Chapter 2 NASDAQ & otc market

INITial public offering (ipo)

An IPO occurs in the primary market. IPOs are made in the OTC market. Proceeds of an offering in the primary market go to the issuer. When an issue starts trading in the secondary market after the IPO is complete, the proceeds go to the seller of the shares.

Investment Banker (underwriter)

Analyze the marketplace and advise issuers about the size and pricing for proposed new issues.

All-or-none commitment

A variation on a best efforts, unwed for start up companies, where if the full amt of offering was not sold, the company would likely fail. Ina best efforts - all or none underwriting, either the issue is sold or the de@l is cancelled

How are Investment Bankers compensated by the issuers?

From the spread between the price the investment banker paid for the new securities and the price at which the banker markets the securities. The spread is the difference but public offering price and amt of the sale proceeds to the issuer.

All of the following statements concerning the NASDAQ Stock Market are correct EXCEPT trading: A. is by open outcry auction in one location B. takes place among various physical locations C. is monitored and regulated by FINRA D. parties have the ability to access quotes and trade against them

The best answer is A. The NASDAQ Stock Market is an electronic networked marketplace, where trading can take place between FINRA member firms. There is no central marketplace like an exchange floor, so there is no open outcry auction as can occur on exchanges. Rather, trades are executed electronically, with market participants accessing electronic quotes and trading against them. The regulator for the NASDAQ Stock Market is FINRA.

Filing of Registration Statement

After signing the letter of intent, the investment banker or the underwriter often invites other underwriters to join forming a syndicate. While the underwriters form the syndicate, the issuer files a registration statement (S-1) w/the Securities and Exchange Commission. Prior to the registration , selling the issue and soliciting customers to buy the issue is prohibited.

Best efforts stock underwriting

Agency relationships where the underwriter uses its "best efforts" to sell the issue, but takes no liability for unsold shares. Any unsold issues stay w/issuer.

WHAT ARE THE DIFFERENT LEVELS THAT THE INVESTMENT BANKER CAN AGREE TO IN REGARDS TO UNDERWRITING COMMITMENT?

-FIRM COMMITMENT UNDERWRITING + STAND-BY UNDERWRITING -BEST-EFFORTS UNDERWRITING + ALL-OR-NONE Commitment

"Cooling off period"

20 calendar days following the filing of a completed registration statement. During this time the underwriter may: -not market or advertise the securities to the public bc the SEC has not yet reviewed the new issue. -the underwriter may send a preliminary prospectus ("red herring") or prospective purchasers and may take indications of interest from them, but may not distribute sales literature for the new issue, recommend it purchase, nor make any sales

During the "cooling off period" SEC requires a Due Diligence Meeting

At the due diligence meeting: the officers for the issuing company, the underwriter, attorneys, accountants, and anyone who will sign the registration statement must review the registrations statements and proposed prospectus to make sure they are accurate and disclose all facts relevant to the stock issue. The underwriter looks for omissions or misstatements in the registration statement and In the proposed prospectus

In addition to stocks, what are other securities traded or are issued in the OTC market?

Corp bonds not listed on an exchange, muni bonds, us gvt and agency debt, money market instruments, bank and insurance company issues, adr's(American depositary receipts)

FOURTH MARKET

DIRECT TRADING OF SECURITIES FROM INSTITUTION TO INSTITUTION VIA ECNs, SUCH AS INSTINET(NASDAQ) AND ARCHIPELAGO(NYSE)

What are the OTC markets ?

Second- trading of unlisted securities otc third- trading of listed securities otc and fourth markets- trading of not listed and unlisted securities otc by means of electronic communication networks (Ecn)

SELLING GROUP

In a firm commitment underwriting, the syndicate members share in selling responsibility and agree to share liability for any unsold shares. The selling group simply act as a agent for the syndicate, by finding customers, they take no liability and earn a selling concession (a portion of the underwriters spread is "conceded" to them for finding the customer"

Where are the companies that cannot meet Nasdaq listing standards quoted?

In the OTCBB by OTC Market maker or in the Pink Sheets

Red Herring contains:

Info about the issue, such as its probable POP and expected date of distribution, but the red herring does not offer the security for sale. It gets its name from the required SEC Warning in red on the front cover that's states: "This is not an offer to sell securities...."

What are the 2 major ECNs?

Instinet and Archipelago. Instinet is owned by Nasdaq and Archipelago is owned by NYSE

Differences between old NASDAQ System//new NASDAQ System

Level i-highest bid &lowest ask price // now called NBBO Listing shown in level ii Level ii- level I and actual current quotes of all market makers//still shows as level ii Level iii - levels I and ii and registered market makers can revise and enter quotes//obsolete

NASDAQ

National Association of Securities Dealers Automated Quotations: NASDAQ is a "virtual" electronically linked exchange that has no physical trading floor. Called the "Second Market" because it started after the NYSE (which is the "First Market"). (NASDAQ started in 1971; the NYSE started in 1792).

THIRD MARKET

OTC TRADING OF LISTED SECURITIES. "THIRD MARKET MAKERS" ARE OTC MARKET MAKERS THAT COMPETE W/EXCHANGE SPECIALISTS (DMMs)

SECOND MARKET

OTC TRADING OF SECURITIES THAT ARE NOT EXCHANGE LISTED (UNLISTED). FOR EQUITIES IT CONSISTS OF NASDAQ, THE OTCBB AND THE PINK SHEETS

What two display facilities do not have listing requirements for stocks?

OTCBB and the Pink Sheets

FIRM COMMITMENT UNDERWRITING

Obligates the underwriter to buy the entire issue at a set price and try to sell to the public at a set price. All financial risk falls on the underwriter as dealer. Underwriter acts as principal in this transaction.

Stand-by underwriting

One kind of firm commitment-involves an issue of preemptive stock rights to current shareholders. If all of the shareholders subscribe, then the issuer successfully marketed its shares w/o needing an underwriter. However as a back-up, the issuer will have an underwriter on stand-by on a firm commitment basis to pick up any unsubscribed shared in the rights offering. Stand-by underwriting are used by companies that have already completed their IPOs and are now public—giving these offerings the name "add-ons" bc the company is adding more registered shares to its existing outstanding shares

Companies that are not current in their SEC filings are quoted in the :

Pink Sheets - these are often illiquid "penny stocks"

LETTER OF INTENT

THE PRELIMINARY AGREEMENT BT THE ISSUER AND THE UNDERWRTIER THAT SETS OUT THE ESSENTIAL TERMS FOR THE UNDERWRITING, INCLUDING THE FEES AND THE SPREAD.

FIRST MARKET

TRADING OF LISTED STOCKS ON THE FLOOR OF THE EXCHANGE THAT LISTS THAT STOCK

Which of the following is a negotiated market? A. The Over-The-Counter market B. The New York Stock Exchange C. The American Stock Exchange D. The Chicago Board Options Exchange

The best answer is A. The OTC market is a negotiated market. All exchange floors (New York, American, and Chicago Board Options Exchange) are auction markets

Which security can only be purchased in the OTC market? StatusA A. Closed-end funds Correct B. Mutual funds StatusC C. Listed options StatusD D. Listed stocks

The best answer is B. All Initial Public Offerings are made OTC. Once a company has completed its IPO, its shares will start to trade. Most new issues, once the IPO is complete, start to trade on NASDAQ. However, if the company is very successful, it might get an immediate NYSE listing, if it so wishes (NYSE listing standards are much tougher than NASDAQ standards). All mutual fund shares are offered OTC with a prospectus. These shares do not trade. They can only be redeemed with the sponsor. Closed-end fund shares are very different - they are listed and trade like any other stock - either on an exchange or OTC. Listed stocks are traded on exchange floors - there are only a handful of so-called "dual listed" stocks that are listed both on an exchange like the NYSE and on NASDAQ. Listed options trade on exchanges such as the CBOE.

SYNDICATE

The manager forms s syndicate bc in a firm commitment underwriting, the underwriter buys the issue outright from the issuer. By syndicating the deal, the manager spreads the capital requirements among syndicate members. This reduces the risk to each syndicate participant if the issue proves difficult to sell. By including syndicate members spread across the US, this insures that the issue will be sold to a broad and diverse group of customers, which is usually what the issuer desires. The issuer does not like to see its securities held by only a "few" stockholders. By syndicating the issue, the manager reduced it potential risk, but also reduces its potential for profits. By syndicating the issue, the manager "gives up" a portion of the issue to the other syndicate members, reducing its risk and potential profit

What option do institutions have to use to be able to trade directly w/ each other w/o a broker?

USED IN THE FOURTH MARKET**. ECN's - electronic books for matching orders and provide institutions a way to trade directly w each other w/o brokers. When trades are matched by ecns the institutions can trade very cheaply.