Securities Markets and Capital Market Efficiency

Securities Markets and Capital Market Efficiency

Discuss the evolution of the securities markets, including the impact of the NASDAQ, CME, ECNs, and foreign exchanges.

The evolution of security markets has seen an evolution from brokerage trading of securities and government bonds, and currently being able to trade electronically in real-time (Block, Hirt, & Danielson, 2022). Electronic trading allows for efficient pricing, allowing the market(s) to adapt quickly to any changes. The evolution of security markets has allowed for global exchange in various countries and companies, allowing the exchange of securities across borders.

NASDAQ

The NASDAQ has evolved from a not-for-profit to a for-profit company, like the NYSE (Block et al., 2022). The NASDAQ focuses on the security exchange of technology companies like Microsoft, Intel, Apple, Alphabet, and Cisco Systems (Block et al., 2022). NASDAQ stocks are split into global and small-cap issues; global market issues represent larger companies that require high listing standards but are a little more relaxed than the NYSE or those needed for small-cap issues (Block et al., 2022). The NASDAQ has acquired regional and global exchanges that list equity markets and equity options markets; the exchange speed is essential to traders, and the NASDAQ exchange speed is fast while operating 31 exchanges worldwide (Block et al., 2022).

CME

In 1898, the Chicago Mercantile Exchange (CME) began life; at the time, known as the Chicago Butter and Egg Board, this Board allowed farmers to sell eggs and butter to mercantile companies and allowed for future sales to control prices (Block et al., 2022). A significant economic event occurred in 1972, allowing central global governments with their agreement to trade currencies freely (Block et al., 2022). The CME group is the world’s most diverse derivatives marketplace.

ECNs

Electronic communication networks (ECNs) are one of the most significant changes that the markets have gone through, as the electronic trading systems automatically match “buy and sell orders at specific prices via computers” (Block et al., 2022). This has lowered trading costs and imposed changes in organized security exchanges’ operations and structure (Block et al., 2022).

Foreign exchanges

Many foreign companies trade on the New York Stock Exchange (NYSE), like TDK and Sony of Japan, Philips G.N.V. and Royal Dutch Petroleum of the Netherlands, and BMW of Germany (Block et al., 2022). Foreign exchange has helped capital markets around the world grow.

Based on the efficient market hypothesis, explain the role of securities markets in allocating capital among issuers and investors.

Efficient markets depend on the adjustment and agility of security prices; security prices must adapt to new information, prices must have some stability when consecutive trading takes place, or the continuity of the market (Block et al., 2022). Markets must also be able to trade shares in large quantities or securities without the share prices being affected (Block et al., 2022). The efficient market hypothesis states that stocks should always trade at their fair value on exchanges to deter investors from purchasing undervalued stocks or selling stocks at inflated prices (Block et al., 2022). Three efficient market hypothesis forms are weak, semistrong, and strong. The weak form is when future prices are not predicted based on previous trend pricing. The semistrong form is when the prices are adjusted to public information, and the strong form is when the prices are modified immediately based on private and public information (Block et al., 2022).

Evaluate if the presence of dark pools enhances or reduces capital market efficiency.

It is known as the dark pools effect when large volumes of common stock shares are traded outside the public market or exchanges (Block et al., 2022). Depending on who you ask, dark pools have pros and cons. Some pros are reduced market impact, increased exchange liquidity, minimized price devaluation, information leakage, and control costs (Kessous, 2021). Some cons are the lack of transparency, potential conflicts of interest, privileged trading prices, customer segmentation, and market fragmentation (Kessous, 2021). Dark pools can decrease market efficiency as the lack of transparency could hide essential public information, affecting the adjustment of share prices in both the public and private sectors.

Finally, find a real-life company that raised capital in 2020 and discuss the method used. If possible, try to select a company a fellow student has not already selected.

A company that raised capital in 2020 is Epic Games. Epic Games, the maker of Fortnite, raised capital in 2020, which brought in $1.53 billion in August. In addition to the $250 million the company raised from Sony in July, Epic Games raised $1.78 billion (Kunthara, 2021). This raise in capital came from investments from The Lego Group and Sony as they are looking into a long-term partnership to shape the future of the metaverse to make it safe for families and children (Kunthara, 2021). This also resulted from the worldwide lockdowns due to the COVID-19 pandemic.

References

Block, S. B., Hirt, G. A., & Danielsen, B. R. (2022). Foundations of Financial Management

(18th ed.). McGraw-Hill Higher Education.

Kessous, D. (2021). The risk and reward of more dark pool trading. Nasdaq. Retrieved October 3, 2022. https://www.nasdaq.com/articles/the-risk-and-reward-of-more-dark-pool-trading

Kunthara, S. (2021, February 4). These were the largest funding rounds of 2020. Crunchbase News. Retrieved October 6, 2022, from https://news.crunchbase.com/venture/largest- funding-rounds-of-2020/

ORDER A PLAGIARISM-FREE PAPER HERE

We’ll write everything from scratch

Before beginning work on this discussion forum, read Chapter 14 in the Foundations of Financial Management textbook.

Securities Markets and Capital Market Efficiency

Initial Response:

For this discussion forum,

• Discuss the evolution of the securities markets, including the impact of the NASDAQ, CME, ECNs, and foreign exchanges.
• Based on the efficient market hypothesis, explain the role of securities markets in allocating capital among issuers and investors.
• Evaluate if the presence of dark pools enhances or reduces capital market efficiency.
• Finally, find a real-life company that raised capital in 2020 and discuss the method used. If possible, try to select a company a fellow student has not already selected.

Your initial response should be a minimum of 200 words. Graduate school students need to learn how to assess the perspectives of several scholars. Support your response with at least one credible scholarly resource besides the text.