Stock Exchanges and Electronic Trading in Canada

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.