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Secondary Financial Market Places

ArticleID 106  
Writer Isaac Thuku
Category Personal Article


There are three main types of secondary market places:

• Organized security exchanges.

• Over-the-counter markets.

• Alternative trading system.

An organized security exchange provides the facility for the members to trade securities, and only exchange members may trade there. The members include brokerage firms, which offer their services to individual investors, charging commissions for executing trades on their behalf. Other exchange members by or sell for their own account, functioning as dealers or market makers who set prices at which they are willing to buy and sell for their own account. Exchanges play very important role in the modern economies by performing the following tasks:

• Supervision of trading to ensure fairness and efficiency.

• The authorization and regulation of market participants such as brokers and market makers.

• Creation of an environment in which securities’ prices are formed efficiently and without distortion.

• Organization of the clearing and settlement of transactions.

• The regulation of his admission of companies to be listed on the exchange and the regulation of companies who are listed on the exchange.

• The dissemination of information (trading data, prices and announcements of companies listed on the exchange). Investors are more willing to trade if prompt and complete information about trades and prices in the market is available.

The over-the-counter (OTC) market is not a formal exchange. It is organized network of brokers and dealers who negotiate sales of securities. There are no membership requirements and many brokers register as dealers on the OTC. At the same time there are no listing requirements and thousands of securities are traded in the OTC market. OTC stocks are usually considered as very risky because they are the stocks that are not considered large or stable enough to trade on the major exchange.

An alternative trading system (ATS) is an electronic trading mechanism developed independently from the established market places – security exchanges – and designed to match buyers and sellers of securities on an agency basis. The brokers who use ATS are acting on behalf of their clients and do not trade on their own account. The distinct advantages of ATS in comparison with traditional markets are cost savings of transactions, the short time of execution of transactions for liquid securities, extended hours for trading and anonymity, often important for investors, trading large amounts.
Secondary Financial Market Places
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