Secondary Securities Markets

After securities have been issued, they are frequently traded in the secondary markets. Securities can be traded on organized national and local stock exchanges, in the over-the-counter market, and directly between buyers and sellers, often using the services of an electronic network.

Stock Exchanges:

In the United States, there are 3 major national stock exchanges—the New York Stock Exchange (NYSE), the American Stock Exchange (AMEX), and the NASDAQ—which list most of the major companies—and numerous local exchanges, which list smaller, local companies. The New York Stock Exchange is the largest exchange, followed closely by NASDAQ, while AMEX is a distant third. However, AMEX lists many new types of securities, such as exchange-traded funds. The local exchanges include the following:

• Boston Stock Exchange
• Philadelphia Stock Exchange
• National Stock Exchange (formerly the Cincinnati Stock Exchange)
• Chicago Stock Exchange
• Pacific Stock Exchange

All exchanges have initial listing requirements that companies must satisfy before they can be listed on a particular exchange. Since an exchange makes money by charging commissions or fees on trades, most requirements are designed to ensure that a certain amount of trading will occur in the company’s shares. In most cases, larger companies have more trading activity, and so several requirements are related to ensure a minimum size. The most common requirements are a minimum market value, a minimum income and revenue, a minimum number of shares outstanding, and a minimum number of holders of public stock.

Although most stocks listed on an exchange are listed stocks for that exchange, an exchange can list the securities of any other exchange, if it so chooses. To increase pricing competition, the Securities and Exchange Act of 1934 contains a provision referred to as unlisted trading privileges (UTP) that allows any exchange to list any securities listed on any other exchange.

Only members of an exchange may list and execute trades at the exchange. When a retail investor wants to trade an exchange-listed stock, he must go to a broker. If the broker is a member of the exchange where the stock is listed, then she can send her client’s order to a representative of her firm, who will then execute the trade. However, if her firm is not a member, then she will have to send the order to another broker or dealer who is a member of the exchange or to their representative at the exchange.

Buy or sell limit orders are entered into the system and crossed with matching orders. If there are no matching orders, then they are queued, first by price, then by date, as a bid or offer price. The list of all bids and offers constitutes the order book, and the current market quote is the best bid and offer.