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Source: NYSE Fact Book 2001, New York Stock Exchange. Reprinted by permission.

the folklore.28 In a capital market where trading is dominated by institutions, the best environment is one where all institutions are actively involved because they provide liquidity for one another and for noninstitutional investors.

National Market The development of a National Market System (NMS) has been advocated by financial institu-System (NMS) tions because it is expected to provide greater efficiency, competition, and lower cost of transactions. Although there is no generally accepted definition of an NMS, four major characteristics are generally expected:

1. Centralized reporting of all transactions

2. Centralized quotation system

3. Centralized limit order book (CLOB)

4. Competition among all qualified market makers

Centralized Reporting Centralized reporting requires a composite tape to report all transactions in a stock regardless of where the transactions took place. On the tape you might see a trade in GM on the NYSE, another trade on the Chicago Exchange, and a third on the OTC.

The NYSE has been operating a central tape since 1975 that includes all NYSE stocks traded on other exchanges and on the OTC. The volume of shares reported on the consolidated tape is shown in Exhibit 4.11. The recent breakdown among the seven exchanges and two OTC markets appears in Exhibit 4.12. Therefore, this component of a National Market System (NMS) is available for stocks listed on the NYSE. As shown, although the volume of trading is dispersed among the exchanges and the NASD, the NYSE is clearly dominant.29

28In this regard, see Neil Berkman, "Institutional Investors and the Stock Market," New England Economic Review (November-December 1977): 60-77; and Frank K. Reilly and David J. Wright, "Block Trades and Aggregate Stock Price Volatility," Financial Analysts Journal 40, no. 2 (March-April 1984): 54-60.

29For a discussion of these changes, see Janet Bush, "Hoping for a New Broom at the NYSE," Financial Times, 16 August 1990, 13; William Power, "Big Board, at Age 200, Scrambles to Protect Grip on Stock Market," The Wall Street Journal, 13 May 1992, A1, A8; and Pat Widder, "Nasdaq Has Its Eyes Set on the Next 100 Years," Chicago Tribune, 17 May 1992, Section 7, pp. 1, 4.

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