AMEX vs NASDAQ - Similarities and Differences - Assignment Example

Financial Management A comparison of AMEX and NASDAQ Part One Amex (American Stock Exchange) The AMEX is an order-driven continuous auction market. Amex serves to be the prime focus of individuals or small investors but institutional investors are also active. “Amex employs a wide variety of listed equities, an extensive options market, and an unrivaled listing of more than 100 exchange traded funds (ETFs), the securities category pioneered by the American Stock Exchange.” [1] [5] NASDAQ (National Association of Securities Dealers Automated Quotations System) NASDAQ is an American stock market founded in 1971 by the National Association of Securities Dealers (NASD). It is owned and operated by The NASDAQ Stock Market, Inc. the stock of which was listed on its own stock exchange in 2002. NASDAQ is the largest electronic screen-based equity securities market in the United States, listing over 3,200 companies and on average trades more shares per day than any other U.S. market. [2] Similarities: To start off both Amex and NASDAQ are companies that are based on the stock market. Both handle major clients and conduct transactions with many different exchanges. Both also deal with the buying and selling of stocks. As regards to the popularity each is widely known and capitalizes on their investors. [5] Differences: While similarities exist, both corporations do have obvious differences. The major point of difference is that Amex uses floor exchange methodology; specialist system with a centralized limit order book while NASDAQ employs an electronic listing of competing dealer quotes. This difference leads on to other differences such as transaction processing time (slower in the case of Amex) and efficiency. [3] [4] As mentioned earlier the AMEX is an order-driven continuous auction market, the foundation stone of which are the market makers or “specialists”. The work of the specialists is to facilitate continuous trading by posting quotes for their own account or by offering the best quotes on their limit order book, which represent a centralized depository for limit orders to buy or sell stocks at specified rates or better. Limit orders provide immediate liquidity and their importance on the AMEX can be judged by the fact that nearly 88% of the volume on AMEX arises from trades in which the specialists do not participate for their own account. But specialists in the AMEX are not allowed to trade ahead of limit orders at the same prices so their quotes usually reflect the limit order book. The result is temporarily stale limit prices (in the initial stages) after public announcements. This slow updating of limit orders can delay revisions in the best bid and ask quotes. [3] [4] In contrast to the AMEX market, the NASDAQ employs an electronic listing of competing dealer quotes in which each dealer continually posts firm bid and ask quotes on an electronic screen. [2] There is no central limit order book on NASDAQ, although limit orders may be left with individual broker-dealers. However limit orders on NASDAQ do not drive the posted quotes since dealers are not required to consider limit orders in setting their quotes. Also, the effect of dealer competition is reduced by rules allowing directed order flow to less competitive dealers who agree to meet the best quotes. NASDAQ dealers can not rely on the limit orders of other investors and must post firm bid and ask quotes for minimum 1000 shares. Since NASDAQ dealers have monetary incentive to revise their quotes immediately following public announcements, even in the absence of trades. [3] [4] The WorldCom Scandal: Even the stock exchange community is not beyond scandals. One such scandal that astounded the international stock exchange community in general and the U.S stock exchange community in particular occurred in September 2002 when five corporate executives (former WorldCom chief executive Bernard Ebbers, Qwest chairman Philip Anschutz, former Qwest CEO Joseph P. Nacchio, Metromedia Fiber chairman Stephen Garofalo and former McLeod CEO Clark McLeod) were sued by New York State Attorney General Eliot Spitzer for repayment of funds acquired through profiteering in Initial Public Offerings (IPOs) and phony stock ratings given by Salomon Smith Barney’s analyst Jack Grubman in return for investment banking business. Executives at WorldCom exercised various methods of hiding expenses for a period of more than two years between 2000 and 2002. They delayed reporting some expenses and misrepresented others to give investors the appearance of growth during secretly hard times. The investigations ended in December 2002 with a settlement that included millions of dollars in fines and some restrictions. [9] Ebbers was ousted as CEO in April 2002 and replaced by John Sidgmore, former executive of UUNet Technologies, Inc. [8] WorldCom was US’s second largest long distance phone company behind AT&T. growing largely by acquisitions, most notably MCI Communications. The company filed for bankruptcy in 2002 and changed its name to MCI in April 2003. The company emerged from bankruptcy in 2004 with about $5.7 billion in debt and $6 billion in cash. About half of the cash was intended to pay various claims and settlements. Bernard Ebbers was sentenced to 25 years in prison. Part Two: 1- What are the economic functions financial intermediaries perform? Economic Functions of Financial Intermediaries: Creating liquidity: Borrowing short (ready to repay), lending long Minimizing cost of obtaining funds: Spreads activity over borrowers Minimizing cost of monitoring borrowers: Household don’t need to monitor lending of money to a firm Providing means for pooling savings: Banks, mutual funds, pension funds and the like pool resources of individuals for investment in large-scale projects. Pooling risk (mitigate): Using pooling to promote efficient risk-sharing by providing small savers with a level of diversification that would otherwise be impossible. Information: Promoting exchange of information among self-interested parties. 2- What is the role of broker in the financial market? The broker is a financial intermediary, so in essence it provides all the services that are listed as answer to the first question. The broker lends money to its clients for the purchase of stocks (on similar terms as a bank would). On the other hand the broker itself reduces the cost of obtaining funds by spreading the cost over a large number of clients. The broker executes securities’ transactions on client’s behalf. Providing accurate information and competent advice to investors is also part of the broker’s job. [6] 3- How has that role changed since the inception of on-line investing? Even after the advent of internet and on-line investing/brokerage firms the basic role performed by the broker has not changed. What has changed is the way these roles are now performed. Increasing complexity in markets and the consolidation of securities listings have been a boon for brokers and investors alike but at the same time the dissemination and delivery of increasingly complex information is now the domain of computers, which provide accurate information in a fraction of the time. Hence the impact of online investing is likely to involve reshaping and restructuring, rather than simple displacement of legacy brokerage houses. [6] Works Cited 1. www.amex.com Accessed on 20/07/06 2. www.nasdaq.com Accessed on 20/07/06 3. AMEX. American Stock Exchange. Constitution. Article I. Retrieved 20/07/06 from http://wallstreet.cch.com/AMEXtools/PlatformViewer.asp?SelectedNode=chp_1_1_1&manual=/AMEX/constitution/AMEX-constitution/ Cybo-Ottone 4. Recent Development in the Structure of Securities Markets. Brookings-Wharton Papers on Financial Services 2000 (2000) 223-273. Retrieved 20/07/06 from http://muse.jhu.edu/demo/brookings- wharton_papers_on_financial_services/v2000/2000.1cybo-ottone.html 5. Finance Professor.com. 2002. Stock Markets. Retrieved 20/07/06 from http://www.financeprofessor.com/fin322/notes/stockmarkets.html 6. Smart Investing. 2004. A short history of Wall Street. Retrieved 20/07/06 from http://www.stocks-investing.com/stock-market-history.html 7. http://www.stockmarketinvestinginfo.com/smi_mainplayers_add_2.html Accessed on 20/07/06 8. WorldCom News. 2006. Questions, answers and updates. 20/07/06 from http://www.worldcomnews.com/ 9. “Fact Sheet”, Retrieved on 20/07/06 from www.sec.gov/news/speech/factsheet.htm Read More