Chapter 6 INVESTOR PARTICIPATION IN THE

FINANCIAL MARKETS

• How should investors choose a broker?

• What are the various types of orders placed by investors?

• What is cyber trading?

• What are block trades and program trading?

• Who regulates the financial markets and protects investors?

Choosing a broker

• Types of brokerage firms

• Full service firms

• Discount firms

• Deep discount firms

• Cyber (electronic) brokers

• Buying securities without a broker

Dividend reinvestment plans

• No-load stock purchase programs

Types of orders• Market order

– Definition

• How it is executed on the NYSE

• How it is executed on Nasdaq

• Spreads and decimal pricing

• Clearing procedures

• Limit orders

• Stop (or stop-loss) orders

Margin transactions

• What is a margin transaction

• Initial and maintenance margin requirements

• Margin calls

• Risk/return characteristics of margin transactions

• Short sales

Figure 6.2 – Illustration of Cash versus Margin Purchase

Cyber trading

• History of cyber trading

• Advantages and disadvantages of cyber trading

• Low cost

• Easy, 24 hour access

• Delays in order execution

–Margin calls are not required

• Day trading

Block trades and program trading

• Block trades

• Definition

• The creation of block houses and the third market

Program trading

• Wall Street definition

• Index arbitrage

• Circuit breakers employed by NYSE

Investor protection• Importance of investor confidence

• Government regulation in the United States

• The Securities & Exchange Commission

• Regulatory philosophy

• Full and fair disclosure

• Prospectus

• Insider trading

• State regulation

Securities regulation in other countries• Modeled on U.S. regulation

• Japan

• Canada

• Industry self regulation

• Professional rules of conduct

• NASD rules

• AIMR standards

• Arbitration and discipline procedures

• Market surveillance