Ngân hàng, tín dụng - Chapter 6: The structure and performance of securities markets

1Copyright © 2009 Pearson Addison-Wesley. All rights reserved. Chapter 6 The Structure and Performance of Securities Markets Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 6-2 Learning Objectives • Differentiate the types of financial markets including auction, brokered, and dealer markets • Describe the differences and functions of the primary and secondary markets • Understand the function and determination of bid/ask spreads • Explain the efficient market hypothesis and its relevance to the allocation efficiency of financial markets Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 6-3 Nature and Function of Securities Markets • All markets bring sellers and buyers together • Price balances supply and demand for the securities by all potential market participants • Key role of markets is to provide information to buyers/sellers • Markets reduce transaction costs – Buyers and sellers may be unaware of each other – Different locations – Different times 2Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 6-4 Nature and Function of Securities Markets (Cont.) • In real world, prices that approach the true equilibrium is best we can hope for • Security markets are organized to bring buyers and sellers together, so both parties will be satisfied that a fair transaction price has been arranged • Auction Market – Buyers and sellers confront each other directly to set the price – Either a single trade between all parties at a single price or a series of trades at different prices Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 6-5 Nature and Function of Securities Markets (Cont.) • Auction Market (Cont.) – Particular rules of the auction determine exactly how buyers and sellers are matched up. – All buy/sell orders are centralized so highest bidders and lowest offers are exposed to each other – Most popular example of a securities auction market is the New York Stock Exchange • Posts—Specific locations where auctions for individual securities take place • Specialists—Individual designated by the exchange to represent buy/sell orders tendered by customers Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 6-6 Nature and Function of Securities Markets (Cont.) • Brokered Markets – Buyers/sellers employ services of a broker to search for information about the “other side” of the trade – Broker’s role is to provide information – Brokers earn a commission – Real estate brokers—provide information for buyers/sellers of homes – Municipal bonds are traded primarily in a brokered market 3Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 6-7 Nature and Function of Securities Markets (Cont.) • Dealer Markets – Security dealers sell/buy for their own account – Help to stabilize the market – Commit own capital in process of bringing sellers and buyers together – Expect to earn a profit by “buying low and selling high” – Take a risk on a change of price in the securities they own Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 6-8 Nature and Function of Securities Markets (Cont.) • Dealer Markets (Cont.) – Most securities trade in dealer markets • Over-the counter (OTC) – Network of dealers linked together by telephone or computers – Most trades take place in a partially automated electronic stock market called NASDAQ—National Association of Security Dealers Automated Quotation System • New York Stock Exchange is a cross between a dealer market and an auction market. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 6-9 Nature and Function of Securities Markets (Cont.) • Dealer Markets (Cont.) – Organizational structure of a dealer market and technological information keep transaction prices as close to true equilibrium as is economically feasible – Good marketability of a security implies it can be sold, liquidated, and turned into cash very quickly without a collapse in price 4Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 6-10 Nature and Function of Securities Markets (Cont.) • Primary Versus Secondary Markets – Secondary Market • Deal in existing securities (second-hand markets) • Examples—New York Stock Exchange and Tokyo Stock Exchange Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 6-11 Nature and Function of Securities Markets (Cont.) • Primary Versus Secondary Markets (Cont.) – Primary Markets • Deal in newly issued securities • Investment Banks – Distribute newly issued stocks and bonds to investors – Also trade in the secondary market – Dissemination of information to issuer and potential buyers about price and trading – Underwriting—Investment bank guarantees a price on the new issue Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 6-12 Nature and Function of Securities Markets (Cont.) • Primary Versus Secondary Markets (Cont.) – Primary Markets (Cont.) • Investment Banks (Cont.) – Underwriting Spread—Fee earned by investment bankers – Trading in this market is not in a physical market, but electronically or personally between the investment bankers and ultimate investors—usually large institutional investors – Tombstone—Announcements of successful underwritings (Figure 6.1a) 5Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 6-13 Newspaper advertisement (A “tombstone”) An underwriting syndicate floats a new issue. Source: Wall Street Journal, November 26, 2002 Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 6-14 Nature and Function of Securities Markets (Cont.) • Primary Versus Secondary Markets (Cont.) – A close interrelationship between prices and yields on securities in secondary markets and those in primary markets – High prices in the secondary market will generally indicate high prices can be expected with primary issues Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 6-15 Efficiency of Secondary Market Trading • Efficient markets result in a transaction price close to true equilibrium price—highly liquid • Low transaction costs-timely information • Walrasian auction – Auctioneer announces the price and asks buyers/sellers to submit quantities they want to buy or sell – If not equal, auctioneer raises or lowers price until the market clears—quantity demanded is equal to quantity supplied – Exchange occurs at single equilibrium price 6Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 6-16 Efficiency of Secondary Market Trading (Cont.) • Financial markets operate differently with transactions occurring continuously throughout the day at different prices • Dealers (market makers) quote a bid price at which they will buy (seller’s supply curve) and an offer price at which they will sell (buyer’s demand curve) Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 6-17 Efficiency of Secondary Market Trading (Cont.) • Dealer’s objective is to sell inventory that has been purchased before the equilibrium price has an opportunity to change • Since buyers/sellers are concerned that equilibrium price might change before the auction occurs, they may chose to transact at dealer’s bid and offer price. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 6-18 Efficiency of Secondary Market Trading (Cont.) • Measure of Liquidity – Spread between bid and asked prices • Bid Price—What dealer is willing to pay (supply curve) (Figure 6.1) • Asked Price—What sellers are willing to accept (demand curve) (Figure 6.1) – Perfectly competitive markets trade at equilibrium price—bid and asked prices are identical. – Wider bid-asked spreads indicate high transaction costs, lack of information and transaction prices will differ considerable from equilibrium prices 7Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 6-19 FIGURE 6.1 Bid-asked spreads cause actual transactions prices to hover about the true equilibrium price. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 6-20 Efficiency of Secondary Market Trading (Cont.) • Measure of Liquidity (Cont.) – Dealer will quote a narrow bid-asked spread if: • Expected value of transactions is large • Expected risk of large equilibrium price change is low • Competitive pressures from other dealers – Although the spread is shown as a dollar amount, comparison with the price indicates the percentage variation – In general, higher transaction costs for equities result in a larger spread which reflects the greater risk of price fluctuation Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 6-21 Efficiency of Secondary Market Trading (Cont.) • Ability of a market to handle large trades of institutional investors – Does a large buy/sell order shift demand/supply curve and significantly alter the equilibrium price – Characteristics of a stable market—low price volatility • Depth of market—easy to uncover buy/sell orders above and below current prices • Breadth of market—orders above/below current prices exist in large volume • Resilience of market—new orders quickly pour in which prices move up or down 8Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 6-22 Efficiency of Secondary Market Trading (Cont.) • Thin Markets—only a small volume of trading can be absorbed without causing wide price swings • Equilibrium price changes are part of everyday price movement – Reflect basic changes in supply/demand – Readily available information permits traders to continuously monitor prices and quickly enter the market when prices deviate from equilibrium – Contributes to price stability and liquidity Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 6-23 Efficient Capital Markets and Regulation • Efficient Capital market—Current price of a security reflects all publicly available information • Changes in information will cause the demand/supply curves to shift, resulting in a change in the expected equilibrium price • The issue is how quickly does the market absorb new information, resulting in a price change • Can individual investors earn above-average returns by trying to “second-guess” the market? • Security analysts and stock-brokerage firms advertise they can “out-perform” the market Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 6-24 Efficient Capital Markets and Regulation (Cont.) • The Securities and Exchange Commission (SEC) – Established to prevent fraud and promote equitable and fair operations in securities market – Require full disclosure of information that might be relevant for valuing a security – Ban misinformation and dissemination of false or misleading reports – Prohibit the use of insider information for personal gain of individuals, brokers and dealers 9Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 6-25 Efficient Capital Markets and Regulation (Cont.) • The Securities and Exchange Commission (SEC) (Cont.) – Despite the scrutiny of the SEC, investors, and traders—manipulation, fraud, misinformation, and deception still exist in the market – Caveat emptor et venditor—buyers/sellers beware—necessary precautions to ensure market efficiency Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 6-26 TABLE 6.1 Sample Bid and Asked Quotations on Securities