Federal Regulation of Securities
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Description
The capital markets of the United States provide mechanisms for the purchase and sale of instruments, broadly known as securities, which represent claims of a contractual nature against the company that sells or issues the instrument and which is generally referred to as the ‘issuer’. Equity and debt instruments which can have standardized characteristics, and thus can be widely traded by the public, are used by business enterprises as sources of funds. The use of securities represents one of the available financing devices to corporations generally, regardless of whether the instruments are publicly tradable. There are many marketable (but not widely traded) securities that have terms which are individually tailored to particular transactions or interests. Because one or more classes of security (usually stock) will also possess the power to vote, securities may also be designed and issued for the purpose of allocating control of the entity. There are several different types of public markets for securities in the United States. Stock exchanges are the oldest public markets. They are private enterprises, with members who buy their memberships in the form of ‘seats’. The issuer of securities which are to be traded on a stock exchange must meet the listing requirements of the exchange, enter into a contract with the exchange, called a ‘Listing Agreement’, and pay listing fees to the exchange. Listing requirements typically include a minimum amount of assets, a minimum number of shares outstanding, and certain governance structures. Public trading of securities off the exchanges is done in the ‘over-the-counter’ (OTC) market. The principal OTC market is NASDAQ, the National Association of Securities Dealers Automated Quotation System, which is divided into several tiers, the largest of which is the National Market System. NASDAQ is run by the NASD, which is a trade association composed of virtually all the brokers and brokerage houses in the United States The stock exchanges and the NASD support themselves by member fees and ‘listing fees’ paid by companies whose securities they trade. The primary source of profits to members of both the stock exchanges and the NASD is the money they make from trading securities, either for their customers or for their own accounts. The greater the number of listings a market has, or the bigger the listings in terms of company size and market capitalization, the greater the trading volume is likely to be, and the more money the members will make. As a result, there is considerable competition among the various markets for listings. The stock exchanges, of which the New York Stock Exchange is the largest in the United States, are called ‘auction’ markets. All buyers' and sellers' orders are brought together in a single place and are matched in an auction-type setting, resulting (theoretically, at least) in the best price to the parties, and in the least volatility in prices because any particular price change should be only an incremental change from the prior price. To facilitate this auction, the exchanges have firms called ‘specialists’ through whom all buy and sell orders flow. Each listed security is assigned to a particular specialist. Although the specialist doesn't have to be involved in all matches between buyers and sellers, it can be and it must be there to ‘create an orderly market’ when there are temporary order imbalances. Thus, if there are more buyers than sellers for a few hours, the specialist is required to sell shares of the stock as a principal (rather than a broker) to keep the market from swinging wildly. Most transactions on the exchanges, however, are done by brokers who act as agents for customers and are paid through commissions on the sales. Transactions on the exchanges are reported as they occur, so the actual sales price for the last prior transaction is easily available. Unlike the exchanges, the over-the-counter markets do not have a centralized trading location. Instead, transactions are executed over phone lines and on computer screens. These markets are ‘dealer’ markets, because each trade is executed with a dealer (a market professional acting as a principal) on one side, whose profit is not a commission, but a ‘spread’. NASDAQ has moved to real-time trade reporting, so trades are reported as they are on the exchanges.
Source Publication
Fundamentals of American Law
Source Editors/Authors
Alan B. Morrison
Publication Date
1996
Recommended Citation
Scott, Helen S., "Federal Regulation of Securities" (1996). Faculty Chapters. 1260.
https://gretchen.law.nyu.edu/fac-chapt/1260
