Exchange Market Structure

CFA Level 1 - Securities Markets

Call vs. Continuous Markets

There are two typical structures of a securities exchange. They are:

• Call Markets

A call market is a market where a stock can only trade at a specific time. Bids for the stock are collected and then traded at a specific time and at one price. Because this market trades only at specific times and at one negotiated price, it is typically only used for smaller markets.

• Continuous Markets

A continuous market can occur at any time as long as the market is open. Buyers and sellers are matched up on a continuous basis and the price is determined through an auction or through bid-ask quotes.

Structural Differences Among the Different Markets

While markets and exchanges facilitate the buying and selling of securities, there are some structural differences among them.

• National Stock Exchanges

These exchanges trade numerous issues of diverse shares to a wide number of investors. A national stock exchange operates as an auction market where buyers and sellers are driven by price. The New York Stock Exchange (NYSE) and the American Stock Exchange (AMEX) are examples of national stock exchanges in the U.S. The London Stock Exchange (LSE) is an example of a national stock exchange outside of the U.S. A national stock exchange typically has stringent qualifications a stock must meet in order to be listed.

• Regional Exchanges

A regional exchange is similar to the national stock exchanges except regional exchanges serve smaller markets and typically trade smaller issues. A company that cannot list its shares on a national stock exchange because it does not meet the requirements may choose to list its share on a regional exchange. The Boston exchange is an example of a regional exchange in the U.S.

• Over-the-Counter Markets (OTC)

An OTC market is a less formal exchange. Both listed stocks and unlisted stocks can trade in the OTC market. The OTC market operates as an order- driven market where buyers and sellers submit bids and a dealer buys or sells the stock from his own inventory. Unlike a national exchange where a broker matches buyers and sellers, an OTC market comprises any securities for which there is a market. As a result, the OTC market is also referred to as a negotiated market. In the U.S., the Nasdaq system is used as the quotation system for the OTC market.

It is important to understand the relationship between exchanges and companies and the ways in which the requirements of different exchanges provide protection to investors. For more on the exchanges, review the article: Getting to Know Stock Exchanges

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