Stock Exchanges and Electronic Trading in Canada

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Questions and Answers

What is the primary function of stock exchanges?

To allow buying and selling of existing stocks (correct)

To create new stocks for investors

To provide loans for stock purchases

To ensure stocks are traded at a fixed price

Which of the following exchanges in Canada is dedicated to trading derivatives?

Montreal Exchange (correct)

Toronto Stock Exchange

TSX Venture Exchange

TSX

What type of companies primarily trade on the TSX Venture Exchange?

Venture capital-backed startups (correct)

Established large corporations

Companies with substantial cash flow

Companies with no growth potential

What are the minimum requirements for a firm to be listed on the TSX?

Revenue, cash flow, net tangible assets, and working capital Signup and view all the answers

What is the function of the bid price in stock trading?

It indicates the price a buyer wishes to pay Signup and view all the answers

Which operational structure does the TSX currently utilize for trading?

Electronic trading system Signup and view all the answers

How many companies are listed on the TSX and TSX Venture Exchange combined?

3511 Signup and view all the answers

Who operates the TSX and TSX Venture Exchange?

The TMX Group Signup and view all the answers

What primarily characterizes a high-quality stock exchange?

A small bid–ask spread Signup and view all the answers

How do market makers contribute to liquidity in the market?

By actively trading even when market forces fail Signup and view all the answers

What is the bid–ask spread earned by a market maker?

The difference between the ask and bid price Signup and view all the answers

Which of the following describes the transformation of a stock exchange from a member-owned organization to a publicly owned entity?

Demutualization Signup and view all the answers

What is a key feature of the over-the-counter (OTC) market?

Principal-to-principal transactions Signup and view all the answers

What was a significant event for the New York Stock Exchange in 2007?

It merged with Euronext Signup and view all the answers

How is the debt marketplace different from organized stock exchanges?

It is less transparent and compiles trade information later Signup and view all the answers

What is the primary purpose of using market makers in an electronic trading system?

To provide liquidity Signup and view all the answers

What does the NYSE currently operate as?

A division of Intercontinental Exchange Signup and view all the answers

Which of the following statements about OTC markets is FALSE?

OTC markets are always equitable in pricing Signup and view all the answers

Study Notes

Stock Exchanges

Stock exchanges facilitate the buying and selling of existing stocks (secondary market).
Organized exchanges operate in physical or virtual locations.
Stocks must meet exchange requirements to be traded.
Canada has the TSX (senior equities) and TSX Venture Exchange (venture capital).
The TMX Group owns and operates both.
3511 companies are listed on these exchanges.
The Montreal Exchange is a derivatives exchange (options, futures).
Listing requirements for the TSX include minimum revenue, cash flow, net tangible assets, working capital, and cash.

Electronic Trading

Major Canadian exchanges use electronic trading systems.
This replaced the open-outcry system.
Integrated systems process buy/sell orders.
Bid price (buyer's desired price) is typically lower than the ask price (seller's desired price).
A high-quality exchange has a small bid-ask spread, high volume, and high liquidity.
Market makers maintain liquidity when natural market forces don't.
Market makers earn profit from the bid-ask spread.

New York Stock Exchange (NYSE)

The NYSE is a prominent US exchange.
It handles transactions for about 2400 stocks.
It merged with Euronext in 2007, and was acquired and is now part of Intercontinental Exchange (ICE).
NYSE stock transactions are conducted by authorized traders.
Demutualization converts member-owned exchanges into public, for-profit entities.

Over-the-Counter (OTC) Market

The OTC market is an electronic network for security buying/selling (less transparent than organized exchanges).
OTC markets have less regulations and are more driven by supply and demand.
OTC transactions occur directly between individuals or firms (principal-to-principal) at their stated price.
Organized exchanges operate like an auction system.
Canadian OTC stocks can be accessed through the NEX board.

Market Liquidity and Depth

Liquidity: ease of buying or selling an asset. High volume and many traders create liquidity.
Depth: the volume of shares offered at different prices.
Market makers play a vital role in maintaining sufficient liquidity for stocks. They achieve this by acting as buyers and sellers to absorb and provide stock.
Bid-ask spread: The gap between the highest price that a buyer will pay and the lowest that a seller will accept to sell.

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Description

This quiz explores the fundamentals of stock exchanges, particularly in Canada. It covers organized exchanges like the TSX and TSX Venture, electronic trading systems, and key terms like bid-ask spread and liquidity. Test your knowledge on trading requirements and market operations!