The Secondary Markets

There are several stock exchanges in the United States. Two of these, the New York Stock Exchange (NYSE, or the Big Board) and the American Stock Exchange (Amex), are national in scope and are located in New York City. The others, such as the Boston or Pacific stock exchanges, are to a considerable extent regional exchanges, which tend to list firms located in a particular geographic area. There also are several exchanges for the trading of options and futures contracts, which we will discuss later 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 $2,650,000 (in 1999). See Table 3.1 for a history of seat prices since 1875.

The NYSE is by far the largest single exchange. The shares of nearly 3,000 firms trade there, and more than 3,000 stock issues (common plus preferred stock) are listed. Daily trading volume on the NYSE averaged 1.04 billion shares in 2000. The NYSE accounts for about 85-90% of the trading that takes place on U.S. stock exchanges.

The American Stock Exchange also is national in scope, but it focuses on listing smaller and younger firms than the NYSE.3 The national exchanges are willing to list a stock (i.e., allow trading in that stock on the exchange) only if the firm meets certain criteria of size and stability.

stock exchanges

Secondary markets where already-issued securities are bought and sold by members.

3Amex merged with the Nasdaq market in 1998 but still operates as an independent exchange. Amex is home as well to considerable trading in exchange-traded funds, which are securities that represent claims to entire portfolios of stock and which today account for a large share of total trading on the exchange. These products are described in greater detail in the following chapter.

Part ONE Elements of Investments

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