Chapter 14

Secondary Markets

Function of Secondary Markets

Providing security values and required

returns
Providing liquidity
Reducing cost of transacting by
providing market for financial assets

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Trading Locations
Organized Exchanges
National exchanges (NYSE)
Regional Exchanges (Philadelphia Stock
Exchange - NASDAQ OMX PHLX)
Over-The-Counter Exchanges

(NASDAQ)

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Market Structures
Continuous Market
prices are determined continuously
throughout the trading day

Call Market
orders are grouped together for
simultaneous execution at the same price
Mixed Market
using elements of the continuous and call
market
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Perfect Markets
Large number of buyers and sellers
Buyers and sellers are price takers
Commodity traded is homogeneous
Market is frictionless with no

transactions costs, taxes and other

impediments
Ability to sell short

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Market Friction
Commissions
Bid-ask spreads
Handling and clearance charges
Taxes
Costs of information acquisition

Trading restrictions
Restrictions on market makers

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Brokers
A broker acts on behalf of an investor

who wishes to execute orders.

Broker functions:
Receives, transmits and executes orders
Brings together buyers and sellers
Negotiates prices

In return, the broker receives a

commission
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Dealers
The dealer holds in inventory the

financial asset traded

Dealer functions:
Takes a position (long or short) in the asset
Provides opportunity to trade immediately
Offers price information
Serves as auctioneer

Dealer profit is the bid-ask spread

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Market Efficiency
Operational Efficiency
Offers investors reasonably priced services
related to buying and selling securities

Pricing Efficiency
Prices fully reflect all available information
relevant to the valuation of securities

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