Specialists Create Market Efficiency

Specialists Create Market Efficiency

Length: 875 words (2.5 double-spaced pages)

Rating: Excellent

Open Document

Essay Preview

More ↓
Specialists Create Market Efficiency

The NYSE should not abolish specialists. Both the NYSE and NASDAQ, however, need to realize that their relative trading volumes will continue to deteriorate as ECN's become more and more popular. The need for secondary and third markets will be diminished, however they still offer liquidity, so in some shape or form they will always be fashionable to certain types of investors.

The current system established within NYSE is very old and outdated. For any single trade, a number of players must be involved. First, an investor places a buy or sell order to a broker. The brokerage firm then contacts its commission broker, who is actually on the floor, to consummate the order. In this rigid and time consuming system, the specialist plays a major part in any trade. Any buying or selling in a particular stock takes place at the specialists post. A computer monitor shows all bid and ask prices for a stock in addition to the number of shares they are willing to buy or sell at the given bid ask price. Basically, Specialists execute the trades of other brokers, but they can also buy or sell shares for their own portfolios. When no other broker can be found to take the other end of a trade, the specialist must take the end of the trade where no one else can be found to do so. This is done to create liquidity, and is one of the biggest benefits to this system. Also, this type of trading creates an auction market, where buyers and sellers are together in one location, and the best buy or sell orders win trades. They also act as a dealer when they have to execute a trade when there isn't a buyer or seller available using their own inventory. Again, this is meant to facilitate liquidity. NYSE stocks, until recently, couldn't trade certain NYSE stocks outside of a formal stock exchange, however the NYSE has since abolished this rule. This has created a small trading volume of NYSE stocks over ECN's.

The current system on NASDAQ and most other OTC's incorporates dealers, who offer bid and ask prices to brokers who execute trades based on a listing of the current quotes from dealers. Although this is a very liquid market, dealers typically take a spread from the bid/ask price in exchange for the risk that they incur for holding the security.

How to Cite this Page

MLA Citation:
"Specialists Create Market Efficiency." 123HelpMe.com. 05 Apr 2020
    <https://www.123helpme.com/view.asp?id=48000>.

Need Writing Help?

Get feedback on grammar, clarity, concision and logic instantly.

Check your paper »

The Informational Efficiency of the Stock Market Essay

- Since the existence of stock markets, people tried to formulate models that reflect and deal as a guideline to understand how markets function. The concept of market efficiency is a major and broadly accepted hypothesis that mainly developed since the formulation of the market efficiency hypothesis by Eugene Fama, in 1970. Although the term market efficiency to economists is also a broadly known term referring to operational efficiency, this paper concentrates on the efficiency of stock markets or to be more precise the informational efficiency of the stock market....   [tags: market efficiency, stock market, eugene fama]

Research Papers
1636 words (4.7 pages)

Essay on How Dimensional Leverages Market Efficiency

- How Dimensional leverages market efficiency xxxxxx xxxxxx University of the People Word count Abstract In this paper, we review and explore how the financial services firm Dimensional, leverages market efficiency to their advantage, to their clients’ advantage and to the market overall. How Dimensional leverages market efficiency Dimensional, a global investment corporation with 12 offices and a portfolio of $415 Billion dollars to manage on behalf of their investors. The Father of modern finance on market efficiency, Eugene Fama, is also one of the key people behind Dimensional....   [tags: Investment, Finance, Economic efficiency]

Research Papers
783 words (2.2 pages)

Essay about Specialists are Not Overrated

- The speaker's contention that generalists are more important than specialists is, in some respect, a reflection of the current problems in our society. Specialists are clearly more preferred for very technical or highly specialized fields but, at the same time, the understanding of what we as human species are and where our evolution or the progress is directed does require much broader perspective. First let's acknowledge that specialists are not overrated and sometimes even greater specialization is required in some fields, such as medicine, scientific inquiry or sports....   [tags: specialists, generalists, philosophy, ]

Research Papers
701 words (2 pages)

Essay on Behavioral Finance And Market Efficiency

- Introduction Although, behavioral finance and market efficiency are topics that may seem separate and different, they both work conjointly. Finance has always been imagined to be a subject of numbers, calculations, spreadsheets and everything that encompasses investing. By glancing over the title of this paper, one could assume that the topic is related to a psychology or behavioral class more than finance. However, by researching the topic, it is clear that finance relies on behavioral sciences and psychological understanding more than expected....   [tags: Investment, Finance, Psychology, Risk aversion]

Research Papers
924 words (2.6 pages)

An Examination of the Efficiency of Fair Market Accounting: An Analysis of SFAS No. 115 and SFAS 157

- Throughout the last few decades, a greater emphasis has been placed on fair value accounting rather than employing the lower-of-cost-or-market (LCM) method as a result of issues related to the 1980s Savings and Loan Crisis. Its prominence has been especially pressed in the financial industry including, but not limited to, those employed for banking purposes. Selected occurrences that sparked this marked increase in the fair value approach include accusations that the historical cost method has failed to accurately illustrate financial institutions’ sustainability and health....   [tags: Cost, Market, Finance]

Research Papers
1907 words (5.4 pages)

Empirical Results on Market Efficiency and Its Analysis Essay

- Empirical Results on market efficiency and its analysis During the late 1990s, there existed several market frictions and phenomena unique in the Korean futures and stock markets that would hinder a quick adjustment of market prices to information. In order for futures trading to effectively reduce market frictions in the stock market, it is necessary that information created in the futures market be transmitted to the stock market freely and quickly. When futures trading introduce in Korea in 1996, several market regulations including daily price change limit such as “circuit breakers” and “sidecar system,” restrictions on foreign ownership of Korean stocks, and inactive program trading mad...   [tags: Economics]

Research Papers
918 words (2.6 pages)

Market Efficiency Essay

- Market Efficiency In simple Microeconomics Market efficiency is the unbiased estimate of the actual value of the investment. The stock price can be greater than or less than true value till the time these deviations are arbitrary. Market efficiency also states that even though investor has got any kind of precise inside information will be unable to beat the market. Fama (1988) has defined three levels of market efficiency: 1. Weak-form efficiency Asset prices instantly and completely reflect all information of the previous prices....   [tags: Economics]

Research Papers
2047 words (5.8 pages)

Analysis of Capital Market Efificiency and the Efficient Market Hypothesis

- Capital market efficiency is concerned with assessing the movements of security prices over different time horizons. In this paper, I will briefly discuss capital market efficiency and then finish with an extensive discussion of the Efficient Market Hypothesis (EMH), which is a leading theory in explaining some of the major reasons for fluctuations in security prices. From this perspective, we will examine the three forms of efficiency, supporting and opposing arguments of the EMH, alternative theories, and potential modifications to the model....   [tags: Information Continuum, Liquidity Position]

Research Papers
2757 words (7.9 pages)

The Meaning of the Phrase, Beating the Market Essay

- The Meaning of the Phrase, Beating the Market "Beating the market" is a difficult phrase to analyze. It can be used to refer to two different situations: 1. An investor, portfolio manager, fund, or other investment specialist produces a better return than the market average. The market average can be calculated in many ways (some of which are shady and used to make it look like someone has exceeded market returns), but usually a benchmark like the S&P 500 or the Dow Jones Industrial Average index is a good representation of the market average....   [tags: Beating the Market Stock Markets Essays]

Research Papers
5157 words (14.7 pages)

The Concept of Efficiency Essay

- The Concept of Efficiency This article aims to give an analysis of the concept of efficiency. The importance of such an analysis lies in the fact that the role which efficiency plays in different sectors of our society leads to opposite evaluations resulting in a clash of opinions concerning this role. In order to clarify this situation, I first trace the historical roots of the concept. This brief historical reconnaissance shows that ‘efficiency’ is not a unitary concept. Moreover, I also argue that our use of the concept of efficiency presupposes the decisions which we make with regard to the kinds of costs we recognize....   [tags: Efficiency Philosophy Essays]

Research Papers
3687 words (10.5 pages)

Related Searches

This is a major downside, because why should any investor be willing to be charged a mark up when they can enter into an ECN where there is no actual spread, other than the capital gain or loss the seller is wishing to capitalize or reduce, respectively.

ECN's are an alternative to both NASDAQ over-the-counter markets and stock exchanges for trading securities. The ECN system allows buy or sell orders to be matched with other buy or sell orders within the system. Both sides benefit because this eliminates any bid/ask spread, which can be very expensive. Instead, investors are charged a certain fee per transaction or per share, which is almost always smaller than a dealer's bid/ask spread. Basically, an ECN has eliminated a middleman who takes a profit because it provides an atmosphere of buyers and seller without dealers or a need for a formal trading floor. Additionally, major players on Wall Street such as Charles Schwab, Fidelity Investments, and Donaldson, Lufkin & Jenrette are or have announced joint forms of ECN's. Most of the big Investment Banks such as Goldman Sachs have invested in ECN's. Also, the NYSE is being pressured to incorporate an ECN to trade NASDAQ stocks by the Investment Banks, which as we've seen have big stakes at hand because they have invested in many ECN's. Finally, the advent of ECN's brings many small investors into play. Although currently small investors don't have direct access to ECN's, they can send orders through their brokers who then execute the trade on the ECN. It is widely speculated the future will bring direct access to ECN's for smaller investors, which is a major reason why so many Investment Banks have invested in this business. There are, however some drawbacks. This can lead to markets becoming fragmented. Members in one form of ECN have no other form of reference the prices in other ECN's, or for that matter the prices on NASDAQ or NYSE.

In conclusion, there will always be a demand for the NYSE system as we know it and the inclusion of specialists. Each system has it's own strengths and weaknesses. The NYSE is very rigid and time consuming, however specialists create liquidity. OTC's create a spread for a buyer and seller in a market, however it is much faster than an exchange and doesn't require two parties to be on the same floor. ECN's virtually eliminate commissions and spreads, but may create fragmented markets. This is precisely why no single system will completely dominate or be eliminated. Market share of trading volumes among the three major markets will trend towards increasing parity. Collectively the three systems as a whole give the market liquidity because certain types of investors may wish to use a certain market. Competition among the markets gives investors more options and creates market efficiency.
Return to 123HelpMe.com