As discussed in Chapter 2, secondary markets can be organized either as over-the-counter markets, in which trades are conducted using dealers, or as organized exchanges, in which trades are conducted in one central location. The New York Stock Exchange (NYSE), trading thousands of securities, is the largest organized exchange in the world, and the American Stock Exchange (AMEX) is a distant second. A number of smaller regional exchanges, which trade only a small number of securities (fewer than 100), exist in places such as Boston and Los Angeles.
Organized stock exchanges actually function as a hybrid of an auction market (in which buyers and sellers trade with each other in a central location) and a dealer market (in which dealers make the market by buying and selling securities at given prices). Securities are traded on the floor of the exchange with the help of a special kind of dealer-broker called a specialist. A specialist matches buy and sell orders submitted at the same price and so performs a brokerage function. However, if buy and sell orders do not match up, the specialist buys stocks or sells from a personal inventory of securities, in this manner performing a dealer function. By assuming both functions, the specialist maintains orderly trading of the securities for which he or she is responsible.
Organized exchanges in which securities are traded are also regulated by the SEC. Not only does the SEC have the authority to impose regulations that govern the behavior of brokers and dealers involved with exchanges, but it also has the authority to alter the rules set by exchanges. In 1975, for example, the SEC disallowed rules that set minimum brokerage commission rates. The result was a sharp drop in brokerage commission rates, especially for institutional investors (mutual funds and pension funds), which purchase large blocks of stock. The Securities Amendments Act of 1975 confirmed the SEC's action by outlawing the setting of minimum brokerage commissions.
Furthermore, the Securities Amendments Act directed the SEC to facilitate a national market system that consolidates trading of all securities listed on the national and regional exchanges as well as those traded in the over-the-counter market using the National Association of Securities Dealers' automated quotation system (NASDAQ). Computers and advanced telecommunications, which reduce the costs of linking these markets, have encouraged the expansion of a national market system. We thus see that legislation and modern computer technology are leading the way to a more competitive securities industry.
The growing internationalization of capital markets has encouraged another trend in securities trading. Increasingly, foreign companies are being listed on U.S. stock exchanges, and the markets are moving toward trading stocks internationally, 24 hours a day.