This Week In Finance

"NYSE vs. Nasdaq: Round 1"

How the world changes! Remember the good old days when we would tell students that the NYSE is home to the stocks of big, well-established firms, and the Over-the-Counter market consisted primarily of the stocks of small, risky firms? (If you're really old, you might even have told students that the OTC market was home to most banking and insurance company stocks. Well pull up a rocker, Grampa, things have changed!)

The front page of the Friday, February 26th issue of The Wall Street Journal contains a long story which should be required reading for Corpfin students trying to understand how the financial markets work (and how they have continued to evolve).

Entitled "Floor Plan: Big Board Seeks a Way to Trade Nasdaq Stocks, Probably Electronically," the article does a wonderful job making several good points with which discussions can be generated.

First, while the NYSE continues to dominate domestic equity trading, several competitors are nibbling away at that dominance. For example, the rise of "ECNs" (Electronic Communications Networks) such as Instinet, Tradebook, and Brut have facilitated off-hours trading by institutional investors and, interestingly, provide for trading in stocks regardless of where they are listed.

The onset of online trading by individuals has also impacted the Big Board. As the article notes: ". . . the mere fact that [the NYSE] is considering such extraordinary moves is testament to the magnitude of changes sweeping through the global financial markets. Technology is giving the smallest investor the trading tools and market access traditionally reserved for big institutions. Demand is growing to trade stocks in any venue and time zone, regardless of the market on which they are listed." (emphasis added.)

Finally, the article points out that Nasdaq also faces pressures, not the least of which are the result of competition from ECNs, as well as the recent move to to one-sixteenth minimum bid-offer spreads from one-eighth spreads.

In short, I used this article as a jumping-off point for questions to determine how much my students knew about the financial markets, as well as a means of explaining terms and generating discussion.

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