chapter 12 note - Omar M Al Nasser Ph.D MBA Visiting...

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Omar M. Al Nasser, Ph.D., MBA. Visiting Assistant Professor of Finance School of Business Administration University of Houston-Victoria Email: alnass[email protected] Chapter 12 Market Microstructure and Strategies Outline Stock Market Transactions Placing an Order Margin Trading Short Selling How Trades Are Executed Floor Brokers Specialists Effect of the Spread on Transaction Costs Electronic Communication Networks (ECNs) Program Trading Regulation of Stock Trading Circuit Breakers Trading Halts Securities and Exchange Commission (SEC) How Barriers to International Stock Trading Have Decreased Reduction in Transaction Costs Reduction in Information Costs Reduction in Exchange Rate Risk
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POINT/COUNTER-POINT: Is a Specialist or a Market-maker Needed? POINT: Yes. A specialist or a market-maker can make a market by serving as the counter-party on a transaction. Without specialists or market-makers, stock orders might be heavily weighted toward buys or sells, and price movements would be more volatile. COUNTER-POINT: No. Specialists and market-makers do not prevent stock prices from declining. A stock that has more selling pressure than buying pressure will experience a decline in price, as it should. The electronic communication networks can serve as the intermediary between buyer and seller. WHO IS CORRECT? Use the Internet or some other source search engine to learn more about this issue. Offer your own opinion on this issue. ANSWER: While there are some arguments that the specialist and market-maker stabilize the market, yet there is no evidence that they stand ready to buy up stocks that experience major selling pressure. Specialists earn very high incomes according to the very limited public information about their earnings. They would not earn such high incomes if they were in the business only to stabilize the market. There may be some benefits to a specialist or market-maker in facilitating transactions, but specialists do not take positions to prevent a stock from declining. Questions 1. Orders. Explain the difference between a market order and a limit order. ANSWER: A market order is an order to execute a transaction at the prevailing market price. A limit order is an order to execute a transaction only if the price reaches a specified level. 2. Margins. Explain how margin requirements can affect the potential return and risk from investing in a stock. What is the maintenance margin? ANSWER: Margin requirements specify a proportion of funds to be invested that are borrowed versus paid in cash. Borrowing increases the return earned from the investment in a particular stock. However, it also increases the risk, because it magnifies the potential loss (negative return) that could occur as a result of investing in a stock. The maintenance margin is the minimum amount of the margin that must be maintained over the time
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chapter 12 note - Omar M Al Nasser Ph.D MBA Visiting...

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