The Secondary Markets

There are several stock exchanges in the United States. Two of these, the New York Stock Exchange (NYSE) and the American Stock Exchange (Amex), are national in scope.2 The others, such as the Boston and Pacific exchanges, are regional exchanges, which primarily list firms located in a particular geographic area. There are also several exchanges for trading of options and futures contracts, which we'll discuss in the options and futures chapters.

An exchange provides a facility for its members to trade securities, and only members of the exchange may trade there. Therefore memberships, or seats, on the exchange are valuable assets. The majority of seats are commission broker seats, most of which are owned by the large full-service brokerage firms. The seat entitles the firm to place one of its brokers on the floor of the exchange where he or she can execute trades. The exchange member charges investors for executing trades on their behalf. The commissions that members can earn through this activity determine the market value of a seat. A seat on the NYSE has sold over the years for as little as $4,000 in 1878, and as much as $2.65 million in 1999. See Table 3.1 for a history of seat prices.

The NYSE is by far the largest single exchange. The shares of approximately 3,000 firms trade there, and about 3,300 stock issues (common and preferred stock) are listed. Daily trading volume on the NYSE averaged 1.04 billion shares in 2000, and in early 2001 has been averaging over 1.3 billion shares. The NYSE accounts for about 85-90% of the trading that takes place on U.S. stock exchanges.

The American Stock Exchange, or Amex, is also national in scope, but it focuses on listing smaller and younger firms than does the NYSE. It also has been a leader in the devel-

Table 3.1

Seat Prices on the NYSE

Table 3.1

Seat Prices on the NYSE

Year

High

Low

Year

High

Low

1875

$ 6,800

$ 4,300

1990

$ 430,000

$ 250,000

1905

85,000

72,000

1995

1,050,000

785,000

1935

140,000

65,000

1996

1,450,000

1,225,000

1965

250,000

190,000

1997

1,750,000

1,175,000

1975

138,000

55,000

1998

2,000,000

1,225,000

1980

275,000

175,000

1999

2,650,000

2,000,000

1985

480,000

310,000

Source: New York Stock Exchange Fact Book, 1999.

Source: New York Stock Exchange Fact Book, 1999.

2 Amex merged with Nasdaq in 1998 but still operates as an independent exchange.

CHAPTER 3 How Securities Are Traded 71

opment and trading of exchange-traded funds, discussed in Chapter 4. The national exchanges are willing to list a stock (allow trading in that stock on the exchange) only if the firm meets certain criteria of size and stability. Regional exchanges provide a market for trading shares of local firms that do not meet the listing requirements of the national exchanges.

Table 3.2 gives some initial listing requirements for the NYSE. These requirements ensure that a firm is of significant trading interest before the NYSE will allocate facilities for it to be traded on the floor of the exchange. If a listed company suffers a decline and fails to meet the criteria in Table 3.2, it may be delisted from the exchange.

Regional exchanges also sponsor trading of some firms that are traded on national exchanges. This dual listing enables local brokerage firms to trade in shares of large firms without needing to purchase a membership on the NYSE.

The NYSE recently has lost market share to the regional exchanges and, far more dramatically, to the over-the-counter market. Today, approximately 70% of the trades in stocks listed on the NYSE are actually executed on the NYSE. In contrast, about 80% of the trades in NYSE-listed shares were executed on the exchange in the early 1980s. The loss is attributed to lower commissions charged on other exchanges, although the NYSE believes that a more inclusive treatment of trading costs would show that it is the most cost-effective trading arena. In any case, many of these non-NYSE trades were for relatively small transactions. The NYSE is still by far the preferred exchange for large traders, and its market share of exchange-listed companies when measured in share volume rather than number of trades has been stable in the last decade, between 82% and 84%.

The over-the-counter Nasdaq market (described in detail shortly) has posed a bigger competitive challenge to the NYSE. Its share of trading volume in NYSE-listed firms increased from 2.5% in 1983 to about 8% in 1999. Moreover, many large firms that would be eligible to list their shares on the NYSE now choose to list on Nasdaq. Some of the well-known firms currently trading on Nasdaq are Microsoft, Intel, Apple Computer, Sun Microsystems, and MCI Communications. Total trading volume in over-the-counter stocks on the computerized Nasdaq system has increased dramatically in the last decade, rising from about 50 million shares per day in 1984 to over 1 billion shares in 1999. Share volume on Nasdaq now surpasses that on the NYSE. Table 3.3 shows trading activity in securities listed in national markets in 1999.

Table 3.2 Some Initial Listing

Requirements for the NYSE

Table 3.2 Some Initial Listing

Requirements for the NYSE

Pretax income in last year

$ 2

500

000

Average annual pretax income in previous two years

$ 2

000

000

Market value of publicly held stock

$60

000

000

Shares publicly held

1

100

000

Number of holders of 100 shares or more

2

000

Source: Data from the New York Stock Exchange Fact Book,, 1999.

Source: Data from the New York Stock Exchange Fact Book,, 1999.

Table 3.3 Average Daily Trading Volume in National Stock Markets, 1999

Shares traded

Dollar volume

Market

(Millions)

($ Billion)

NYSE

808.9

$35.5

Nasdaq

1,071.9

41.5

Amex

32.7

1.6

Source: NYSE Fact Book, 1999, and www.nasdaq.com.

Source: NYSE Fact Book, 1999, and www.nasdaq.com.

72 PART I Introduction

Other new sources of competition for the NYSE come from abroad. For example, the London Stock Exchange is preferred by some traders because it offers greater anonymity. In addition, new restrictions introduced by the NYSE to limit price volatility in the wake of the market crash of 1987 are viewed by some traders as another reason to trade abroad. These so-called circuit breakers are discussed below.

While most common stocks are traded on the exchanges, most bonds and other fixed-income securities are not. Corporate bonds are traded both on the exchanges and over the counter, but all federal and municipal government bonds are traded only over the counter.

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