Chap003HowSecuritiesAreTraded(金融工程南开大学, .pptx

Chapter 3How Securities Are TradedPrimary vs. Secondary Security SalesPrimaryNew issueKey factor: issuer receives the proceeds from the sale.SecondaryExisting owner sells to another party.Issuing firm doesn’t receive proceeds and is not directly involved.Investment Banking ArrangementsUnderwritten vs. “Best Efforts”Underwritten: firm commitment on proceeds to the issuing firm.Best Efforts: no firm commitment.Negotiated vs. Competitive BidNegotiated: issuing firm negotiates terms with investment banker.Competitive bid: issuer structures the offering and secures bids.Public OfferingsPublic offerings: registered with the SEC and sale is made to the investing public.Shelf registration (Rule 415, since 1982)Initial Public Offerings (IPOs)Evidence of underpricingPerformancePrivate PlacementsPrivate placement: sale to a limited number of sophisticated investors not requiring the protection of registration.Dominated by institutions.Very active market for debt securities.Not active for stock offerings.Organization of Secondary MarketsOrganized exchangesOTC marketThird marketFourth marketOrganized ExchangesAuction markets with centralized order flow.Dealership function: can be competitive or assigned by the exchange (Specialists). Securities: stock, futures contracts, options, and to a lesser extent, bonds.Examples: NYSE, AMEX, Regionals, CBOE.OTC MarketDealer market without centralized order flow.NASDAQ: largest organized stock market for OTC trading; information system for individuals, brokers and dealers.Securities: stocks, bonds and some derivatives.Most secondary bonds transactionsThird MarketTrading of listed securities away from the exchange.Institutional market: to facilitate trades of larger blocks of securities.Involves services of dealers and brokersFourth MarketInstitutions trading directly with institutionsNo middleman involved in the transactionOrganized information and trading systemsECN DevelopmentInternational Market StructuresLondon Stock Exchange