Chapter 1: Overview of Market Participants and Market Structure

What’s an Issuer? Provide Examples

Legal entity that sells securities in order to finance operations

• the US Treasury and US govs

• Foreign govs

• state govs

• corporations and banks

Two methods that issuers use to raise capital?

Issuing debt securities (bonds)
Issuing equity securities (stocks)

What are debt securities?

Bonds- publicly traded loans. The creditor (investor) is lending the funds to the issuer who will pay back at maturity.

What are equity securities?

Stock- If an investor purchases the stock they have an ownership interest.

What is a broker?

Defined as any person that engages in the business of buying and selling securities for the account of others. They match up buyers and sellers and charge a commission. (Real-estate agent)

What is a dealer?

Defined as any person that engages in the business of buying and selling securities for its own account. Principle transactions in which they buy securities and hold them in inventory. (Car dealer)

Investment Bankers

IB works directly with the issuers to arrange and structure their securities offerings. How to raise funds during IPO, bonds. Referred to underwriters. May help to merge or acquire another company or restructure bankruptcy. - Underwritters

Research

Study both the markets and individual issuers in order to issue recommendations. Either to buy, sell or hold.

Sales

Referred to as Registered Representatives (RR's) or Investment advisor representatives (IAR's). They market individual stocks or groups of stocks like mutual funds.

Trading

Trading professionals handle the execution of trades for both the firm's clients and the firm's own account.

Operations

This area ensures all of the paperwork, funds, and securities transfers are handled efficiently and according to industry standards.

Market Maker

When a broker-delaer chooses to display quotes into a trading system to indicate readiness to buy and sell securities at a specific price.

Bid price

Price at which the firm will buy

Ask price

Price at which the firm will sell

Investment Advisor

Charge fees for providing advise to clients. Theses fees are often based off of assets under management (AUM) and charged regardless of whether any trades occurred. Broker-Dealer charges commission.

Municipal Advisors

Specialized type of advisor that provides advice either on behalf of a municipal entity, such as a state, county or city. Typically the issuer not the investor.

Retail Investors

Considered "regular individuals" who have limited assets or income.

Accredited Investors

More sophisticated and able to assume greater risk. Net worth of at least $1M (excluding primary residence). Annual income of at least 200K or 300K(with spouse) for at least 2 years.

Institutional Investors

Qualified Institutional Buyers (QIBs) Must be a company. Buyer must own $100M of securities. Cannot be a natural person, they are entities.

Primary Market

When conducting an IPO, since this marks the beginning of the shares existence this is referred to as the primary market

Secondary Market

After the primary market the buyer wants to sell the shares. They are then passed between investors.

Exchange Market

Composed of the NYSE and other exchanges on which listed securities are traded.

NASDAQ

National Association of Securities Dealers Automated Quotations System. Provides quotes on select securities that have been properly registered and meet specific listing criteria.

Designated Market Maker (DMM)

Trading on exchanges is monitored by a specialist called a __________

Over-the-counter (OTC)

When stocks don't qualify for listing on an exchange. Most bonds are OTC. Typically lower activity than NYSE or NASDAQ.

The Third Market

Refers tp exchange-listed securities being traded over-the-counter or away from traditional exchanges.

The Fourth Market

Refers to direct institution- to- institution and does not involve the public markets or exchanges.

Electronic Communication Networks (ECNs)

ECNs are market centers (exchanges) that allow for both the quoting and trading of exchange listed securities. Charge subscribers a fee for using their system and act only in an agency (broker) capacity.

Dark Pools

Provides liquidity for large institutional investors and high frequency traders. Quotes are concealed from the public. Lower fees and low market impact.

Settlement

After the trade the buyer is expected to pay for the security, and the seller is expected to deliver the security.

The Depository Trust and Clearing Corporation (DTCC)

A national clearinghouse for the settlements of transactions in equities, municipal, bonds, OTC, money market instruments. Automate and centralize the process. Non-profit, industry owned.

Clearing Firms (Full Service Firms)

One step below the DTCC on the trade processing hierarchy. They perform order execution, clearing, and settlement. Work with DTCC directly for both their own clients and others.

Introducing Firms

Contract with clearing firms to perform services. They neither process customer transactions nor do they operate their own clearing operations.

Fully Disclosed Accounts

The info about each of the individual customers of the introducing firm will be transmitted to the clearing firm and the clients assets are held there.
Responsible for all paperwork associated with the account

Omnibus Accounts

single brokerage or custodial acco