Security markets exist to aid the allocation of capital among households, corporations, and governmental units, with financial institutions acting as intermediaries
Brianna Mortel
“Security markets exist to aid the allocation of capital among households, corporations, and governmental units, with financial institutions acting as intermediaries” (Block et al., 2019, pg 461, para 8). Capital markets are divided into specialties with each market serving a different type of security such as NASDAQ. Securities markets and trading has a long history. “Historically, exchanges have had a central trading location where securities are bought and sold in an auction market by brokers acting as agents for buyers and sellers” (Block et al., 2019, pg 462, para 4). These trades started at a physical location, a trading post. One of the largest traditional trades with a physical location is NYSE (New York Stock Exchange). Then came in the electronically trading platform, known as ECN or Electronic Communication Network. “ECNs are electronic trading systems that use computers to automatically match buy and sell orders” (Block et al., 2019, pg 463, para 2). Because of the convenience and cost advantage to an ECN, it became a major competitor to traditional exchanges. So, NYSE and the NASDAQ acquired ECNs. Now, all trades on NASDAQ are done electronically with no physical location. “Like the NYSE, the NASDAQ Stock Market has gone through a transformation from a not-for-profit company to a for-profit company” (Block et al., 2019, pg 465, para 1). As the world continues to grow, so does capital and security markets across the world. This increases the popularity of foreign exchanges. Many large U.S. international companies trade on Tokyo and Frankfurt stock exchanges with many foreign companies trading on U.S. stock exchanges. One more growing stock exchange is the CME. “One of the largest futures exchanges is the CME Group, which was created in 2007 from the merger of the Chicago Mercantile Exchange (CME) and the Chicago Board of Trade” (Block et al., 2019, pg 465, para 2). This exchange has grown so large over the last decade that it is beginning to rival traditional stock exchanges.
Markets in general are efficient when “(1) prices adjust rapidly to new information; (2) there is a continuous market, in which each successive trade is made at a price close to the previous price (the faster the price responds to new information and the smaller the differences in price changes, the more efficient the market); and (3) the market can absorb large dollar amounts of securities without destabilizing the prices” (Block et al., 2019, pg 467, para 1). The problem with efficiency is that if a stock market is efficient, it makes it difficult for investors to select portfolios to invest in. That is where the efficient market hypothesis is formed and can be broken down into three forms the weak, semistrong, and strong. A market is generally considered efficient in the weak and semistrong category, but not in the strong category. The general idea is that new laws must be created for securities markets as technology continues to advance. This is because as technology advances, the ability for information to be dismantled and accessed is easier when adjusting stock prices and therefore these laws are forcing fuller discloser of corporate data.
Dark pools are similar to the dark web in that it is not accessible to the general public. It’s where securities are traded in concealed ways such as hidden prices. For large corporations and hedge fund managers, the dark pool is ideal to trade in as you “can hide your trades from other institutional investors…restrict participants such as high-frequency traders from entering the pool…get more efficient executions and lower transaction costs” (Block et al., 2019, pg 468, para 3). The concern is obviously the lack of transparency and the liquidity being taken out of public markets. I don’t have enough knowledge on the subject to know if this enhances or reduces capital market efficiency. It feels border-line unethical even though no laws are being broken. My assumption is that if it isn’t illegal, then it cannot be reducing capital market efficiency by too much, otherwise it would’ve been restricted by the government by now.
Given the pandemic in 2020, raising capital couldn’t have been an easy task. Yet many companies were able to. One such company is Reliance Jio, an Indian telecom network. According to Kunthara (2021), Reliance Jio raised approximately $20 billion in 2020 with many notable tech investors such as Facebook, Google and Intel. “Google, for example, is partnering with Jio Platforms to develop and ‘entry-level affordable smart phone’ that’s optimized for the Google Play Store and Android operating system” (Kunthara 2021, para 4). My guess is that many large companies want to get into the Indian market, but with the strict regulations India has, it’s been incredibly difficult to do. We learned this through our Walmart venture and Walmart’s massive failure penetrating the Indian market. Investing is a great step forward in that market. Furthermore, you can never go wrong with new tech companies.
Resources
Block, S. B., Hirt, G. A., & Danielsen, B. R. (2019). Foundations of financial management (17th ed.). McGraw-Hill Higher Education.
Kunthara, S. (2021, February 4). These were the largest funding rounds of 2020. Crunchbase News. https://news.crunchbase.com/news/largest-funding-rounds-of-2020/.
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