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Learning Objectives

4. Outline the organization of the securities markets. (LO4)

5. Assess the concept of market efficiency and its benefits to the economic system. (LO5)

6. Examine the changing financial regulatory environment. (LO6)

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The Organization of the Security Markets

• Security markets exist to facilitate the direct transfer of capital among households, corporations, and governments.

• After a security is sold initially as an original offering, it then trades among investors, a process known as secondary trading.

• Secondary trading is vitally important as it provides liquidity for investors.

• Secondary market trading activity is divided between organized exchanges and over-the-counter (OTC) markets.

LO4

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Organized Exchanges

• Regulated marketplace where buyers and sellers of securities come together to trade securities in a single location

• Exchanges are auction markets where there is a price offering and acceptance between buyers and sellers

• Key components of organized exchanges are fair prices, transparency, liquidity and integrity

LO4

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Organized Stock Exchanges

• Toronto Stock Exchange (TSX) – largest and most important market for stocks in Canada– strict requirements in order for a firm to be traded on that

exchange– smaller and less significant globally than the NYSE

• New York Stock Exchange (NYSE) – largest and most important market for stocks in the world

• Alternative trading systems (ATS)– also known as Electronic Communication Networks (ECN)

use the Internet to electronically match buyers and sellers

LO4

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Figure 14-11 Secondary Market: Annual Value of Trading

LO4

Source: Investment Industry Association of Canada (ILAC) Reports, 2010 www.iiac.com. Reprinted with permission.

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Figure 14-12World equity markets: Annual value traded, 2010

Source: World Federation of Exchanges, 2010

LO4

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The Over-the-Counter (OTC) Markets

• Have no central location• Networks of dealers connected by

computer terminals and telephones• Buy and sell securities which are not

listed on a stock exchange• Historically, the bulk of all bond trading

was done OTC• CanDeal has been established to report

real time pricing on debt inventories

LO4

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Challenges for Canadian Exchanges

• The extremely liquid markets in the US have tended to attract business away from Canadian exchanges.

• Another threat is the “upstairs rooms” practice, that is, dealers matching large trades in shares through their own trading floors.

• Internet trading systems such as Alternative Trading Systems (ATS) are also competing for business.

• Over the next decade, it is expected that securities market will become more competitive as more computer systems are used.

LO4

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Figure 14-13Money and capital market investments, 2011

Source: Adapted from Statistics Canada, “Canada’s International Investment Position,” Catalogue No. 67-202, 2011, and Statistics Canada, CANSIM Database, Table 376-0037.

LO4