Discuss the evolution of the securities markets, including the impact of NASDAQ, CME, ECNs, and foreign exchanges.
Explain the role of securities markets in the efficient allocation of capital among issuers and investors based on the efficient market hypothesis.
Evaluate if the presence of dark pools enhances or reduces capital market efficiency.
Finally, find a real-life company that has raised capital in 202N and discuss the method used. If possible, try to select a company that a fellow student has not already selected.
ECNs (Electronic Communication Networks): Emerging in the late 1990s, ECNs are automated trading systems that match buy and sell orders electronically. They act as alternative trading systems (ATSs) to traditional exchanges, offering institutional and high-frequency traders greater speed, anonymity, and the potential for better price execution (by matching orders at the bid or ask midpoint). They significantly contributed to market fragmentation and the democratization of trading technology.
Foreign Exchanges: Globalization has integrated markets, allowing foreign corporations to list shares on major U.S. and other international exchanges (and vice-versa). This increased capital mobility, enabling firms to raise funds from a wider pool of global investors and allowing investors to diversify their portfolios internationally. Major exchanges like the London Stock Exchange (LSE), Tokyo Stock Exchange (TSE), and Euronext are now interconnected with global capital flows, fostering worldwide competition and standardization in listing and regulatory requirements.
Sample Answer
Evolution of Securities Markets
The evolution of securities markets has been marked by a profound shift from physical trading floors to electronic, automated platforms, driven primarily by technological innovation and globalization.
NASDAQ (National Association of Securities Dealers Automated Quotation System): Founded in 1971, NASDAQ was the first electronic stock market. It revolutionized trading by moving away from the traditional, physical auction system (like the NYSE) to a screen-based, dealer-driven market. Its impact was to enhance speed, transparency, and competition among market makers, which ultimately lowered the bid-ask spread for many stocks and paved the way for fully electronic trading.
CME (Chicago Mercantile Exchange): While traditionally a commodities exchange, the CME Group (which includes the Chicago Board of Trade, CBOT) is central to the evolution of derivatives markets. Its shift to electronic trading, notably with the Globex platform, globalized futures and options trading, extending trading hours and increasing accessibility. This introduced sophisticated risk management and speculative tools to a broader international audience.
ECNs (Electronic Communication Networks): Emerging in the late 1990s, ECNs are automated trading systems that match buy and sell orders electronically. They act as alternative trading systems (ATSs) to traditional exchanges, offering institutional and high-frequency traders greater speed, anonymity, and the potential for better price execution (by matching orders at the bid or ask midpoint). They significantly contributed to market fragmentation and the democratization of trading technology.