Trading mechanics |
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The actual mechanisms in a financial market to facilitate trading are known as the market microstructure, or the institutional setup of a securities market. This section identifies some typical setup and discusses some underlying principles of market design. It reviews some of the goals of trading systems, various participants in securities market, and the establishment of market prices. Also included is an overview of automated trading systems and various issues important to investors when they are trying to execute a trade. Securities trading systems The trading of securities is conducted by members of the exchange or by an official of the exchange. However, trades are not conducted in the same manner in all stock exchanges around the world (or even in the United States). The three main trading systems are the call market, continuous market, and mixed market. In the call market, trading and prices are determined at a specified time during the day by a designated person collecting the entire buy and sell orders and then determining the equilibrium price (that is, the price where supply and demand are equal). For example, suppose that by 2:00 pm the total accumulated buys order by all investors in Sabra stock is as follows: Buy 60 shares at $13 per share or less. Buy 70 shares at $12 per share or less. Buy 80 shares at $11 per share or less. Buy 100 shares at $10 per share or less. Note that the higher price is associated with a smaller number of shares demanded. Similarly, the following might be the aggregate supply of orders: Sell 10 shares at $11 per share of more. Sell 40 shares at $12 per share of more. Sell 70 shares at $13 per share of more. Sell 150 shares at $14 per share of more. Note that the higher the price, the more shares that are made available to sell. From the aggregate supply and demand information, we see that the equilibrium price is $13 per share and 60 shares traded. Those investors wanting to sell securities at a higher price than $13 will be unable to find a buyer, and those wishing to buy securities at a price less than $13 will be unable to find a seller. Also note that in our example a total of 70 shares were offered for sale at a price of $13; however, only 60 investors were willing to purchase the stock at this price, leaving 10 sell orders not executed. In practice, demand is always equal to supply at a given price. The designated person must then change the price – say, to $12½ - in order to create new demand and supply functions until equilibrium is reached. When trade in one security is finished, trade in the second security takes place, and so on until all securities are traded. All unfulfilled orders can be resubmitted the following day or the next time the security is traded. Call market trading usually occurs once a day, but in some countries it can occur two or three times a day.Call market trading is common in Hong Kong, Israel (with some stocks), Austria, and Norway. In most large exchanges (for example, in the United States, Canada, and the United Kingdom), where the volume of trading and the number of listed securities is large, the continuous market system of trading is employed. As the name indicates, trades in each security occur at any time the stock exchange is open. If there are a seller and a buyer of IBM shares a an agreed price, for example, at 10:00 AM, the transaction is conducted in a matter of minutes. Five minutes later, another transaction in the same stock may be executed at a different price. For example, on some of the business television news networks in the United States, you can view the NYSE and NASDAQ transactions occurring throughout the day by watching the information scrolling across the television screen. This information includes, for example, the ticker symbol of the stock, volume traded, last price, and change in price from the previous price. In some countries (for example, Switzerland and France), a mixed market exists. In this system, a group of stocks is traded continuously for a half hour, and so forth throughout the day. | ||||||||
