CHAPTER THREETYPES OF SECURITY MARKETSSlide 3MAJOR U.S. SECURITY MARKETSSlide 5Slide 6TRADING HALTSMysteries of the Stock Market (“Beast on Wall Street” – Haugen)Orange Juice Futures (Roll, American Economic Review, 1984)Daily Stock Returns (French & Roll, Amer. Econ. Review, 1986)Mysteries of the Stock MarketEffects of Cross-listing on Stock VarianceSlide 13Slide 14Slide 15PLACING AN ORDERSlide 17Slide 18Slide 19OTHER EXCHANGESSlide 21Slide 22OVER-THE-COUNTER MARKETSlide 24Slide 25THIRD AND FOURTH MARKETSSlide 27PowerPoint PresentationOTHER METHODS OF ORDERINGFOREIGN MARKETSSlide 31Slide 32INFORMATION- AND LIQUIDITY-MOTIVATED TRADERSINFORMATION- AND LIQUIDITY-MOTIVATED TRADERSREGULATION OF SECURITIES MARKETSSlide 36Slide 37Slide 38Slide 391CHAPTER THREESECURITY MARKETS2TYPES OF SECURITY MARKETS•CALL MARKETS–have posted hours for trading only–“called” securities are for sale to those buyers or sellers3TYPES OF SECURITY MARKETS•CONTINUOUS MARKETS–trading may occur at any time during a regular trading day–dealers (market makers)•provide liquidity to brokers who cannot find a suitable buyer or seller•usually are temporary positions4MAJOR U.S. SECURITY MARKETS•THE NEW YORK STOCK EXCHANGE (NYSE)–established as a corporation, with a charter and regulations for membership–approximately 1,366 members–Board of Directors: 26 elected5MAJOR U.S. SECURITY MARKETS•NYSE SEATS:–purchased from a current member–give privileges to members to execute trades–held by individuals as well as brokerage firms6MAJOR U.S. SECURITY MARKETS•LISTED SECURITIES: Some criteria to list–the degree of national interest–relative position and stability in the industry–prospects of maintaining its relative position7TRADING HALTS•THE EXCHANGE MAY IMPOSE TRADING HALTS AND CIRCUIT BREAKERS–Designed to try to help control stock market volatility that has gotten out of hand•One problem with a company’s going public and being listed on an exchange is that it is then subject to stock market volatility•What is the major determinant of stock market volatility? Interestingly, whether the stock market is open for trading!Mysteries of the Stock MarketMysteries of the Stock Market(“Beast on Wall Street” – Haugen)(“Beast on Wall Street” – Haugen)Silence after the closing bellSilence after the closing bellToo much stock volatilityToo much stock volatilityVolatility too unstableVolatility too unstableUnconnected marketUnconnected marketOrange Juice FuturesOrange Juice Futures (Roll, (Roll, American Economic Review, 1984)American Economic Review, 1984)Orlando weatherOrlando weather, oil prices, substitute juice prices, & , oil prices, substitute juice prices, & exchange rates explain only 10% of price variability.exchange rates explain only 10% of price variability.If the distribution of possible futures returns is constant If the distribution of possible futures returns is constant from day to day, then variance should be proportional from day to day, then variance should be proportional to the interval used to measure the return.to the interval used to measure the return.But price variability is only 54% greater from Saturday But price variability is only 54% greater from Saturday through Monday than it is on other days. It should be through Monday than it is on other days. It should be 200% greater since this is a 3-day period.200% greater since this is a 3-day period.Daily Stock ReturnsDaily Stock Returns (French & Roll, (French & Roll, Amer. Econ. Review, 1986)Amer. Econ. Review, 1986)Stock returns only 11% more variable in periods from Stock returns only 11% more variable in periods from Saturday through Monday than on other days.Saturday through Monday than on other days.In last half of 1968, NYSE was closed on Wednesdays; in In last half of 1968, NYSE was closed on Wednesdays; in this period, weekly variance falls to 82% of variance in this period, weekly variance falls to 82% of variance in other weeks. Returns from Wed. through Thurs. are only other weeks. Returns from Wed. through Thurs. are only 14% more variable than on other days.14% more variable than on other days.Implies stock variance is Implies stock variance is 25 times25 times greater when exchange is greater when exchange is open than when closed.open than when closed.Variance multiple decreases with size.Variance multiple decreases with size.Mysteries of the Stock MarketMysteries of the Stock MarketToo much stock volatilityToo much stock volatilityVolatility too unstableVolatility too unstableUnconnected marketUnconnected marketSilence after the closing bellSilence after the closing bellCross-listing increases volatilityCross-listing increases volatility (Makhija & Nachtmann, unpublished (Makhija & Nachtmann, unpublished manuscript, University of Pittsburgh, 1989)manuscript, University of Pittsburgh, 1989)Effects of Cross-listing on Stock VarianceEffects of Cross-listing on Stock Variance81 U.S. stocks are cross-listed on the London Stock Exchange 81 U.S. stocks are cross-listed on the London Stock Exchange (1969-82).(1969-82).With 1-hour overlap, the trading day increased by 5 hours for With 1-hour overlap, the trading day increased by 5 hours for these stocks.these stocks.Daily return variance is measured during 200 days before and Daily return variance is measured during 200 days before and after cross-listing. after cross-listing. Variance goes up for 60 stocks, down for 21 -- an average Variance goes up for 60 stocks, down for 21 -- an average increase of 57% over all 81 stocks.increase of 57% over all 81 stocks.Average increase is significant at better than 99% confidence.Average increase is significant at better than 99% confidence.13TRADING HALTS•THE EXCHANGE MAY IMPOSE TRADING HALTS AND CIRCUIT BREAKERS–Trading Halts:•are temporary suspensions of trading in a listed firm’s shares14TRADING HALTS–Circuit Breakers: Rule 80A•rule states that if the Dow Jones Industrial Average (DJIA) moves 50 or more points from a previous closing price, all index arbitrage orders will be subject to the “tick test.”15TRADING HALTS–Circuit breakers: Rule 80B•if a 350 point change before 3 PM occurs, the NYSE shuts down for one-half hour•if a 550 point change (total) occurs after the reopen, NYSE shuts down for 1 hour.•size of move triggering circuit breakers is set as a percentage of average value of DJIA