LOS g Compare Market Organization and Structure LOS g Compare Market Organization and Structure

Trading Instructions Order Execution

Execution: How to trade Validity: When to trade
Good till canceled
Market order: Best price available Immediate or cancel
Day order
Limit order: Specified price or better Stop orders: Execute if price reaches specified level

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LOS g Compare Market Organization and Structure LOS h Compare Market Organization and Structure

Order Execution Types of Orders

Market order
 Dealer buys at bid price, sells at ask price
Immediate execution at best available price
 Bid-ask spread → dealer profit  Useful when trading based on information
 Best bid: Highest bid price  Can execute at unfavorable price
 Best offer: Lowest ask (offer) price Limit order
 The best bid and best offer “make” the market Buy at limit price or lower, sell at limit price or higher
 A trade accepting a current bid or offer is said to  Avoids execution price uncertainty
“take” the market  Order might not be filled
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LOS h Compare Market Organization and Structure
Types of Orders
Stop (loss) order: A trade at the stop (trigger) price
activates a market order
 Trader who owns a stock trading at 35 might enter a
stop sell order at 31.50
 Trader who is short a stock trading at 35 might enter a
stop buy order at 39
 Technician who believes that a trade above 60
indicates a strong upward move will follow, might enter
a stop buy at 60
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LOS i Define/Explain Market Organization and Structure
Primary vs. Secondary Capital Markets
Primary capital markets: Sales of new issues of
stocks and bonds (IPOs and seasoned offerings);
proceeds less underwriting fees to issuer
Secondary capital markets: Where securities trade
after their initial offerings (e.g., NYSE, Nasdaq, other
OTC)
Secondary markets provide liquidity and information
about value to investors.
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LOS h Compare Market Organization and Structure
Execution and Validity Example
Investor owns Acme shares which are priced at $40. He
wants to sell his shares only if the price decreases by
10% or more. What type of order should the investor
place now?
Stop-sell order at $36 will execute only if price decreases
to $36
Trailing 10% stop:
If price increases to $42, increase stop to $37.80
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LOS i Define/Explain Market Organization and Structure
Primary Markets
Underwritten offer: Investment bank guarantees security
sale
Best efforts: Investment bank acts as broker
Private placement: Sell directly to qualified investors
Shelf registration: Issue securities over time
Dividend reinvestment plan: Issue new shares to
shareholders who reinvest dividends
Rights offering: Sell new shares to current shareholders
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LOS j Describe Market Organization and Structure LOS j Describe Market Organization and Structure

Market Structures Call vs. Continuous Markets

Quote-driven: Investors trade with dealers Call markets: Securities trade at specific times
 All bids and asks are accumulated, then price is set
that clears the market
Order-driven: Rules used to match buyers  Used in smaller markets and to open major markets
and sellers Continuous markets:
 Trades occur any time the market is open
 Price is set by auction or by dealer bid-ask quotes
Brokered markets: Brokers find counterparty for
a trade
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LOS k Describe Market Organization and Structure LOS l Describe Market Organization and Structure

Well-Functioning Financial System Objectives of Market Regulation

 Complete: Assets and contracts are available  Protect unsophisticated investors

 Operationally efficient: Low transactions costs  Require minimum standards of competency

 Informationally efficient: Prices reflect  Prevent trading on inside information

fundamental (intrinsic) value  Require common financial reporting standards
 Financial intermediaries facilitate transactions  Require minimum levels of capital

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