Investments: Analysis and Management, Second Canadian Edition

1
Chapter 5
How Securities Are Traded
2
Brokerage Operations

• Brokerage firms earn commissions on executed
  trades, sales loads on mutual funds, profits from
  securities sold from inventory, underwriting fees
  and administrative account fees
• Full-service brokers offer order execution,
  information on markets and firms, and investment
  advice
• Discount brokers offer order execution

3
Fees and Costs

• Brokerage commissions differ by security, broker,
  and investor
• Institutional investors have greatest negotiating
  power
• On-line trading offers significantly lower
  commission rates to individual investors
• In 1992 ETRADE became the first brokerage
  service to offer on-line trading

4
Orders on Organized Exchanges

• The TSX introduced the worlds first
  computer-assisted trading system (CATS) in 1977
• The NYSE continues to make use of the specialist
  system
• Specialists maintain the limit order book
• Specialists keep a fair and orderly market by
  providing liquidity

5
Orders in OTC Markets

• Dealers are ready to either buy or sell
• Bid price is the highest offer price to buy
• Ask price is the lowest price willing to sell
• Ask price - Bid price gt0 (dealer spread)
• Dealer makes a market in the security
• More than one dealer for each security in
  over-the-counter markets

6
Types of Orders

• Market order Authorizes immediate transaction at
  best available price
• Limit order Specifies a particular market price
  before a transaction is authorized
• Stop order Specifies a particular market price
  at which a market order is authorized

7
Clearing Procedures

• Settlement dates for stocks are three business
  days after the trade date
• Legal ownership transferred and financial
  arrangements settled with brokerage firm
• Transfer of securities and funds between exchange
  members facilitated by a clearinghouse The
  Canadian Depository for Securities (CDS)

8
Canadian Regulatory Environment

• Self-Regulatory Organizations (SROs) regulate
  their own activities
• Canadian Investor Protection Fund (CIPF) was
  established to protect investors
• Investment Dealers Association of Canada (IDA) is
  the national trade association for the investment
  industry
• Canadian Securities Institute (CSI) is the
  national education body of the Canadian
  securities industry