South-Western/Thomson Learning 2004,3-,*,Click to edit Master title style,Click to edit Master text styles,Second level,Third level,Fourth level,Fifth level,THE MARKETPLACE,CHAPTER THREE,Practical Investment Management,Robert A.Strong,Outline,The Role of the Capital Markets,Economic Function,Continuous Pricing Function,Fair Pricing Function,The Exchanges,National Exchanges,Regional Exchanges,Trading Systems,The Specialist System,SuperDOT and NYSE Direct+,Marketmakers,Circuit Breakers and Trading Curbs,The Nasdaq Stock Market,The Small Order Execution System(SOES),The Nasdaq National Market,The Nasdaq Small Cap Market,The Over-the-Counter Market,Over-the-Counter Bulletin Board(OTCBB),Pink Sheet Stocks,Third and Fourth Markets,Outline,Regulation,The Exchanges,The SEC,Background,Primary Acts,The NASD,SIPC,Ethics,Illegal vs.Unethical,The Chartered Financial Analyst Program,History,The CFA Program Exams,AIMR Standards of Professional Conduct,Outline,An exchange serves three principal functions.,The Role of the Capital Markets,Continuous Pricing Function,Fair Pricing Function,Economic Function,Even in the days before,perestroika,socialism was never a monolith.Within the Communist countries,the spectrum of socialism ranged from the quasi-market,quasi-syndicalist system of Yugoslavia to the centralized totalitarianism of neighboring Albania.One time I asked Professor von Mises,the great expert on the economics of socialism,at what point on this spectrum of statism would he designate a country as socialist or not.At that time,I wasnt sure that any definite criterion existed to make that sort of clear-cut judgment.,And so I was pleasantly surprised at the clarity and decisiveness of Misess answer.A stock market,he answered promptly.A stock market is crucial to the existence of capitalism and private property.For it means that there is a functioning market in the exchange of private titles to the means of production.There can be no genuine private ownership of capital without a stock market:there can be no true socialism if such a market is allowed to exist.,-Murray Rothbard,from,Making Economic Sense,Economic Function,Capital markets facilitate the flow of capital from savers to borrowers.,Capital,Savers,Borrowers,Capital Market,Economic Function,Bank,Banks offer home mortgages so that home buyers who are short of cash can borrow money to buy houses.,$,$,Mortgage,Home Seller,Home Buyer,Home,Ownership,Economic Function:An Example,$,$,Mortgage,Mortgage-,backed,securities,Bank,Investors,Govt,Agency,Facilitated by,government agencies,such as the Federal National Mortgage Association,banks sell the mortgages to investors with surplus cash.,Economic Function:An Example,The primary market is the“new securities market where securities are sold to the public for the first time.,The secondary market is the“used securities market,where previously issued securities are traded among security holders.,Economic Function,Dollar Holdings,Investor Group (billions)%of Total,Household sector$6,579 38.70%,State/local governments 115 0.68,Rest of world 1,712 10.07,Bank trusts/estates 315 1.85,Life insurance companies 938 5.52,Other insurance companies 179 1.05,Private pension funds 1,999 11.76,State/local retirement funds 1,937 11.39,Mutual funds 3,226 18.98,Total$17,000 100.00,Economic Function,Capital markets enable market participants to get accurate,up-to-date price information.,Continuous Pricing Function,Capital markets remove the fear that people have of buying or selling at a rip-off price.,The greater the number of participants and the more formal the marketplace,the“fairer the price.,Fair Pricing Function,Functions of the Capital Markets,Fair price function,Continuous pricing function,Economic function,The Role of the Capital Markets,United States,National Exchanges,New York Stock Exchange(NYSE),American Stock Exchange(till 1999),Regional Exchanges,e.g.Philadelphia Stock Exchange,International,Exchanges,e.g.England,France,Japan,Thailand,The Exchanges,Trading Systems,Specialists,are charged with making a fair and orderly market in one or more assigned securities at,posts,on the exchange floor.,SuperDot,and,NYSE Direct+,are electronic systems enabling NYSE firms to send market and limit orders directly to the specialists posts.,Marketmakers,are groups of competing individuals who maintain a fair and orderly market through,open outcry,trading in,pits,on the exchange floor.,Both,trading curbs,and,circuit breakers,are designed to reduce temporary volatility in the market.,At the NYSE,when the Dow Jones Industrial Average fluctuates by more than 2%,the circuit breaker is activated and computerized trading becomes restricted.,When a trading curb is triggered,all,trading at the exchange is halted.,Circuit Breakers and Trading Curbs,The Nasdaq(National Association of Securities Dealers Automated Quotations)market is a worldwide computerized linkup of brokerage firms,investment houses and large commercial banks.,The Nasdaq market is somet