Ch.4

Explain what an ENCs office

An ECN is an Electronic Communication Network. Basically, ECNs are fully computerized trading networks that match buy and sell orders from investors without the use of a dealer.

Is there any similarity between an NASDAQ market maker and a Designated Market Maker on an exchange

A specialist on the exchange often acts as a dealer, buying and selling for his or her own account. Nasdaq market makers may do the same thing.

What is meant by block activity on the NYSE? How important is it on the NYSE?

Blocks are defined as transactions involving at least 10,000 shares. Large-block activity on the NYSE is an indicator of institutional investor participation in equity trading. The total number of large-block transactions has increased over the years on the NYSE.

What is meant by the term blue-chip stocks? Cite three example

Blue chip stocks are large, well-established and well-known companies with long records of earnings and dividends. They are typically traded on the NYSE. Examples include Coca-Cola, General Electric, and Exxon Mobil.

In what way is an investment banker similar to a commison broker

Commission brokers are members of brokerage houses with memberships on exchanges. They act as brokers for customers. Investment bankers act as middlemen between the issuers of the securities and the purchasers, in the same way that brokers do. Some firms offer both investment banking and retail brokerage services.

Discuss the importance of the financial markets to the U.S economy.

Financial markets are essential for both businesses and governments in raising capital to finance their operations. Both experience demands for funds that are not in balance with their actual funds on hand. Financial markets are absolutely essential to the functioning of our capitalistic economy.

Outline the process for a primary offering of securities involving investment bankers

In a primary offering involving investment bankers, the potential issuer of the securities meets with an investment banking firm for advice on selling the new issue. In a negotiated bid arrangement, these two parties negotiate and work together on the issue. Subsequently, the investment banker, working with other investment banking firms (i.e., a syndicate), underwrites the issue; that is, the investment bankers purchase the securities from the issuer, thereby assuming the risk involved in actually selling the securities. After all legal requirements have been met (e.g., the issue is registered with the SEC), the selling group sells the securities to the public via brokers who contact their customers about the issue.

Discuss the function of an investment banker?

Investment bankers act as intermediaries between issuers and investors. They provide several functions, including: (1) an "advisory" function, wherein they offer advice to clients concerning the issuance of new securities; (2) an "underwriting" function, consisting of the purchase of securities from an issuer and their subsequent sale to investors; (3) a "marketing" function, involving the sale of the securities to the investing public.

Explain the difference between NASD and NASDAQ

NASD stands for the National Association of Security Dealers, a self- regulating body of brokers and dealers that oversaw Nasdaq and OTC practices. NASD licensed brokers and handled the punishment for violators of its prescribed fair practices. The NASD merged with the New York Stock Exchange's regulation committee in 2007, resulting in the Financial Industry Regulatory Authority, or FINRA. Nasdaq is an electronic screen-based equity securities market providing instantaneous transactions as market makers compete for investor orders.

Explain the role of the Designated Market Makers the successors to specialists. Refers to the NYSE for information

Specialists are members of exchanges who are assigned to particular stocks on an exchange. They are charged by the exchange with maintaining a continuous, orderly market in their assigned stocks. They do this by going against the market, buying (selling) when the public is selling (buying).

Since the NYSE features a fully automated auction why do you think it also features a physical auction as well?

Specialists should be, and are, closely monitored and regulated. Because they maintain the limit books, they have knowledge of all limit orders on either side of the current market price. They are charged with acting for the public interest by maintaining an orderly market; simultaneously, they buy and sell for their own accounts in hopes of profiting from the spread between purchases and sales. Clearly, specialists must be closely regulated because of these potentially conflicting roles.

Can primary markets exist without secondary markets?

Technically, primary markets can exist without secondary markets since new securities can be sold to investors. For example, bonds could be sold to institutional investors to be held until they mature. However, investors would have difficulty reselling these securities if they needed to, and many would be discouraged from buying them because of this reason.

What is the Dow Jones Industrial Average?

The Dow-Jones Industrial Average is a price-weighted average of 30 large (blue-chip stocks) trading on the NYSE. The S&P 500 Composite Index is a market value index consisting of 500 stocks, with a base period set to 10 (1941-1943).

What is the EAFE index

The EAFE Index, or the European, Australia, and Far East Index, is a value-weighted index of the equity performance of major foreign markets. It is, in effect, a non-American world index.

Outline the structure of equity markets in the US. Distinguish between auction markets and negotiated markets

The equity markets in the United States consist primarily of the organized exchanges-- the NYSE (which merged with the Amex) and Nasdaq (approved to be an exchange in January, 2006). Over- the-counter securities are now traded on the OTC Bulletin Board or the Pink Sheets LLC. • Auction markets, involving the NYSE Euronext and any regional exchanges, include a bidding (auction) process in a specific physical location with brokers representing buyers and sellers. • The NYSE is now a hybrid market, following its merger with Archipelago, an ECN. • Nasdaq is a negotiated market, where dealers make the market in securities by standing ready to buy from, and sell to, investors based on bid-ask prices. Nasdaq has been approved to be an exchange.

How does it differ from the S&P 500 Composite Index?

These measures are the two most often-used indicators of what stocks in general are doing. The Dow-Jones Averages are supported by The Wall Street Journal, while the S&P 500 Index is the indicator most often used by institutional investors.