The CFTC was created by the Commodities Futures Trading Commission Act of 1974. Some of the things that it regulates seem very similar to things regulated by the SEC. A trader seeking broad exposure to the market, for example, might buy an S&P Index ETF (an exchange-traded fund, regulated by the SEC) or go long a stock index futures contract (regulated by the CFTC). The similarities are strong enough that we might expect agreement about how the market should be organized and regulated. In practice, though, the ETF and the futures contract are traded under substantially different rules, and regulatory philosophies differ significantly. In the European Union, securities overseen by the Europe an Commission’s Internal Market and Services Directorate General, Directorate G – Financial Markets. The overarching regulation is the Markets in Financial Services Directives 2 (“MiFID 2”). Much authority still resides with the exchanges and their home countries. Summary of terms and concepts Exchanges; listing; brokers (retail, prime, discount, full- service); “make or take”; hit the bid/lift the offer; active vs. passive/resting/standing; liquidity (immediacy, breadth, depth, resiliency); transparency (pre- and post-trade), latency; SEC; 1933 Act; primary market; 1934 Act; secondary market; CFTC; FINRA.
Chapter 3. Floor Markets Many of today’s securities markets started as floor markets. A floor market is simply some central place where people go to trade. The facilities can be modest. The New York Stock Exchange op- erated for a while in the Tontine Coffee House (a sort of precursor to Starbucks). The American Stock Exchange started as the New York Curb Market, operating on the sidewalk outside of the NYSE’s buildi ng. On the floor, the traders meet face to face. They negotiate, bargain, and attempt to reach agreement on terms of trade. A trade is not inevitable: the attempt at agreement might break- down, and then someone walks away. Although most trades are bilateral (one buyer, one seller), the negotiation takes place in a crowd. Everyone can see and hear the proposed terms of trade. Anyone can jump in, perhaps displacing a buyer or seller who has dominated the negotiation up to that point. As a financial institution , “the floor” reached the zenith of its scope and power in the last half of the twentieth century, when it dominated stocks, futures and options. At the end of the century, however, most markets transitioned to screen-based electronic trading, and floors closed. The London Stock Exchange closed its floor in 1992; The Chicago Mercantile Exchange closed its trad- ing pits in 2015. At this point, the transition is nearly complete. The era of floor markets is over. So why study them? There are several reasons. Most importantly, many trading practices, rules, and regulations arose in floor markets, and are best understood in the context of a floor market. An electronic market will sometimes exhibit behavior that at first glance looks like some- thing completely new because it embodies advanced technology (particularly when that technol- ogy features speed). But then on closer examination, it becomes more familiar, an adaptation of
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