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Chapter 5ORGANIZATION OF THE FINANCIAL MARKETS
• What are the different types of financial markets?
• How do the primary financial markets function?
• Why are secondary financial markets important?
• How are the secondary financial markets organized?
• How are financial markets evolving?
What is a financial market
• A general definition
• Characteristics of a good market
• Liquidity
• Sufficient information is available
• Trading takes place in full view of all participants
What is a financial market – Cont.• Price continuity
• Low transactions costs
• Equal access to the market
• Price adjust quickly to new information
Classification of financial markets
• Primary and secondary markets
• Money and capital markets
• Debt and equity markets
• Organized versus over-the-counter markets
• Global versus regional markets
Primary financial markets
• Open auctions
• US Treasury security auctions
• Federal agency security auctions
• Mortgage backed security auctions
Figure 5.1 – Example of an IPO
Underwriting and investment banking• Role of the investment banker
• The underwriting process
• Underwriting discount
• Competitive versus negotiated arrangements
• Syndication
• Private placements
The importance of secondary markets• Liquidity
• Price discovery
• Why some securities develop better secondary markets than others
• Bid-ask spread as an indication of the depth of the market
• Trading volume
• Size of the issue
Secondary bond markets
• U.S. government securities
• Municipal bonds
• Corporate debt securities
• International bond markets
Domestic stock markets
• Distribution of trading activity
• NYSE – largest by dollar value of shares traded
• Nasdaq – largest by number of shares traded
• Stock market indexes
The New York Stock Exchange
• Listing requirements
• Trading practices
• Auction market
• The role of the specialist
The Nasdaq stock market
• Listing requirements
• Trading practices
• Electronic market
• Role of the market maker
Other domestic stock markets• The American Stock Exchange
• Regional exchanges
• Third and fourth markets
• Third market
• Fourth market
• Electronic Communications Network (ECN)
• In house networks
International stock markets
• The London Stock Exchange
• The Tokyo Stock Exchange
• Emerging markets
Figure 5.2 – Growth in Trading Volume in International Stock Issues on the London Stock Exchange
Figure 5.3 – Month-to-Month Volatility in the Brazilian Stock Market Index
The future of the financial markets• Growing importance of institutional
investors
• Globalization
• Advances in technology
• Will 24 hour trading every become a reality?