Trading Procedures in Financial Markets

Topics: Stock exchange, Stock market, Trade Pages: 2 (505 words) Published: July 23, 2013
Trading Procedures in Financial Markets:

A huge volume of trading occurs in the secondary markets. Although there are many secondary markets for a wide variety of securities, we can classify their trading procedures along two dimensions: location and method of matching orders.

Physical Location versus Electronic Network
A secondary market can be either a physical location exchange or a computer/ telephone network. For example, the New York Stock Exchange, the American Stock Exchange (AMEX), the Chicago Board of Trade (the CBOT trades futures and options), and the Tokyo Stock Exchange are all physical location exchanges. In other words, the traders actually meet and trade in a specific part of a specific building. In contrast, Nasdaq, which trades a number of U.S. stocks, is a network of linked computers. Other network examples are the markets for U.S. Treasury bonds and foreign exchange, which are conducted via telephone and/or computer networks. In these electronic markets, the traders never see one another except maybe for cocktails after work. By their very nature, networks are less transparent than physical location exchanges. For example, credit default swaps are traded directly between buyers and sellers, and there is no easy mechanism for recording, aggregating, and reporting the transactions or the net positions of the buyers and sellers.

Matching Orders
The second dimension is the way orders from sellers and buyers are matched. This can occur through an open outcry auction system, through dealers, or by automated order matching. An example of an outcry auction is the CBOT, where traders actually meet in a pit and sellers and buyers communicate with one another through shouts and hand signals. In a dealer market, there are “market makers” who keep an inventory of the stock (or other financial instrument) in much the same way that any merchant keeps an inventory. These dealers list bid and ask quotes, which are the prices at which they are...
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