Securities Market

Lecture 4: Secondary Market

MSc. Le Quoc Tuan

LOGO
 Secondary Market

 The market where investors buy and

sell securities they already own
 Investors are responsible for their own risk
and profit
 No new capital raised for the issuers
 Main content

Over-the-
Exchanges counter
market
 Exchange

Listing
Trading
 Listing

Provide platform
for trading listed
Exchange Allowing members to provide
trading service to clients
firm’s securities

Issuers who list their securities

Investment Banks/Securities Firms
for trading on Exchange
who provide brokerage/trading services

Listed Client
Members
companies
Service provider
 Exchanges

 Exchanges are the organizers of trading

platforms for securities.
 NYSE – Financial Heaven

 1,366 seats
 1 seat= 3 million USD
 Daily: 1.46 billion stocks
traded with total market value
of $46,1 billion
 2,800 stocks are listed with
total market value of $20,000
billion
 The third largest exchange in
the world
 NYSE is where the
"American dream" was
completed and buried
most pressing
7
 Stock Exchange in Vietnam

 Ho Chi Minh Stock

Exchange (HOSE)
 Founded in 2000
 344 listed firms with total
market value of 2,600 trillion
VND (roughly 120 billion USD)
 Daily trading of 200 million
shares with the average
market value of 4 trillion VND
( about 200 million USD)
Stock Exchange in Vietnam

 Hanoi Stock Exchange

(HNX)
 Founded in 2005 (HASTC)
 Changed to HNX in 2009
 1,074 listed firms with total
market value of 260 trillion
VND (roughly 12 billion
USD)
 Daily trading of 60 million
shares with the average
market value of 668 billion
VND ( about 30 million
USD)
 Roles of Exchanges

 Creating a platform for daily trading

activities.
 Fair determination of securities price
(through trading mechanism)
 Information disclosure (Public,
Transparency, Equality)
 Main function: Maintain the market for
eligible securities to be traded.
Types of ownership of Exchanges

Limited Liabilities

Corporation

State-owned
 Of Singapore stock exchange
http://www.sse.com.cn
13
 Members of Exchange

• Types of members
1

• Criteria for eligible members

2

• Rights and responsibilities of

3 members
 Types of members

Brokers: conducts a transaction of securities

1 purchase or sale for clients for commission.

Dealers: involves in security trading by its

2 own capital in order to get profit

Specialists: are dealers or market makers

assigned by the exchange to conduct the
3 auction process and maintain an orderly market
in one or more designated stocks.
 Brokers

 The investors places an order with a broker. The

brokerage firm owning a seat on the exchange
contacts its commission brokers, who is on the floor
of the exchange, to execute the order.
 Floor brokers are independent members of the
exchange who own their own seats and handle work
for commission brokers when those brokers have too
many orders to handle.
 Dealers

 Post prices at which they will buy or sell a

specific security of instrument (Bid & Ask
price)
 Designated as a “market maker” –
provides liquidity and transparency by
electronically displaying
 Bid-ask spread represents a tangible cost
to investors and profit to dealers
 Specialists

 As dealers, they trade for their own accounts

in any temporary absence of public buyers or
sellers, and only after executing all public
orders in their possession at a specific price
 As agents, they execute market orders
entrusted to them by brokers, as well as
orders awaiting a specific market price.
 As catalysts, they help to bring buyers and
sellers together
 As auctioneers, they quote current bid-ask
prices that reflect total supply and demand for
each of the stocks assigned to them
 Member criteria

1 2 3 4

Compliance
Financial Performance with the
Infrastructure and regulations
condition
experience of Stock
Exchange
 Member criteria

- Able to maintain a
required infrastructure - Behave ethically, in
for trading of securities.
good physical condition
- A staff of experienced
for the job.
and certificated
Institutions
employees
- Well-educated in
Economics, Banking,
Individuals
- Appropriate deposits at
Finance, Stock market.
a highly-reputated - Financially stable
financial institution - Own appropriate
- Fully compliance of
degrees/certifications
laws and Exchange
regulations

Why do Exchanges impose such high

requirements for their member?
Procedure for acceptance of members

1 2 3

Receiving Processing Making

registration registration decision to
documents document accept the
member
 Rights of member

Receiving information

Using services and

Utilities by Exchanges
Proprietary trading
Of securities
on Exchange
Rights

Charging the customers

Voting for the Exchange’s For services provided
Board of Administratives
 Responsibilities of member

Supporting other members

Being monitored by All fees must be

The Stock Exchange fully paid

Respon-
sibilities

Reporting to the Stock Exchange Complying other regulations

 Listing on the Exchange

 To list the securities of a corporation is to

allow the trading of eligible company’s
securities
 Listed firms are primary market’s issuers
who are listed on the Exchange.
 Listable securities

Securities
Securities Exchanges
Exchanges

Listable

Stocks Bonds Convertibles Derivatives

 Definition

 A company must apply to a stock exchange to

have its shares quoted if it wishes to become a
publicly listed corporation and raise equity
capital through an offer of shares to the public
 The stock exchange will ensure that the
company complies with the stock exchange
listing requirements.
 Delisted: if a listed corporation does not comply
with the listing rules of the stock exchange, the
offending company is liable to be suspended
from quotation, or it may be delisted
 Decree 58/2012/NĐ-CP

HOSE HOSE HNX

Capital 120 billion VNĐ 30 billion VNĐ

Type of 2 years operated as joint-stock 1 years operated as joint-stock

business company company
Profit The latest ROE ≥ 5% The latest ROE ≥ 5%
Business operation in two years No accrued loss
preceding the year of listing is No payable debt > 1 year
profitable
No accrued loss
No payable debt > 1 year

Ownership  At least 20% voted stocks  At least 15% voted stocks

hold by 300 investors hold by 100 investors
- Limited transfer - Limited transfer
 Type of listing

Chang
Initial
e
listing
listing

Back
Cross-
Door
listing
Listing
 Listing standards

Quantities Quality others

 Capital - The level of

 Time of national interest  Audit’s
operation   - The position opinions
 Profitabilit of the Company  Disclosure
y   - Prospect  Securities
 Debt ratio Company
 Pros and Cons of Listing

Cons Pros

Fund raising

Lower cost of ca
Information Disc pital
los ure
Public relationsh
ip
Takeover target
Liquidity
 Exchanges

Listing
Trading
 Trading

Trading
Order
process

Special
Trading
transaction
Mechanism
s
 Trading procedure on Exchanges

- Open account
- Giving Order
Results

Investor
Buy orders
Brokers
Securities
Investor Results
Depository
Exchange (Central Clearing Bank
Clearing
Investor House)
Brokers Sell order
Investor

Results

Front Office Back Office

Day T Day T+2
 Trading process

1) Investor open an account and deposit money or

securities at Security Company
2) Investor make an order to Purchase or Sale of
Security
3) After verifying order’s validity, the order will be
delivered to the Trading System in the Stock
Exchange
4) The order will be matched according to the Central
Limit Order Book or Negotiated Method.
5) When the order is successfully matched, the results
will be notified to Securities Company and then to
investors. Money and Securities will be settled in T+2
including brokerage fees.
 Vietnam Securities Depository

 On 27th, July, 2005, The Government signed

the decision for the establishment of VSD
 On 1st, May,2006, VSD started its operation
 29th, July, 2009, VSD changed its ownership
types to state-owned one-member Limited
Liability as Vietnam Securities Depository
 Vietnam Securities Depository

 Main functions of VSD:

 Securities registration & depository
 Clearing and Settlement
 Securities-related rights
 Set trading code
 Set securities tickers
 Types of order

Orders

Common Other
Types Issues
What is an order?

38
Trading position
 Common orders by price

Limit Order (LO)

At The Open (ATO)

Stop Order (SO)

Common
orders

At The Close (ATC)

Market Order/Price (MP)

 Limit order (LO)

 A limit order is an
order to buy or sell a
stock at a specific
price or better
 A buy limit order
 A sell limit order
 Advantages
 Disadvantages
 No guarantee it
will be executed
 Executed after MP
 Market order (MP)

 Market order is An order to buy or sell a

security at the best price currently available.
 Advantages:
 buy or sell a stock at the best available price.
 will be executed, priority & immediately
 Disadvantages:
 the price at which a market order will be executed
is not guaranteed. 
 ATO order

 ATO is An order to buy or sell a security at the

opening price.
 ATO priority over limit orders in the matching process.
 ATO entered into the trading system during the Opening
Call Auction Session.
 No specific price ATO records.
 ATO will automatically be canceled after the time of the
opening price for the order is executed or the order
remains unfulfilled.
 ATC order

 ATC is An order to buy or sell a security at the

closing price.
 ATC priority over limit orders in the matching process.
 ATC is entered into the trading system during the
Closing Call Auction Session
 ATC will automatically be canceled after the time of
closing price determined for the command is executed
or the order remains unfulfilled.
 Stop orders

 A stop order, also referred to as a stop-

loss order, is an order to buy or sell a
stock once the price of the stock
reaches a specified price, known as the
stop price.
 A stop order to buy
 A stop order to sell
 A stop – limit order
Buy stop order
Buy stop order
Sell stop order
Sell stop order
 Other issues

 Methods to give orders

 Order Specification
 Order Availability
 Preference
 Price Unit (tick size)
 Methods to give orders

 Order slips
 Online trading
 Phone with record in Brokerage firms.
 Contact with brokers (mobile phone,
facebook, LINE, Zalo call, etc.) then sign
the order report later
Orders
Order Slip
Online Trading
Online Trading
 Order Specifications

Good-Til-Cancel(GTC)

Immediately-Or-Cancel(IOC) or Fill-Or-
Kill (FOK)

All-Or-None(AON)
Day Order(DO)
 Order Availability

Order Order Matching Market Negotiated

Opening Call Continuous Closing Call Market
Auction Auction Auction
ATO X
LO X X X X
MP X
ATC X
Preference

Price

Time

Amount
 Price unit/Tick sizes

Market price HOSE HNX UpCom

(VND)
< 10,000 10 100 100

10,000 – 50 100 100

49,950
≥50,000 100 100 100

Not applicable to negotiated market and bonds

 Securities Exchange of Thailand

Market Price Level (THB) Tick sizes (THB)

(effective since March 30, 2009)
Less than 2 0.01
2 up to less than 5 0.02
5 up to less than 10 0.05
10 up to less than 25 0.10
25 up to less than 100 0.25
100 up to less than 200 0.50
200 up to less than 400 1.00
400 up 2.00
 Central Limit Order Book

Order matching
Continuous
Call Auction Auction
 Call Auction

 Applied for: opening session & closing

session,
 is utilized in calculating the opening and
closing prices of a security at the opening and
closing of the trading hours.
 Opening and closing Price

 Step 1: an arrangement of all orders from clients

within a certain period
 Step 2: Buying accumulated with price – priority:
 ATO/ATC
 From Highest price to lowest price
 Step 3: Selling accumulated with price – priority:
 ATO/ATC
 From lowest price to highest price
 Step 4: determines the number of stocks that can be
traded/matched
 Opening and closing Price

 Step 5: The opening/closing price will be determined

from:
 The price that generates the greatest trading
volume.
 If there is more than one such price, the value that
is closest to the Last Executed Price (LEP) will be
chosen.
 If there is still more than one such price, the higher
one will be chosen.
 If the closing price of a security cannot be calculated
utilizing the above criteria, the last executed price of
that day will be chosen to be the closing price of that
particular stock.
 The orders matching principles

 All buying orders having price higher than the

listed price and all selling orders having price
lower than the listed price are executed
 All buying orders having price lower than the listed
price and all selling orders having price higher than
the listed price are not executed
 Buying and selling orders having price equal to the
listed price can be partly or fully executed depend
on each case
 Example

 assume that the last executed price (LEP) before the

call auction session of that day was 151 Baht, the
trading system randomly selected 16:38 hours as the
closing time, and at that time, there were orders as
follows: Bid (Buy) Offer (Sell)
Buy Price Order Order Time Price Sell
Volume Time Volume
G 500 ATC 16:35 16:30 149 800 D

A 300 150 16:37 14:25 150 700 E

B 200 149 15:30 9:35 152 500 F

C 300 148 10:50      

the trading system will calculate the matched volume of
each price level as follows

Price Buy Volume Sell Volume Matched

Volume
148 300+200+300+500 = 0 0
1,300
149 200+300+500 = 1,000 800 800
150 300+500 = 800 800+700 = 800
1,500
151 0+500 = 500 800+700 = 500
1,500
152 0+500 = 500 800+700+500 500
= 2,000
 From the above example, the prices generating the
greatest trading volume are 149 and 150 Baht. So the
trading system will choose 150 Baht to be the closing
price, as it was closest to the last execution price (151
Baht). Orders will be matched according to the price and
time priority and ATC orders would be matched as the
First priority, as follows:

Deal Buyer Seller Time Price Volume

1 G D 16:38:01 150 500
2 A D 16:38:02 150 300
 Example

 A Stock exchange hold a periodic call auction

to fix an opening price. After opening 30
minutes on 1/1/N, all related orders of stock A
are as the following table (the prior closing
price of stock A was 29,500VND/stock)
 Call Auction

 All Limit Orders

Buying Price Selling Expected
Amount Acc. Amount Acc. match

100 29 1000
1200 28.9 1200
1100 28.8 1500
800 28.7 900
750 28.6 1000
550 28.5 450
110 28.4 100
100 28.3 200
 Call Auction

 With ATO/ATC
Buying Price Selling Expected
match
Amount Acc. Amount Acc.

2000 55.5 1200

3000 55 2000
6000 54.5 1500
1200 54 700
500 53.5 1100
1000 ATO/ATC 1300
 Call Auction

 Multiple price choice

Buying Price Selling Expected
match
Amount Acc. Amount Acc.

100 26.5 500

1900 26.2 1000
500 26 0
500 25.8 1400
2000 25.4 600
1000 25.3 0
 LEP: 26.1
 Continuous Auction

 Continuous Auction
Method of order matching during the regular
trading sessions. The Exchange continuously
matches the first buy and sell orders in the queue,
and at the same time, confirms each executed
transaction via the member's (broker's) terminal
 Matching principles:
- The purchase price must be greater than or
equal to the sell price
- Matching the price of the previous orders.
 Example

Time Investor Buying Price Selling Price

quantitative quantitative
10h01 A 1000 50.5
10h02 B 700 50
10h03 C 500 51
10h04 D 2000 52
10h05 E 3200 MP
 Result

Buying Selling
Time Price
quantitative quantitative
10h01 No transaction
10h02 A-700 50.5 B-700
10h03 No transaction
10h04 D-500 51 C-500
D-1500 52 E-1500
10h05
A- 300 50.5 E-300
77
 EXAMPLE

TIME INVESTOR BUYING ORDER SELLING ORDER

QUANTITY PRICE QUANTITY PRICE

(shares) (1000 VND) (shares) (1000
VND)

9h31 A 500 36,5

9h32 B 300 36,7
9h34 C 400 36,6
9h35 D 300 MP
9h59 E 100 36,7
 Exercise 3

 Continuous auction with MP

Time Investor Purchase Sale
Amount Price Amount Price
9h30 A 500 50.5
9h31 B 200 50.6
9h33 C 1000 50.7
9h34 D 1500 MP
 The stock market index

 Market index is the measure of overall stock

market performance, comprised of all (or a
number of representative) stocks on the market.
 Market indexes could also be used for:
 A benchmark for portfolio performance
evaluation.
 A Measure of performance of Market Portfolio
 An underlying assets for Derivatives (Ex. Futures
on Index).
 The stock market index

 Examples of market indexes (indices)

 Dow Jones Industrial Average
 S&P 500
 NYSE (equal-weighted)
 NYSE (value-weighted)
 Nikkei 225
 Kospi 100
 VN-index
 VN-30 index
 The stock market index

 Types of Market Index:

 Price-weighted average (DJIA)
 Market-value-weighted average (S&P 500)
 Equally-weighted average (NYSE)
 Price-weighted average

 Measures
  the return of a portfolio that holds one
share for each stock.
 Give higher-priced share more weight
 Ex. DJIA-The average of 30 blue-chip large
corporation
 The formula:

Pi: price of stock i in the index

 The index has to be adjusted for events such as
stock-split or replacement of stocks in the index
 Market-value-weighted average

 Measure the return of a portfolio of all (or a

number of) stocks on the stock market in
proportion to their market value
 Computed by the return of total market value of
all (or a number of representative stocks)
 Base on a starting value (such as 100) to
calculate the index divisor
 Market-value-weighted average

 The
  initial index divisor is calculated as:

In which, suppose that we have n stocks

Ni,0 number of shares outstanding of stock i at

initial time (day 1, time 0)
Pi,0 price of stock i at initial time
 Market-value-weighted average

 The
  value of the index is calculated as:

equal to the total market value (capitalization) at

time t divided by the index divisor
 Market-value-weighted average

 Example:
  A market with 5 stocks
Stock Outstanding Price at Price at Market cap Market cap
shares time 0 ($) time 1 ($) time 0 time 1
A 50 3 4 150 200
B 50 1 1 50 50
C 70 7 7 490 490
D 20 9 9 180 180
E 10 10 9 100 90
Total 970 1010

 The Index divisor:

 At time 0, the index is set at base of 100 points
 Index at time 1:
 Market-value-weighted average

 An
  adjustment to the formula:
 Free-float adjustment (VN-30): free-float factor is
the ratio of the number of shares that could be
traded freely (free-float) to the total number of
shares outstanding.

 We multiply the number of shares to the free-

float factor
 Equally-Weighted Index

 The
  equally weighted average of return of
each stock in an index.
 The return of each stock is calculated as:

 The index is calculated as:

 Equally-weighted index put more weight on

small stocks
 Daily trading limit
 Each trading day, the price of stock could only fluctuate
within a limit, namely, daily trading limit
 Daily trading limit is the price fluctuation during the day
compared to the reference price
 Reference Price: Usually the closing price of the
previous session (unless specified otherwise)
 Example: The reference price is 20,000VND/CP
 The order is only valid if the price is within the range
of 19,000 to 21,000 VND per share
 If the reference price is valid 50,000VND/CP
 Daily trading limit: 47,500-52,500
90
 Trading limit

Country Daily trading limit

Poland +/-10%

Malayxia +30%
Shanghai +10%

New York Dows Jones decreased by 250 points, NYSE stop

for 30 minutes
Dows Jones decreased by 400 points, NYSE stop
for 60 minutes

HOSE +/- 7% reference price for company shares

 Trading limit
 From the reference price and price limit, we
calculated the price ceiling and price floor:
 The Ceiling price
= Reference price + (reference price × upper limit)
 The Floor price
= Reference price - (reference price × lower limit)
 Special transactions

-The investors trade/buy on margin -The investors borrow securities

(borrow funds from securities
firms to buy more shares than
their financial position allowed)
-The securities bought are used
as collateral for the funds borrowed
and sell them today in order to
subsequently buy back at lower
price in the future.
-Also called Securities borrowing
& Lending (SBL)
 Margin trading

 Margin account – You have to open a margin

account to buy on margin.
 Minimum investment amount – The investment
firm sets the minimum amount you must deposit
in a margin account. This is sometimes called the
minimum margin.
 How much you can borrow – This depends on
the price of the stocks you're buying. Your
investment firm may lend you up to 70% of the
money you invest. This is called your maximum
loan value.
 Short sales

 Allows investors to profit from a decline in a

security’s price.
 An investor borrows a share of stock from a
broker and sells it.
 The short-seller must purchase a share of the
same stock in the market to replace the share
that was borrowed. (Covering the short position)
 Short-seller must pay the lender of the security
any dividends paid during the short sale.
 Special transactions

 For both margin trading and short-sales, the investors

have to pay a deposit as follows:
 Initial margin: the amount of value (cash/securities)
owned by the trader which the trader have to deposit at
the securities firms to initiate margin trading or SBL
service.
 Maintenance margin: the amount of value the trader
have to maintain on his/her account in order not to get
margin call.
 Special transactions

 Margin call: When the value of the investment on drop

below maintenance margin, the traders get a margin
call from the securities firms.
 Upon receiving a margin call, an investor have to
deposit more value into the account to raise the value of
the investment to at least maintenance margin level or
sell all or parts of his/her investment.
 If he/she failed to satisfy a margin call, their investment
will be liquidated immediately.
 Margin call

 Initial margin = Equity in account / Value of

stock
 Maintenance margin

 Current value of stock = Number of stock x

current market price
 Margin trading

 Example
On 17th, June, 20XX Mr. Investor buys 100 IBM
shares at $10 per share (total of $1,000)
• Initial margin: 60%, Investor has to deposit 60%×
1,000 = $600 ($400 is the amount borrowed from
securities firms
• Maintenance margin: 30%
 Margin trading

 On 20th, June, 20XX price of IBM share rises to $25

• The value of the investment: $2,500
• The value of the Investor’s equity (deposit) rises to:
$2,500 - $400 = $2,100
• The deposit ratio now is: $2,100/$2,500 = 84%
 Investor could either withdraw:
2,100 - 60%×2,500 = $600
 Or borrow 600/ 60% = $1,000 to buy more share
For $1,000: the Investor could buy 40 = 1,000/25 shares
 Margin trading

 On 25th, June, 20XX price of IBM share drops to $5

• The value of the investment: $500
• The value of the Investor’s equity (deposit) drops to:
$500 - $400 = $100
• The deposit ratio now is: $100/$500 = 20%
 Investor has to either deposit an extra amount of:
30%×500 – 100 = $50
 Or sell: (500 – 100/0.3)/ $5 = 33.33 shares
 Short-Sale

 Example
On 17th, June, 20XX Mr. Speculator shorts 100 APPL
shares at $50 per share (total of $5,000)
• Initial margin: 50%, Investor has to deposit $7,500
(include $5,000 as the proceeds from short-sale and
$2,500 from the investors)
• Maintenance margin: 30%
 Short-Sale

 Example
 
The Equity = Deposit + Initial short position - current
value of short position
Value of stock owed = current value of short position

At all time, the speculator must maintain the

percentage margin no less than 30%
 Short-Sale

 Example
 
On 25th, June, 20XX price of APPL rises to $70 per
share. The market value of the APPL short-sale rises
to $7,000.
 The maintenance margin: 30%
The value of stock owed = 100 × 70 = 7,000
The equity = 7,500 – 7,000 = 500
The current margin: < 30%
The speculator get a margin call and have to deposit:
7000 × 30% - 500 = $1,600 more
Or buy back (7,000 – 7,500/1.3)/70 = 17.58 shares
Vietnam Status Quo

Short selling

Not Strongly
popular developed banned

2007 depression
2008 2009 11/2009

Developed
in some
securities
The Over-The-Counter market
 Overview

The market for unlisted A

stocks Over – The
– Counter
There is no membership B market
requirements for trading &
securities

Trading via the computer-linked C

network, telecommunications
network
D
A broker can execute a trade by
contacting a dealer listing an
attractive quote
 Exchange & OTC market

 Location
 Securities
 Risks
 Market makers
 Settlement
 Regulations
 Trading methods

Agreem
ent

OTC
Quotation

Market
makers

109
 (1) Agreement transaction

Buyers Agreement Sellers

Buyer’s brokerage Seller’s brokerage

firm firm

Confirm the Receive Confirm the

Confirm the transaction execution
execution orders
Transaction system

Settlement system

110
 (2) Quoted transaction

Buying order Buying order

Investor Brokerage firm
A A
Inform the Inform the
execution execution

Confirm the
transaction Transaction
system
selling order
Inform the
results
Inform the selling order
execution

Investor Brokerage firm

B B
 (3) Market – maker transaction

Market Market
maker A maker B
quotation

Confirm the quotation

orders transaction

Report the
execution
orders
OTC
Investor A Brokerage firm
central
Inform the
A confirmation system
result

quotation

Market
maker C
 Nasdaq stock market

 Established in 1971
 A telecommunications network that links thousands of
geographically dispersed market – making participants
 Its electronic quotation system provides price quotations to
market participants on Nasdaq – listed stocks
 Brokers register with the SEC as dealers in OTC securities.
Security dealers quote:
 Bid prices at which they are willing to purchase securities
 Asked price at which the dealer is willing to sell securities
 A broker/dealer who receive a buy or sell order from an
investor can examine all current quotes, contact the dealer with
the best quote, and execute a trade
 Market maker on Nasdaq

 Continuously post two-sided quotes (bid & ask) for 1,00

shares. (if any NASD member presents an order to a market
maker, he is obligated to trade at term no worse than its quotes.
Failure to do so constitutes “backing away”, which may be
subject to regulatory sanction
 Report trades promptly
 Be subject to automatic execution against their quotes via
Small Order Execution System (SOES)
 Integrate customer limit orders and not place a quote on any
system different from their Nasdaq quote unless that system is
linked backed into Nasdaq
 Quotation system

 Nasdaq has three levels of subscribers

 Level 3 (the highest)
• is for firms dealing, or market makers, in OTC
securities.
• Subscribers may enter the bid and asked prices
at which they are willing to buy or sell stocks
into the computer network and update these
quotes as desired
 Quotation system

 Level 2:
• subscribers receive all bid and asked quotes but
cannot enter their own quotes
• These subscribers tend to be brokerage firms
that execute trades for clients but do not actively
deal in the stocks for their own account
• Brokers attempting to buy or sell shares call the
market maker who has the best quote to execute
a trade
 Quotation system

 Level 1
 Subscribers receive only the median, or
“representative”, bid and ask price on each stock
 Subscribers are investors who are not actively
buying and selling securities, yet the service
provides them with general information
 Other OTC markets

Non-Nasdaq
OTC market

OTC Bulletin Pink Sheet

Board (OTCBB) -Dealer quotations
-Display real time were disseminated
quotes, last sale by paper copy
prices, & volume - An electronic
information version of the Pink
- Includes stocks Sheet is updated
not traded on the daily &
NYSE, AMEX, or disseminated over
Nasdaq the market data
vendor terminals
 The third market

 The third market refer to trading of exchange –

listed securities on the OTC market.
 Member of NYSE were required to execute all
their trades of NYSE-listed securities on the
exchange and to charge commissions according
to a fixed schedule
 Like Nasdaq, the third market is a network of
broker/dealers that aggregates quotation
information and provides interparticipant order
routing tools, but leaves order execution to
market participants
 The fourth market

 The fourth market refers to direct trading

between investors in exchange – listed
securities without benefit of a broker.
 Electronic Communications Networks (ECN)
 Crossing networks
THANK YOU