SIE Chapter 14: Securities Markets

Primary market vs Secondary Market

Primary Market: Where the security issuer receives proceeds from selling securities (IPOs and seasoned equity offerings)

Secondary market: Where already-issued securities trade between investors

3rd Market

Over-the-Counter (OTC) trading

• Prices are negotiated

• Any security that can trade in the secondary market can also be traded in the third market

ex. Exchange listed securities trading

4th market

Institution to institution trading through ECNs (electronic communication networks)

Exchange (auction market)

A physical or electronic venue where buyers and sellers trade listed securities

Floor broker

Executes orders on behalf of their firm’s customers

Designated market maker (DMM)

They manage the auction market trading for a particular security

• They keep track of and execute limit orders on behalf of exchange members

• Purpose is to maintain a fair and orderly market

OTCBB (over the counter bulletin board)

A quotation service for unlisted securities that are traded OTC

• Corporations too small for OTCBB may sell their securities in the Pink Market

Inside market

The highest bid and lowest ask currently quoted among all market makers in a security

Broker (agent)

Executes trades without using firm inventory

• Charges a commission

*One the same trade firms cannot act as both broker and dealer

Dealer (principal)

Trades from its own inventory; charges a markup when selling or charges a markdown when buying (reducing the price a customer receives by charging a sales charge)

*On the same trade firms cannot act as both broker and dealer

Introducing Broker vs Clearing (carrying broker) vs Prime broker

Introducing Broker: Provides advice to investors

• Typically recommends trades to clients but gives the job of executing the trade to a clearing firm

Clearing broker: Executes trades and holds custody of client assets

Prime broker: Serves institutions and large clients with consolidated statements and other complex services.

Market Order

Executes immediately at the best available price

• For a buy order: unspecified price the investor would be buying at the lowest ask

• For a sell order: unspecified price the investor would be selling at the highest bid

Stop order

Triggers a market order once a trigger price is touched

• Buy stop: Protects a short position (buys if a price rises to X)

• Sell stop: Protects a long position (Sells if price fall to Y)

Trigger is synonymous as elected: For example stop order triggers a market order when an elected price is touched

Limit order (they don’t want to pay more than acertain amount or sell for less than a certain amount)

Executes trade only at limit price or better

• Buy limit: Buy security at or below a set price

• Sell limit: Sell security above or at.a set price

A stop limit order

A combination of a stop and limit order

• It a stop order that becomes a limit order after the stop price is reached

Day order

Cancels automatically if unfilled by the end of the trading day

• This is the default for stop and limit orders

Good-til canceled (GTC/open order)

Order stays opened until executed or canceled

Not held (NH)

This order gives the broker discretion about when to execute the trade

• It only deals with timing of the trade within the day

Fill or Kill (FOK)

This order instructs the broker to execute the entire order at the limit price or cancel it

Immediate or cancel (IOC)

These limit orders are similar to FOK order except they may be partially filled

• Any order not completed is canceled

At-the-open

These orders are to be executed at the securities opening price

• If they’re not executed at the opening price they’re canceled

At-the-close (market on close)

This order is executed at the closing price

• If not executed at closing price it is canceled

Do not reduce (DNR)

this order says not to reduce the price of a stop or limit order in response to a dividend

Alternative order

This order instructs the broker to execute one of two and then cancel the other

Bid wanted vs Offer wanted

Bid wanted: This order is an notice that an investor or broker dealer wants to sell a security at a specific price

Offer wanted: This order is a notice that an investor wants to buy a particular security at. a specific price

*These orders are used usually when no current sellers or buyers are available

Solicited order vs Unsolicted order

Solicited order: The rep recommended the trade

Unsolicited order: The customer initiated it

DTCC (Depository trust and Clearing Corporation)

Provides clearing, settlement and asset servicing infrastructure for the US financial markets

Short swing profits

Are profits made on a company stock held 6 months or less by an insider.

Short swing profits have to be returned to the company (this is in order to encourage insiders to hold the stock for longer)

OTC Market group tiering

From highest requirements to lowest:

OTCQX

OTCQB

Pink Market