Thursday, July 12, 2012

Organized and Over-the-counter Securities

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Organized and over-the-counter securities exchanges are similar in that they both deal with the trading of securities such as stocks and bonds. However, they are different in many ways. An organized securities exchange is defined as “A securities marketplace where purchasers and sellers regularly gather to trade securities according to the formal rules adopted by the exchange.” On the other hand, a security is traded over-the-counter (OTC) if it trades in some context other than a organized exchange. The New York Stock Exchange and the Nasdaq stock market are two examples of organized securities exchanges.

In an organized market, trading is done in various ways it may occur on a continuous auction basis, it may involve brokers buying from and selling to dealers in certain types of stock, or it may be conducted through specialists in a particular stock. Some stock exchanges, such as the New York Stock Exchange (NYSE), sell seats (the right to trade) to a limited number of members who must meet eligibility requirements. Stocks must likewise meet and maintain certain requirements or risk being delisted. Stock exchanges differ from country to country in eligibility requirements and in the degree to which the government participates in their management. The London Stock Exchange, for example, is an independent institution, free from government regulation. In Europe, members of the exchanges are often appointed by government officials and have semi governmental status. In the U.S., stock exchanges are not directly run by the government but are regulated by law. Technological developments have greatly influenced the nature of trading. In a traditional full-service brokerage, a customer placed an order with a broker or member of a stock exchange, who in turn passed it on to a specialist on the floor of the exchange, who then finished the transaction. Increased access to the Internet and the increase of electronic communications networks (ECNs) changed the investment world. Through e-trading, the customer enters an order directly on-line, and software automatically matches orders to achieve the best price available without the involvement of specialists or market makers.

The New York Stock exchange is the largest organized securities exchange in the world. The NYSE encourages extensive public involvement in this economic process by serving the interests of the companies, which have listed their securities on the Exchange. More than 1,000 of them listing more than 5 billion shares of stock valued at over $11 trillion. All trading is conducted in full view of the public, and all investors can participate during the trading day and know exactly what is taking place. Membership is obtained by purchasing a seat from an existing member; membership is limited to 1,66 seats. To be listed on the NYSE, a company must earn $ 5 million before taxes, have more than one million shares of stock outstanding, give common stockholders voting rights, and publish periodic financial statements.


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NASDAQ is the worlds largest electronic stock market. Nasdaq began as a quotation system, but has now grown to become an organized securities market. It is not limited to one central trading location. Rather, trading is conducted through NASDAQs computer and telecommunications network, which transmits real-time quote and trade data to more than 1 million users in 8 countries. Without size limitations or geographical boundaries, NASDAQs open architecture market structure allows an almost unlimited number of participants to trade in a companys stock. NASDAQ lists the securities of nearly 4,100 of the worlds leading companies. Trading on NASDAQ is not limited to any fixed number of participants. This allows a large number of firms with widely different business models and trading technologies to connect to the NASDAQ network and compete on an equal basis. Rather than forcing investors to go through a single financial firm to buy or sell stocks, NASDAQ links up a variety of competitors and lets participants choose with whom they are going to trade. All firms trading NASDAQ stocks must be certified with the Securities and Exchange Commission (SEC) and registered with NASDAQ and NASD Regulation.

The over the counter market is defined as “A large collection of brokers and dealers, connected electronically by telephones and computers, that provides for trading in unlisted securities” (Brigham & Houston ). In an auction market, exchange members match buy and sell orders as they come in more or less simultaneously. However, when a stock is rarely traded, few buy and sell orders come in, so it is not easy to match them in a reasonable amount of time. Because of this, brokerage firms keep inventories of such stocks, and then try to make a market for them. The stocks are bought when individual investors want to sell, and are sold when investors want to buy. Schedules of fees for buying and selling securities are not fixed in the over-the-counter market, and dealers derive their profits from the markup of their selling price over the price they paid. Many bond issues and preferred-stock issues, including U.S. government bonds, are listed on the New York Stock Exchange but have their principal market over-the-counter. Other U.S. government securities, as well as state and municipal bonds, are traded over-the-counter exclusively. Institutional investors such as mutual funds often trade over-the-counter because they are given volume discounts not offered on the exchanges. The regulation of the over-the-counter market is carried out largely by the National Association of Securities Dealers, which establishes rules of conduct and protects members and investors from abuses.

In conclusion, organized and over-the-counter securities exchanges have their similarities and their differences. The organized securities exchange deals with more frequently traded securities, as opposed to the over-the counter exchange, which deals with the less often traded securities. In organized exchanges the requirements for listing stocks on the exchanges are strict, as opposed to the over-the-counter market. The New York Stock Exchange and NASDAQ were discussed, and are two examples of organized securities exchanges.



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