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1、12,Market Microstructure and Strategies,Chapter Objectives,Describe typical common stock transactions and their executionExplain the role of electronic communications networks (ECNs)Describe the regulation of stock transactionsExplain how barriers to international stock transactions have been reduce
2、d,Stock Market Transactions,Market order to buy/sell at the best possible priceLimit order is a market order with a specific price maximum or minimumDiscount vs. full-service brokerPlacing an order via the Internet,Placing an Order,Margin Trading,Buying stock on margin= borrowing to buy stockFederal
3、 Reserve sets margin requirements (%) or proportion of funds buyer must put downUsed to dampen speculation and market crashesCurrently 50%; half down, half borrowedBroker may set higher margin requirements,Margin Trading, cont.,Customer establishes account with broker (margin account)Initial marginb
4、rokers minimum margin requirement for stock purchaseMaintenance marginminimum proportion of equity/total value of stock borrowing period,Sort Out All the “Margins”,Margin Trading, cont.,Margin trading magnifies returns to investorInvestor must pay interest on borrowed fundsInvestor returns higher/lo
5、wer with lower equity than a 100% purchaseMargin CallStock price falls below maintenance margin requirementsMargin call is a request for cash to maintain maintenance marginBroker/lender may sell stock to protect loan,Short Selling,In a short sale, investor borrows and sells stockPromises to pay back
6、 stock laterShort seller hopes stock price declines to provide gainShort seller covers dividend payments while borrowing stockLimited gain; unlimited lossesShort Interest Ratio as market forecast,Investing in Stock Indexes,Investor may buy stock or stock derivative securitiesThe value of derivative
7、securities follow underlying stock prices or prices of specific stock portfolios (index)Lower transaction costsStock index returns have matched actively managed portfoliosExchange-traded funds (ETFs) designed to match major stock indexes,Exchange-Traded Funds (ETFs) vs. Indexed Mutual Funds,Both ETF
8、s and indexed mutual fundsShare price adjusts in response to change in indexPay dividends earned in added sharesLower management fees than actively managed mutual fundsETFs are different from mutual funds in that they May be traded on an exchange any time during the day May be purchased on margin an
9、d sold shortCapital gains tax onlyValue of ETF shares = underlying value of sharesInvestor must pay transaction costs when buying/selling,Types of Exchange-Traded Funds (ETFs),Cube (QQQ)Tracks Nasdaq100 indexTraded on AmexInvestors may speculate on future of technology stocksPurchase on marginSell s
10、hortSpider (S&P Depository Receipt)Tracks S&P 500 indexTrade at one-tenth S&P 500 Index level,How Trades Are Executed,Specialists,How Trades Are Executed,Floor brokers fulfill trade orders on exchange trading floorMay work for the brokerage house or serve as their agentCompletes the physical trade w
11、ith other floor participants,Floor Broker,How Trades Are Executed,Specialists serve as brokers, matching buy/sell orders in a few, specific stocks on the exchangeServe as a dealer, buying/selling to complete transactionServe to maintain fair and orderly market,Specialists,How Trades Are Executed,Mar
12、ket-makers have dealer positions in specific stocks and complete transactions on NASDAQ marketNo specific location as with specialists on exchangestelecommunications linkSpecialists and market-makers provide continuous market liquidity,Market-Makers,Electronic Communications Networks (ECNs),Automate
13、d systems for disclosing and executing stock tradesFocus on institutional market trading with large-size trades and lower spreadsA programmed market vs. trading by peopleStarted on NASDAQ; spreading to exchange-traded stocksECNs specialize by types orders: market, limit, etc.,Program Trading,Trading
14、 completed by computer “program”Initial use with institutional, large order, high volume to take advantage of technologyNYSE listed stocks dominate program tradingTrading a function of parameters set in “program,” such as “over-valued shares”Used also to manage portfolio riskPortfolio insuranceuse o
15、f stock index futuresProtect gain or minimize loss in portfolio,Program Trading, cont.,Program trading associated with increased volatility of stock market or inciting significant market declinesResearch has refuted claim that program trading has increased stock market volatilityHas not been the ini
16、tial “starter” of sharp market declinesNYSE implemented “collars” or curbs to program trading in volatile periodsCircuit breakersmarket “time out”,Regulation of Stock Trading,Purpose of stock trading regulationTo make market more efficientPromote and preserve competitionPrevent unfair or unethical trading practicesProvide adequate disclosure of informationTo prevent market failurecircuit breakersSecurities Act of 1933 and SEC Act of 1934SEC uses surveillance system to watch tradingInsider tradingAttempts to corner market,
