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1 Stock (Equity) Fundamentals - Pt2 Essential features of pricing, buying, venue (c) 2017 Gary R. Evans. This slide set by Gary R. Evans is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 Intertational License.

2 Topical: The reaction yesterday to the poor Asian market performance on Monday (9/4/17), which in turn was responding to the emerging crisis i in Korea. VIX: The volatility index was up strongly.

3 Alphabet Class A (GOOGL) and Class C (GOOG) stock (and B) Source: bigcharts.com Class A shares get one vote, class C shares get no votes, and class B shares get 10 votes. The issue: should you buy only stocks with voting rights??

4 SNAP - the stock with NO voting rights! Source: bigcharts.com... compared to the S&P 500 since SNAP's inception. But on the other hand SNAP is not going to be in the S&P 500, is it?

5 BABA and the VIE... Should you buy Alibaba, Chinese stocks, or any other Variable Interest Entity (VIE)? The VIE is popular for Chinese tech firms that want to list in the United States, including Alibaba (BABA). But you are not buying common stock when you buy a VIE: In the VIE structure, American stockholders don t own the Chinese company. They just own a company that has some contracts that are supposed to mimic what it would look like to own the Chinese company. You re not buying stock in Alibaba when you buy Alibaba on the NYSE. You re buying a holding company called Alibaba Holdings registered in the Cayman Islands with a claim on some of Alibaba s profits but no actual ownership stake. You don t own shares in the real Alibaba and you don t get a vote in how Alibaba is run, although you do get to share in Alibaba s profits. The danger some observers have noted is that those contractual claims on Alibaba s profits are only enforceable in a Chinese court (because the contract is between the Chinese subsidiary of the Cayman Islands-based holding company and the Chinese incarnation of Alibaba). Will those contracts between the Cayman Islands Alibaba and the Chinese Alibaba be upheld in court? Many experts in Chinese law doubt it. John Ford, "No One Who Bought AlibabaStock Actually Owns Alibaba," The Diplomat, September 24, 2014

6 Order routing Your limit or market order Broker (TDAmeritrade) Exchange (NYSE Arca) (or) Order-flow Market Maker (GSCO - Goldman Sachs) Quotation Service Clearing House

7 Discount/online Brokers Low transactions costs, instant execution ETrade, Ameritrade, Scottrade, TradeKing Traditional full-service "Private clients" charge 1% or so of assets Useful for very large accounts and clueless investors Track record rather motley in 2000 crash. Specialized online Allow exotic online interfaces for day-trades, d options trading, programmed trading strategies Small-market market traditional rip-off brokers for ignorant people

8 Assignment: Peruse Scottrade, E*Trade, TDAmeritrade, Interactive brokers, and Robin Hood 1. Fees for trading 2. Trading platforms 3. Requirements to open an account

9 The primary role of the broker... executing your buy and sell orders... from Chapter 2...

10 Ameritrade Online Trading Screen Enter these Could also be a market order, price box disappears

11 Market order Types of orders An order for the broker to buy a stock at the best possible price. Limit order An order to buy <sell> a stock only if the price falls below <above> some specified price. Example: Buy FEYE at $14.32 or below. Stop loss order (For a stock already owned) Sell at market if the price falls below $ Stop Limit Order Combination of a limit order and a stop order: place a Combination of a limit order and a stop order: place a limit order at X if the stock falls below X (or Y).

12 The distinction between a limit and market order... Figure 2 TDAmeritrade Ticket to Buy 100 shares of INTC with a Market Order (Top) and a Limit i Order (Bottom)

13 Best Bid / Best Ask Best Bid Of the limit orders submitted to buy stock, this is (supposed to be) the highest. This is relevant to you if you are trying to sell the stock with a market order. Best Ask Of the limit orders submitted to sell stock, this is (supposed to be) the lowest. This is relevant to you if you are trying to buy the stock with a market order.

14 National (Protected) Best Bid and Offer [ask] (PBBO) Market and limit orders can be routed by many brokers through many market makers and other major transactors to any one of three primary exchanges in the United States. So how does a single Level II queue and, more important, how does a single Best Bid and Best Ask price emerge from this? Since 1978 an organization called the Securities Industry Automation Corporation (SIAC) has executed a protocol called the Consolidated Quote Plan resulting in the Consolidated Quotation System (CQS). As part of this service CQS identifies the Best Bid and Offer (highest bid and lowest ask), which is disseminated by SIAC to subscribing market participants (including your broker) through the CQS Multicast Line. This. PBBO (protected) quote (formally NBBO) is what you see on an online trading site when you ask kfor a quote. This is also called a Level 1 quote. Normally this system insures that no matter what exchange or network your broker trades through, you will get best bid or best ask on market orders to sell or buy

15 Other terms you should know (from the reading) Round lot Odd lot Block trade Splits Margin account GTD/GTC Day + EXT and purple italicized terms in general from the reading!

16 NASDAQ Level II / DOM Quotations A limit order to buy (sell) will be placed in the bid (ask) queue wherever it belongs. Level II Cisco (CSCO) DOM: Depth of Market - other terms also now used. A market order to buy will (normally) be executed at Best Ask (the top of the ask queue). Vol MPID BID ASK MPID Vol 4 BATS ARCX 1 32 NSDQ PHLX 6 10 ARCX BATS CINN NSDQ GSCO GSCO 9 Market Participant IDs (MPID) Best Buy and Best Ask are shown in yellow. (highest on top) (lowest on top)

17 Typical Level II screen (IB) showing Bid/Ask queue for Intel with Best Bid (35.01) and Best Ak(35 Ask (35.02) at top. Bid queue represents limit orders to buy, Ask, to sell. The Bid queue declines and Ask queue rises. (Sept. 5, 2017) Limit orders make up the queues you are being shown the best order for each exchange or market ktmaker.

18 Clovis Oncology (CLVS) Note the gap between Best Bid and Best Ask. This is why you may want to use limit orders. Note the small volume size compared to INTC. 9/5/ :15 PDT

19 Your teacher s Interactive ti Broker limit order book viewer (now also called the Deep Book) for ARCA (NYSE) and NASDAQ on 9/5/2017, 11:48 AM PDT for INTC. Limit orders to buy are on this side. Unlike Level II, this is a list of all limit orders (except for BATS, which Id don t pay for because eiti is too expensive for the limited information). This costs about $25 per month. Blue is the last price. Limit orders to sell are on this side.

20 Here is Nathan s Famous (NATH), which is far less liquid than INTC. Here are some good exam questions: (1) What is Best Buy? (2) What is Best Ask? (3) Why isn t the last trade price between the two? (4) If you submitted a market order to buy, what price would you pay? (5) If you submitted a limit order to buy for 62.95, what would happen? (6) If you were doing spread arbitrage (see the chapter reading) and wanted to have Best Bid and Best Ask at the same time, how could you do it?

21 More on Limit vs. Market Orders A market order to buy (sell) in an ordinary stock transaction will normally result in the immediate purchase of your stock at Best Ask (Bid). In an orderly market for a liquid stock where there is only a penny spread between bid and ask a market order is suitable. However, in a market for a less liquid stock there is often a wider spread between bid and ask. A limit order priced between bid and ask, or at least no higher than best ask when buying or no lower than best bid when selling, may be more suitable than a market order. In a high-volume volume volatile market when the bid/ask queue is racing, you must use a limit order or you might end up getting a price you really don't want! When trading first day IPOs, options, futures and other derivatives, again you must use limit orders and get very good at doing that. Rule of thumb: if trading gpractice using limit orders even in a stable market when market orders will suffice.

22 Using limit orders... Illiquid Stocks and Big Spreads (and why you must use limit orders sometimes) NATH is still a relatively illiquid stock (only 3,860 shares at 1:45 NYT on Sep 1, 2016 INTC had 13M) so there is a big spread between Bid (48.69) and Ask (49.16) and sometimes the spread is a lot wider than this. This is one of the effects of lack of liquidity (relative trading volume).

23 Your first bit of trading advice: Use limit itorders nearly always, not market orders. You can choose one of three strategies: (1) submit a limit order to buy at best bid ask (49.16), for automatic purchase, or (2) submit a limit order between Bid and Ask, or (3) submit a limit order on down the queue to get a better price than market, with no guarantee of exercise Make sure you watch the videos.

Stock (Equity) Fundamentals

Orange Empire Railway Museum: L.A. Railway LARy-3001, entered service in 1937, dedicated by child film star Shirley Temple. Stock (Equity) Fundamentals Essential features of pricing, buying, venue (c)