Bienvenidos al Capital Markets

Foundation

ACERCA DE USTEDES

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Basics

What is a stock?
What is an option?
What is the role of an exchange?
Why markets: purpose, function, users

3
Options to raise money
Public vs Private
Rules and Regulations
Listings: IPO, primary vs. secondary market
Market Capitalization
Investor Relations, Earnings Reports

8/29/2014 4
Capital Formation
NYSE Overview/ Market
History
8/29/2014 5
Buttonwood Agreement
May 17, 1792






24 New York stock brokers and
merchants pledge to give
preference to each other
Trading is informal and brokers
meet outside or in coffee houses

First Constitution
March 8, 1817





Formal constitution adopted creating the
New York Stock and Exchange Board
forerunner of todays NYSE
40 Wall St is primary home
30 stocks are traded twice a day
Brokers shout out bids and offers from
chairs assigned to them (seats)
1817
1792
First Permanent Home
1865







Broad St
Over 300 different
stocks and bonds are
traded primarily
banks, insurance
companies and
railroads
Introduction of
Continuous Trading
1871






Simultaneous trading in
all securities
Stocks assigned to
specific locations(posts)
and brokers roam large
open trading floor
1871 1865


Introduction of the Ticker
1867









The stock ticker revolutionized
market communications
narrowing the gap between
Wall St and Main St

1867

NYSEs Current Home
1903








Move to current home
with much larger trading
floor

Next Generation Trading
2010






Designated Market Makers
Floor Brokers
2010
1903

Additional Trading Floors
1922








The Garage was added as an
expanded Trading Floor
1922
Incorporation
February 18, 1971






NYSE incorporates as a
not-for-profit company
Owned and operated
by members
NYSE Euronext
April 4, 2007



Creation of NYSE
Euronext, the first truly
global marketplace group
Euronext includes Paris,
Amsterdam, Lisbon, and
Brussels Exchanges (all
electronic platforms)
NYSE MKT added in 2008
Located in the Garage
Includes both options
and small cap equities
2007
1971
NYSE Group
March 7, 2006




NYSE becomes a for-profit
public company through a
reverse merger with Arca
NYSE Arca is a fully electronic
platform where Exchange
Traded Products are listed
and NYSE, NYSE MKT, and
NASDAQ stocks are traded
2006
Nearly 3,000 companies representing the US and 47
other countries are traded on the NYSE floor (over 4500
issuers globally)
Total market capitalization of approximately $12 trillion
(over $22 trillion globally bigger than the next 4
exchanges combined)
Trading volume on the NYSE averages 1 billion shares
each day in transactions worth over $32 billion

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NYSE Today
http://www.youtube.com/watch?v=UvKU5b2R7oY
8/29/2014 11
Video clip
Evolution of Trading
Impacts of Electronic Market
8/29/2014 13
Importance of Technology
Pros:
Tighter Spreads, Cheaper Executions, Market Efficency
Cons:
Cost of Connectivity, Arms Race for Latency, Market Data
Glitches in the Market
Flash Crash 2010
BATS IPO, Facebook IPO
Knight Trading Crash
Major Regulatory Changes
8/29/2014 14
Regulation ATS 1998
Decimalization 2001
Regulation NMS 2007
NBBO

8/29/2014 15
Washington meets Wall St
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Market Share / Venues
US Market Structure
8/29/2014 17
Buy Side

Buy Side
Institutions that invest
money on behalf of
individuals or institutions.
Ex: Mutual Funds, Pension
Funds, Hedge Funds, Private
Equity, Life Insurance



Cannot access market directly
Can send order to Broker for
brokers to execute
Can access Market via Broker
Sponsored connection
Can cross with other buy sides
avoiding Brokers all together
(liquidNet)
Time Horizon
Typical Orders Profile (Large,
Multi day, benchmarked)
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Sell Side
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Sell Side
Conduit for Buy Side to
reach markets, provide
research and execution
services, routing,
technology.
Investment banks bring
listings to the exchanges
Ex: Multi-asset investment
banks, boutique investment
banks, agency brokerage

(BROKERS)
Full regulatory burden
Need to be licensed
Price and Rebate
sensitive
Sponsored Access
Electronic Market Makers

Electronic Market
Making/Prop
High Frequency Trading
Algorithms
Complexity in pricing
Maker/Taker
Evolution of exchanges








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ELECTRONIC MARKET MAKERS
using technology to gain an edge
Post two sided markets to capture spreads
Extremely high frequency
Technology based
Fast Direct connections to markets via sponsored
access
Fast Market Data Feeds for all markets
Most common order is ISO
high percentage of Market Share
DAY TRADERS
Human Based
Use Fast Access via Optimized front ends
Typically Flat at start of day, Flat at end of day
Momentum end Technical analysis driven
Herd mentality
Very popular in the US during the 2000s
Now primarily flow form overseas
Use direct sponsored access
SPECULATORS
Either using technology to gain an
edge or Use extensive research to
take large positions in advance of
markets movements
Use Sponsored Access to go to
markets
Provide high level of activity in the
market
Highly secretive
Strategies change frequently
ARBITRAGEURS
Take advantage of market
inefficiencies to profit
Time frame can go from
microseconds to months
using technology to gain an edge
Most common are Index Arbitrage
and ETF arbitrage

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Maker Taker Model
How Did It Start?
Competitive Landscape Amongst Exchanges
Who benefits? Economies of Scale, Price Tiers

August 29, 2014 22
Retail
Retail
Ma/Pa flow Big Five (Fidelity, Schwab, Ameritrade,
E*trade, Scottrade)
Basic order types= MARKET & LIMIT
Equity + Options flow= 10-15% of OVERALL market volume
in each asset class
Internalization (most flow does not make it to exchange)

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Where can we see stocks trade?
Dark Pools
Typically, do not public real-time bid/ask information
Derive pricing from public available National Best Bid/Offer
Trading must occur at or inside NBBO
Within the US many large broker-dealers have registered their
own ATS with the SEC.
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Examples of Dark Pools

ATS (Alternative Trading Center) that do not display quotes
publicly
ECNs (Electronic Communication Networks) that allow for
undisplayed liquidity
Internalization by a Broker Dealer
A Trading Center whose reported volume is not separately
identified when it is reported to the Consolidated Tape
August 29, 2014 26
Why Use Dark Pools

Reduced Market Impact
Lower Transaction Fees
Less opportunity for information leakage
Participation is optional
Most Dark Pools owned by Broker Dealers
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We are here to help!
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