Trading Procedures in Financial Markets 23

investors. Thus, if you decided to buy 1,000 shares of AT&T stock, the purchase would occur in the secondary market. The New York Stock Exchange is a secondary market, since it deals in outstanding, as opposed to newly issued, stocks. Secondary markets also exist for bonds, mortgages, and other financial assets. The corporation whose securities are being traded is not involved in a secondary market transaction and, thus, does not receive any funds from such a sale. 7. Private markets, where transactions are worked out directly between two parties, are differentiated from public markets, where standardized contracts are traded on organized exchanges. Bank loans and private placements of debt with insurance companies are examples of private market transactions. Since these transactions are private, they may be structured in any manner that appeals to the two parties. By contrast, securities that are issued in public markets (for example, common stock and corporate bonds) are ultimately held by a large number of individuals. Public securities must have fairly standardized contractual features, to appeal to a broad range of investors and also because public investors cannot afford the time to study unique, nonstandardized contracts. Private market securities are, therefore, more tailor-made but less liquid, whereas public market securities are more liquid but subject to greater standardization. The distinctions among markets are often blurred. For example, it makes little difference if a firm borrows for 11, 12, or 13 months, hence, whether such a transaction is a money or capital market transaction. You should recognize the big differences among types of markets, but dont get hung up trying to distinguish them at the boundaries.

1.8 Trading Procedures in Financial Markets

The vast majority 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. 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 U.S. stocks, is a network of linked computers. Other 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. 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.
Distinguish between (1) physical asset markets and financial asset markets, (2) spot and futures markets, (3) money and capital markets, (4) primary and secondary markets, and (5) private and public markets.

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