy/sell at a specified price (buy 1000 shares as $75- good till cancel)
Organized exchanges
NYSE, NASDAQ and 8 regional exchanges Listed requirements Trading floor Designated market maker (DMM)/ Open Auction system- the old specialist - KEY FACT- Open Auction market with DMM about 5000 stock traded
How a trade takes place in securities in an ECN?
Place order (goes to a group of whole sellers) 1. Match instantaneously 18% of time (depends on size) 2. if it doesn't get matched it can be put in the dark pool (negative publicity). Really big trades--> 17% of time 3. Public exchanges--> 65% - NYSE gets 23%, NASDAQ gets 20%, BATS gets 12%, Direct Edge gets 10% Limit orders go straight to public exchange a lot of trades don't make it to public exchange
Advantages to being an ECN
Rather than risking their own capital to execute orders. ECN can simply match bids and asks and collect commissions The advantages of ECNs - no market impact- simply match of orders - lower commissions - faster trades - after-hours trading ENCs account for 30% of NASDAQ Trades and 50% of NYSE trades ECNS become exchanges: BATS, Direct Edge, and 10 others