The Theory and Practice of Investment Management: Asset Allocation, Valuation, Portfolio Construction, and Strategies, Second Edition

THE U.S. EQUITY MARKETS

The U.S. equity markets have undergone considerable change in recent years. Traditionally, the U.S. markets have been driven by two exchanges, the New York Stock Exchange (also called “the Big Board”) and Nasdaq (the acronym for the National Association of Securities Dealers Automated Quotation System).

An exchange is typically defined as a market where intermediaries meet to deliver and execute customer orders. There are, however, some off-exchange markets which perform this function. In the United States, exchanges must be registered with the Securities and Exchange Commission (SEC). The U.S. markets have been based on two different market models. The first model is “order-driven,” in which public participants who are owners of securities meet and provide buy and sell orders (“orders”) and via an auction system which establishes market prices at which other public participants can trade. This mechanism is an auction-based, order-driven market. The second model involves intermediaries, referred to as market makers or dealers, who provide quotes (bid quotes to buy and offer quotes to sell) at which market participants can trade. This mechanism is a dealer-based, quote-driven market.

The NYSE has been mainly an order-driven, auction market. The NYSE has not, however, been purely an order-driven market because it provides “specialists” for each stock who function as dealers for their allocated stocks and buy or sell these stocks for their own account ...