Securities Markets

1
Securities Markets

• BKM Chapter 3
• Primary and Secondary Markets
• Trading on exchanges
• Trading on OTC markets

2
Asset Markets

• Primary Market
• Market for new issues of securities.
• Initial Public Offerings (IPO)
• Seasoned Public Offerings
• Private Placements
• Secondary Market
• Existing securities are traded.

Investors
Firms
Investors
Investors
Investors
Investors
3
Issuing Securities

• Investment banks
• Purpose provide capital for clients
• Spends time and resources finding investors for
  clients
• Investment Bank Duties
• Underwrite (market) public offerings in
  syndicates
• Prepare prospectus to get SEC approval,
• Underwriting arrangements
• Firm commitment
• Best-efforts

4
Two IPO Puzzles

• IPO stocks experience on average large returns on
  the first day of trading.
• IPO stocks under-perform comparable publicly
  traded companies over the next five years.

5
Number of IPOs (Bars) Average First-Day Returns
(Diamonds)
Source Ritter (2004)
6
Money Left on Table (Bars) Average First-Day
Returns (Diamonds)
MLOT (Closing Price IPO Price) (Number of
Shares Sold at IPO Price) Source Ritter (2004)
7
Long-Term Performance of IPOs (1970-2002)
Source Ritter (2004)
8
IPO Puzzles Bookbuilding

• Bookbuilding
• Preliminary price set
• Road show
• Those who show a willingness to pay a higher
  price get more shares
• Money left on table is compensation for
  revealing price information

9
VasteraStock Price Performance
10
Secondary Markets

• Stock Exchanges
• NYSE
• Amex
• Regional exchanges
• The Over-the-Counter Market
• An informal network of brokers and dealers
• NASDAQ A computer linked price quotation system
• Do you have what it takes to be a dealer? Find
  out!
• https//www.nasdaqtrader.com/HeadTrader/ptg-main.s
  tm

11
Order Types

• Market buy buy at best going price
• Market sell sell at best going price

12
Bid-Ask Prices

• The ask price is the price at which someone
  stands willing to sell.
• The bid price is the price at which someone
  stands willing to buy.
• AskBid (always)

13
Bid-Ask and OTC Markets

• On Over-the-Counter markets
• Only dealers post bid-ask prices.
• All buy orders buy at ask (the higher price)
• Market buy
• Limit buy
• Stop buy
• All sell orders sell at bid (the lower price)
• Market sell
• Limit sell
• Limit buy

14
Trading on OTC Market

• Investor places an order with broker.
• Broker tries to locate the dealer offering the
  best deal.
• Trades are negotiated through dealers who
  maintain an inventory of securities.

15
Trading on Exchanges
Specialist Sams Small Firm
Tessas Tiny Firm
Specialist Microsoft
Floor Broker
Floor Broker
Floor Broker
Specialists Deal in security (post own bid-ask
prices) Charge commissions to
execute trades of brokers Brokers Pay high
prices for a seat on the exchange Charge
commissions to other outside brokers to execute
trades
16
Trading on Exchanges

• Investor places an order with broker.
• Brokerage firm contacts its commission broker or
  independent floor broker to execute order.
• The specialist makes a market in the shares of
  one or more firms.
• Can act as both a broker and a dealer
• Maintains a limit order book.
• Maintains a fair and orderly market by dealing
  personally in the stock.

17
Bid-Ask and Exchanges

• Any limit order is a bid-ask price
• Any broker can post a limit order
• These are arranged at specialist desk

Last Trade 50.00
market buy stop buy orders executed at lowest
ask (effective ask price)
market sell stop-loss orders executed at
highest bid (effective bid price)
18
Trading is Hazardous to Your Wealth
Source Barber and Odean (2000)
19
Performance of Stocks Purchased vs. Stocks Sold
Source Barber and Odean (1999)
20
Boys will be Boys
Source Barber and Odean (2001)
21
Trading and Financial Markets

• Primary Markets
• Allows companies to raise capital
• Secondary markets
• Information
• Liquidity needs
• Retail Investors vs. Institutions