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18 Cards in this Set

  • Front
  • Back
What is the major distinction of the secondary market?
issuer of the asset does not receive funds from the buyer; gives issuer information about the value of the asset; offers liquidity and information
What are examples of secondary markets?
1. stock exchanges; specific locations
2. over-the-counter or OTC market, like Nasdaq and LSE; traders linked via telecommunication
What does it mean that many secondary markets are continuous?
prices determined continuously throughout the day as buyers and sellers submit orders; prices may vary because of differences in order flows not supply and demand
What is a call market?
orders are batched or grouped together for simultaneous execution at the same price (fix price); market maker holds an auction; NYSE begins trading at 9:30 with a call auction
What is a perfect market for a financial asset?
number of buyers and sellers is sufficiently large, no single individual is large enough to influence the commodity's price; all price takers, price determined by supply and demand; no frictions; product usually has to be homogenous for a perfect market (corn or wheat)
What are frictions?
transaction costs; commissions charged by brokers, taxes, bid-ask spreads charged by dealers, costs of acquiring information, restrictions to market makers, restrictions and regulations on how much a buyer can buy and a seller sell
What does a broker do?
receives, transmits, and executes investor's orders with other investors
What is the price of immediacy?
when buyers and sellers do not want to wait for the arrival of sufficient orders on the other side of the trade; transact at a price other than the consensus price
What does a dealer or market maker do?
stands ready to buy and sell a security and provide price stability in the presence of short-term order imbalances; provide reliable price information and bring order and fairness to a market
What are limit orders?
orders that are executed only if the market price of the asset changes in a specified way
What does an auctioneer do?
provides order and fairness but does not take a position in the traded asset as a dealer in a continuous market does
What are the risks of a dealer's position?
1. uncertainty of future price of the security
2. how thick is the market? when can he unwind a position
3. other traders may have better information
What is an operationally (or internally) efficient market?
transaction services are cheap
What is a pricing (or externally) efficient capital market?
market where prices at all times fully reflect all available information
What is an active strategy?
investors seek to capitalize on what they perceive to be the mispricing of a security
What is indexing?
policy of matching the performance of some financial index from the market
How does electronic trading help a market?
1. provides liquidity
2. price discovery
3. utilization of new technologies
4. trading and portfolio management efficiencies
What is short sale?
the sale of an asset that the seller has borrower and must repay to the lender