Lesson 9: Secondary Market

Securities Exchange Act of 1934

• governs the trading of securities in the post-effective period

• concerns the secondary market → exchange trading, OTC, market making, broker-dealers

Broker (agent)

• helps match two parties to facilitate a trade

• their fee is a commission

Dealer (principal)

• when a broker-dealer is buying a security from a customer their fee is a mark-down

• when a broker-dealer is selling a security they mark-up

• role is to trade for its own account

market maker

• firms that stand ready to buy and sell a particular stock on a regular and continuous basis at a publicly quoted price

• can fill orders as brokers or dealers

• can only post quotes 9:30 am - 4:00 pm (normal market hours)

round lot

100 shares

backing away

describes a violation when a market maker fails to honor a firm quote

inside market

the highest bid and lowest offer

NYSE - listed exchange

• physical floor

• designated marker maker (DMM)

• auction marketplace

• quotes must be 2-sided

Nasdaq - listed exchange

• electronic exchange

• many market makers per stock

• negotiated marketplace

• quotes must be 2-sided

OTC quotation facilities

• OTC Pink: no listing requirements, companies not required to be SEC fillers

• less liquid, speculative, volatile

• MM quotes can be 1-sided or 2-sided

buy order

• customer buys securities

• bullish market view

long sell order

• customer sells securities they own

• bearish market view or profit taking

sell short order

• customer sells securities they do not own

• bearish market view

• shares must be delivered T+1 → these are borrowed shares and to close the position the short-seller must buy shares in the market

market order

immediately executed at the best available price during normal trading hours

limit order

• will only execute at a specified price or better

• buy limit executes at a price or below

• sell limit executes at a price or above

stop order

• a two step process: a trade occurs at or through the stop price then the order becomes a market order

• sell stop is at the stop price or below

• buy stop is at the stop price or above

order splitting

when a trader splits a customer’s order into multiple small orders for best execution

trade shredding

a violation when traders split a customer’s order into multiple orders to increase commissions

market manipulation

• a violation when a firm attempts to influence the price of a security

• ex. paying an investment website to discuss a security

trading ahead of research reports

a violation where a firm increases its inventory in a stock ahead of a research report being published on that company

pump and dump

a violation where an investor hypes up the value of a company to inflate its stock price so the shares can be sold at a profit

spoofing

a violation where a trader enters orders to push prices higher or lower with no intent to actually execute at the quoted price

arbitrage

a permitted trading strategy where a market participant buys a security in one market and then immediately resells it in another market for a profit

marking the open or close

when a trader attempts to manipulate the opening or closing price of a security by entering a number of buy or sell orders just prior to the open or close of trading

third market

refers to the OTC trading of exchange-traded securities

fourth market

refers to a market where securities trade directly between institutions on a private, OTC computer network rather than large exchanges such as the NYSE or NASDAQ

Real-Time Transaction Reporting System (RTRS)

• MSRB Rule G-14 requires trades in munis to be reported within 15 minutes of execution on this platform

• in Sep 2024, the SEC approved a proposed rule change to reporting “as soon as practicable” but no later than one minute from the time the trade was executed

front-running

• firms are prohibited from placing orders when they possess material, nonpublic information about an imminent block trade

• a block trade generally involved at least 10,000 shares or a large dollar amount