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?