Discuss the evolution of the securities markets, including the impact of NASDAQ, CME, ECNs, and foreign exchanges.
Explain the role of securities markets in the efficient allocation of capital among issuers and investors based on the efficient market hypothesis.
Evaluate if the presence of dark pools enhances or reduces capital market efficiency.
Finally, find a real-life company that has raised capital in 202N and discuss the method used. If possible, try to select a company that a fellow student has not already selected.
ECNs (Electronic Communication Networks): Emerging in the 1990s (like Instinet and Island), ECNs are computerized systems that automatically match buy and sell orders at the best available price. They operate as alternative trading venues, bypassing traditional exchanges and market makers. ECNs intensified competition, leading to tighter bid-ask spreads (lower transaction costs) and greater anonymity for traders, which directly paved the way for modern algorithmic and high-frequency trading.
Foreign Exchanges: Globalization and technology (facilitated by ECNs and electronic platforms) made it easier for international companies to cross-list on major global exchanges (like NYSE or London Stock Exchange) and for investors to trade foreign securities. This created a global capital pool, increasing liquidity and competition between exchanges worldwide.
Role of Securities Markets and the Efficient Market Hypothesis (EMH)
Securities markets play a critical role in the efficient allocation of capital by acting as an information-processing mechanism, a concept formalized by the Efficient Market Hypothesis (EMH).
Sample Answer
The evolution of securities markets has been a radical shift from physical trading floors to highly automated, fragmented electronic systems, dramatically changing how capital is priced and allocated.
Evolution of the Securities Markets
The transition has been driven primarily by technology and a push for greater efficiency, lower costs, and increased competition.
NASDAQ (National Association of Securities Dealers Automated Quotation): Launched in 1971, NASDAQ was the first fully electronic stock market. It replaced the over-the-counter (OTC) manual trading with a computerized quotation system that displayed real-time bid/ask prices from multiple market makers. This breakthrough introduced screen-based trading, eliminated the need for a physical trading floor, and accelerated the growth of the technology sector, which heavily favored listing on the new, innovative exchange.
CME (Chicago Mercantile Exchange) / Globex: The CME, originally a commodity exchange, pioneered the electronic trading of futures and derivatives. Its Globex platform, launched in 1992, allowed for 24-hour electronic trading of futures contracts globally. This brought commodities and derivatives into the electronic age, significantly enhancing risk management capabilities and global price discovery outside of standard business hours.