Role of Brokers, Dealers, Exchanges & Electronic Networks in Securities Trading, Slides of Marketing

Download Role of Brokers, Dealers, Exchanges & Electronic Networks in Securities Trading and more Slides Marketing in PDF only on Docsity! Brokers, Dealers, Exchanges & ECNs docsity.com Brokers, Dealers Exchanges & ECNs • Brokers deal with public. Example: Merrill Lynch • Dealers execute trades • Exchanges are places where dealers operate. Examples: NYSE, Nasdaq, Arizona Exchange • Electronic Communications Networks (ECNs) allow investors to communicate with each other, and to exchange. Examples: Island, Instinet (now Inet) docsity.com Exchanges • New York Stock Exchange, established 1792 by the Buttonwood Agreement among 24 brokers. • Exchanges provide standards and codes of ethics for broker members, standards for stocks. • Regional Exchanges: American Stock Exchange, Philadelphia Exchange • Listing requirements for stocks. Delisting too. • NASDAQ –National Association of Securities Dealers Automatic Quotation System, 1971, first electronic exchange, replaced old “pink sheet” system for over-the-counter stocks. docsity.com Markets to Lend (Not Sell) Shares • “Loan Crowd” on floor of NYSE 1926-33 led active market • Wall Street Journal reported “Loan Rate” often negative (Charles Jones & Owen Lamont) • J. Edgar Hoover, Crash of 1929 • Equilend was established in 2001 (http://www.equilend.com/) sponsored by Barclays Global Investors, Bear Stearns, Goldman Sachs, JP Morgan, etc. docsity.com New Exchanges • NASDAQ in 1971 did not require that stocks have ever made a profit before listing, listed IPOs immediately. • Intel, Microsoft refused NYSE switch • Foreign imitators of NASDAQ: Neuer Markt, Germany, Mothers, Japan • Neuer Markt shut down 2002 docsity.com Payment for Order Flow • Brokers drum up orders, deal with customers • Brokers sell the order flow to crossing networks, who profit from the order flow. • November 2000 SEC posted rules that brokers must post composite statistics on fraction of order flow going to various places. • Firms must also report statistics on their order- execution quality docsity.com The Battle of the Platforms • Exchanges merge to try to gain critical mass • Rumors of possible NYSE-Nasdaq merger • Euronext merges European stock exchanges • Instinet buys Island 2002 (to form Inet.com). Offered automatic trading facilities that Nasdaq lacked. (Nasdaq responds with Supermontage) • The Pacific Exchange acquires Archipelago.com 2000, then REDIBook. ArcaEx trading system docsity.com Shares Traded per Day (Dec. 2003) • New York Stock Exchange 1.3 billion • Nasdaq 886 million • Inet 586 million • Pacific Exchange 526 million docsity.com The “Book” on NASDAQ • NASDAQ’s book is visible to everyone who orders NASDAQ Level 2 service • NYSE says it has plans to make its specialist’s book more widely available docsity.com Gambler’s Ruin Problem • Starting with $S, betting $1 on heads on a coin toss with probability p of coming up heads, continuing to toss until ruin, probability of eventual ruin equals 1 if p is less than or equal to one half, otherwise equals: ( )S p p−1 docsity.com Gambler’s Ruin Derivation • Call probability of ever failing, playing forever, given that one has S dollars today Pr(S). Then, S p pS SpSpS       − =∴ = −−++= 1)Pr( 1)0Pr( )1Pr()1()1Pr()Pr( docsity.com The Crowd, NYSE • Floor brokers cluster around specialist post, and trade among themselves • About 50% of NYSE share volume (though only about 10% of trades) go through floor brokers, not through specialist’s book • In addition to the crowd, there are the “upstairs traders” who handle very large orders. docsity.com Myth: Stock trading is going all electronic • Electronic trading remains a venue for small trades • If they close the NYSE floor, the floor traders will just go upstairs. • Frankfurt, London, Paris, Toronto electronic exchanges: between 40% to 60% of trades were never orders on the book (though trade may be ultimately reported there.) • Books have too much transparency, large orders tip their hand too much by putting it on book. docsity.com Criticism of NASDAQ • William Christie & Paul Schultz , Journal of Finance, Dec. 1994, pointed out that “odd eighths” spreads were rare on NASDAQ: dealers rarely quote prices ending in 1/8, 3/8, 5/8 and 7/8. • Therefore inside spread is always at least ¼. • Day after study reported in news, spreads narrow. • Authors interpret as evidence of tacit collusion. • Federal class action lawsuit against NASDAQ won $1.03 billion in 1998. docsity.com