Chap003HowSecuritiesAreTraded(金融工程-南開大學(xué),

1、How Securities Are TradedChapter 3Primary vs. Secondary Security SalesPrimaryNew issueKey factor: issuer receives the proceeds from the sale.SecondaryExisting owner sells to another party.Issuing firm doesnt receive proceeds and is not directly involved.Investment Banking ArrangementsUnderwritten vs

2、. “Best EffortsUnderwritten: firm commitment on proceeds to the issuing firm.Best Efforts: no firm commitment.Negotiated vs. Competitive BidNegotiated: issuing firm negotiates terms with investment banker.Competitive bid: issuer structures the offering and secures bids.Public OfferingsPublic offerin

3、gs: registered with the SEC and sale is made to the investing public.Shelf registration (Rule 415, since 1982)Initial Public Offerings (IPOs)Evidence of underpricingPerformancePrivate PlacementsPrivate placement: sale to a limited number of sophisticated investors not requiring the protection of reg

4、istration.Dominated by institutions.Very active market for debt securities.Not active for stock offerings.Organization of Secondary MarketsOrganized exchangesOTC marketThird marketFourth marketOrganized ExchangesAuction markets with centralized order flow.Dealership function: can be competitive or a

5、ssigned by the exchange (Specialists). Securities: stock, futures contracts, options, and to a lesser extent, bonds.Examples: NYSE, AMEX, Regionals, CBOE.OTC MarketDealer market without centralized order flow.NASDAQ: largest organized stock market for OTC trading; information system for individuals,

6、 brokers and dealers.Securities: stocks, bonds and some derivatives.Most secondary bonds transactionsThird MarketTrading of listed securities away from the exchange.Institutional market: to facilitate trades of larger blocks of securities.Involves services of dealers and brokersFourth MarketInstitut

7、ions trading directly with institutionsNo middleman involved in the transactionOrganized information and trading systemsECN DevelopmentInternational Market StructuresLondon Stock ExchangeDealer market similar to NASDAQStock Exchange Automated Quotation Greater AnonymityTokyo Stock ExchangeNo market

8、making serviceSartori provides bookkeeping serviceFeature a floor and electronic tradingGlobal Market AlliancesCosts of TradingCommission: fee paid to broker for making the transactionSpread: cost of trading with dealerBid: price dealer will buy from youAsk: price dealer will sell to youSpread: ask

9、- bidCombination: on some trades both are paidTypes of OrdersInstructions to the brokers on how to complete the orderMarketLimitStop lossUsing only a portion of the proceeds for an investment.Borrow remaining component.Margin arrangements differ for stocks and futures.Margin TradingMaximum marginCur

10、rently 50%Set by the FedMaintenance marginMinimum level the equity margin can beMargin callCall for more equity fundsStock Margin TradingX Corp$7050%Initial Margin40%Maintenance Margin1000Shares PurchasedInitial PositionStock $70,000 Borrowed $35,000 Equity $35,000Margin Trading - Initial Conditions

11、Margin Trading - Maintenance MarginStock price falls to $60 per shareNew PositionStock $60,000 Borrowed $35,000 Equity 25,000Margin% = $25,000/$60,000 = 41.67%Margin Trading - Margin CallHow far can the stock price fall before a margin call?(1000P - $35,000)* / 1000P = 40%P = $58.33* 1000P - Amount

12、Borrowed = EquityShort SalesPurpose: to profit from a decline in the price of a stock or security.MechanicsBorrow stock through a dealer.Sell it and deposit proceeds and margin in an account.Closing out the position: buy the stock and return to the party from which it was borrowed.Short Sale - Initi

13、al ConditionsZ Corp100 Shares50%Initial Margin30%Maintenance Margin$100Initial PriceSale Proceeds$10,000Margin & Equity 5,000Stock Owed 10,000Short Sale - Maintenance MarginStock Price Rises to $110Sale Proceeds$10,000Initial Margin 5,000Stock Owed 11,000Net Equity 4,000Margin % (4000/11000) 36%Shor

14、t Sale - Margin CallHow much can the stock price rise before a margin call?($15,000* - 100P) / (100P) = 30%P = $115.38 * Initial margin plus sale proceedsRegulation of Securities MarketsGovernment RegulationSelf-Regulation Circuit BreakersInsider TradingECNs and FragmentationHow Securities Are Trade

15、dChapter 3Primary vs. Secondary Security SalesPrimaryNew issueKey factor: issuer receives the proceeds from the sale.SecondaryExisting owner sells to another party.Issuing firm doesnt receive proceeds and is not directly involved.Investment Banking ArrangementsUnderwritten vs. “Best EffortsUnderwrit

16、ten: firm commitment on proceeds to the issuing firm.Best Efforts: no firm commitment.Negotiated vs. Competitive BidNegotiated: issuing firm negotiates terms with investment banker.Competitive bid: issuer structures the offering and secures bids.Public OfferingsPublic offerings: registered with the

17、SEC and sale is made to the investing public.Shelf registration (Rule 415, since 1982)Initial Public Offerings (IPOs)Evidence of underpricingPerformancePrivate PlacementsPrivate placement: sale to a limited number of sophisticated investors not requiring the protection of registration.Dominated by i

18、nstitutions.Very active market for debt securities.Not active for stock offerings.Organization of Secondary MarketsOrganized exchangesOTC marketThird marketFourth marketOrganized ExchangesAuction markets with centralized order flow.Dealership function: can be competitive or assigned by the exchange

19、(Specialists). Securities: stock, futures contracts, options, and to a lesser extent, bonds.Examples: NYSE, AMEX, Regionals, CBOE.OTC MarketDealer market without centralized order flow.NASDAQ: largest organized stock market for OTC trading; information system for individuals, brokers and dealers.Sec

20、urities: stocks, bonds and some derivatives.Most secondary bonds transactionsThird MarketTrading of listed securities away from the exchange.Institutional market: to facilitate trades of larger blocks of securities.Involves services of dealers and brokersFourth MarketInstitutions trading directly wi

21、th institutionsNo middleman involved in the transactionOrganized information and trading systemsECN DevelopmentInternational Market StructuresLondon Stock ExchangeDealer market similar to NASDAQStock Exchange Automated Quotation Greater AnonymityTokyo Stock ExchangeNo market making serviceSartori pr

22、ovides bookkeeping serviceFeature a floor and electronic tradingGlobal Market AlliancesCosts of TradingCommission: fee paid to broker for making the transactionSpread: cost of trading with dealerBid: price dealer will buy from youAsk: price dealer will sell to youSpread: ask - bidCombination: on som

23、e trades both are paidTypes of OrdersInstructions to the brokers on how to complete the orderMarketLimitStop lossUsing only a portion of the proceeds for an investment.Borrow remaining component.Margin arrangements differ for stocks and futures.Margin TradingMaximum marginCurrently 50%Set by the Fed

24、Maintenance marginMinimum level the equity margin can beMargin callCall for more equity fundsStock Margin TradingX Corp$7050%Initial Margin40%Maintenance Margin1000Shares PurchasedInitial PositionStock $70,000 Borrowed $35,000 Equity $35,000Margin Trading - Initial ConditionsMargin Trading - Mainten

25、ance MarginStock price falls to $60 per shareNew PositionStock $60,000 Borrowed $35,000 Equity 25,000Margin% = $25,000/$60,000 = 41.67%Margin Trading - Margin CallHow far can the stock price fall before a margin call?(1000P - $35,000)* / 1000P = 40%P = $58.33* 1000P - Amount Borrowed = EquityShort SalesPurpose: to p