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Introduction
The exchanges are the
places where buyers and sellers of securities (stocks, bonds, options and
futures) come together to make trades. The main focus of this section will
be the stock exchanges. They are the mechanisms used by investors to
exchange investment securities. Companies use the exchanges when they raise
money by selling shares, or when they repurchase shares. The stock exchanges
are also popular vehicles used by company owners to raise cash by selling
shares (to cash out). Stock exchanges connect buyers with sellers, and
ensure that transactions are safe and secure. Prices, in most cases, are
determined by the buyers and sellers, not the exchanges. The operations of
most industrial organizations are not affected by the secondary trading of
shares. The trading of shares by company owners usually has no physical
impact on an organization, unless control is affected.
Global competition and technology improvements
have been changing the way the exchanges operate. In the United States, the NYSE
is the dominant exchange, even though it uses a “people intensive” auction
system. It merged with Archipelago’s automated trading platform, to better
compete against NASDAQ and other electronic communication networks (ECNs).
Computers can now handle the matching of orders faster and cheaper than the
existing manual auction system. Investors also prefer the control over their
trades that automation provides. The NYSE, therefore, is under competitive
pressure to automate, to maintain and grow its worldwide listing and trading
leadership position. The NYSE operates with a major physical presence on
Wall Street, while NASDAQ and the other ECNs conduct trades through a
network of computers around the country.
Automation of the NYSE
may have the following effects:
The physical NYSE building
will probably, in the future, evolve into a
museum and tourist attraction. As computers take over more and more
functions, the trading floor may become obsolete. The open outcry system,
where floor brokers shout out prices, will be missed.
The Floor Traders traditionally execute trades on behalf of their clients by matching
buyers with sellers. Their positions will most likely be eliminated as
automation progresses. Computers will reduce the need for people to match
buyers with sellers, as is done on NASDAQ.
The Specialist
work to maintain a fair and orderly
market; they do so by providing liquidity and managing prices. They set opening prices and provide
bid and ask quotes to brokers throughout the day. If needed, they use their own capital to balance
out order flow distortions, in order to maintain an orderly market. They also trade
on their own account. The specialists under the "old" NYSE will evolve into market
makers of the "new" NYSE.
Market Makers
are broker-dealers who work with NASDAQ and specialize in specific stocks.
There are multiple market makers for every stock, who are obligated to stand
ready to buy or sell at least 100 shares, on a regular and continuous basis,
at a publicly quoted price. They are also required to provide two-sided
quotes; bid and ask prices that they will honor. Market makers hold an
inventory of a particular stock, and provide it to the market as needed. To help offset the market risk of buying high and
selling low, they make a spread, which is the difference between the bid and
the ask price. Take that spread of a few pennies, and multiply it by the
shares traded, and you can conclude that these players make significant
money.
The Day Traders
are the ones who will see and feel the differences in exchanges similar to
those that young adults will see. They look to profit from pennies. The
stocks that trade on the NYSE are watched over by specialists, who manage
prices. They set the opening prices, and try to keep price swings to a
minimum. This makes it hard for day traders to make a quick gain. However,
because NASDAQ is automated, it has no specialists keeping prices in line.
It uses market makers to provide order by their bid and ask quotes. NASDAQ
stocks have larger daily price swings, creating more opportunities for
traders and investors alike. The greater price volatility of NASDAQ
securities versus NYSE securities is believed to be due to the smaller and
less mature companies found on NASDAQ. Nonetheless, by automating the NYSE,
it will speed up trading time and reduce cost, but it may increase price
volatility, which can be profitable to traders. Order flow and emotions can
more easily move prices. News becomes important, because small price
movements equate to money for day traders.
There are exchanges all
over the world. Global competition is taking its toll on the United
States stock exchanges. Recently, most of the large billion dollar plus
capital raising deals have been done outside of the United States. The
regulatory environment, in the United States, is just to harsh. The US stock
exchanges are looking to develop new products and expand globally to
maintain their customers.
In the United States there are the
major exchanges and several smaller regional exchanges.
The Major Stock
Exchanges Are:
The New York Stock
Exchange (NYSE) Founded in
1792, it is commonly known as “The Big Board”. It is the largest exchange in
the world for the listing and trading of securities. The NYSE lists
approximately 2,800 companies, with a total market capitalization of over
$20 trillion. On an average day, 1.6 billion shares, valued at $56 billion,
are traded. Trading starts at 9:30 a.m. and closes at 4 p.m. There are,
however, overtime opportunities with extended hours. This is the place
where executives and heads of state want to have a photo opportunity,
ringing the opening bell of the exchange. Companies listed on the exchange
have to meet certain size (listing) requirements to substantiate that they
are successful organizations, with the financial resources deserving
secondary markets where their shares can trade. The NYSE still uses floor
traders to make trades. Its merger with Archipelago is
expected to more fully automate their processes, and transform them into a
publicly traded for-profit company. The NYSE is also looking to expand
overseas.
The American Stock
Exchange (AMEX) Founded in 1849,
it today lists over 600, mostly smaller and younger midsize growth,
companies. Trading hours are from 9:30 a.m. to 4 p.m.
Many exchange-traded funds,
derivatives and bonds are traded on the AMEX. Listing requirements are
favorable to smaller companies that don’t qualify for the NYSE. The
majority of AMEX’s trading volume and growth is derived from exchange-traded
funds.
NASDAQ
Founded in 1971, it is the largest of the automated computerized trading
platforms, and lists over 3,200 companies. NASDAQ Merged with AMEX in 1998
and is now exploring global opportunities.
Electronic
Communication Networks (ECNs)
These are companies with customer friendly, computerized systems that
automatically match customer orders. They are generating significant
volume, and threatening the existing exchanges. Archipelago and Instinet
were ECNs. ECNs are growing quickly because their fee structures are less
than the bid/ask spreads that are charged by the market makers. There is
always a market for low cost alternatives and the ECNs are filling that
niche.
The Chicago Board
Options Exchange (CBOE) Founded
in 1973 by the Chicago Board of Trade, with the intent to standardize and
trade public option contracts. Today, CBOE is the largest option exchange in
the world.
The New York
Mercantile Exchange (NYMEX) Founded
in 1872 as the Butter and Cheese Exchange of New York; added fruit and
poultry contracts 10 years later and changed its name to NYMEX. Today NYMEX
is the world’s largest physical commodity future exchange and a preeminent
trading forum for energy and precious metals.
Chicago Mercantile
Exchange (CME) Founded in 1898 as
the Chicago Butter and Egg Board; changed its name to CME in 1919. Today,
CME is the second largest exchange for futures, and options on futures, in
the world.
There are also a few
regional stock exchanges in the United States, as well as major exchanges in
many foreign cities
Regulators
The SEC
regulates the exchanges in the United States.
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