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Discuss the evolution of the securities markets, including the impact of the NASDAQ, CME, ECNs, and foreign exchanges.
The securities market is a digital or physical marketplace where individuals and firms can trade the financial securities of publicly traded companies. The market forces of demand and supply determine the price of such securities. The Dutch East India Co. was the first company to offer equity shares of its business to the public, conducting the world’s first initial public offering (Beattie, 2021). In the United States, the first stock exchange, the Philadelphia Stock Exchange, happened in 1790. In 1971, the National Association of Securities Dealers Automated Quotations (NASDAQ) was founded and became the first exchange to allow traders to perform their operations on a computer network. The evolution from physical to electronic trading provided more investors access to greater options for investing. As capital flow increased beyond domestic borders due to international trade and globalization, publicly traded companies from underdeveloped countries started to gain access to international funding through NASDAQ, CME, ECNs, and foreign exchanges.
Explain the role of securities markets in the efficient allocation of capital among issuers and investors based on the efficient market hypothesis.
The Efficient Market Hypothesis (EMH) argues that the current stock prices reflect all existing available information, making them fairly valued as they are presently (Sharma & Kumar, 2019). Based on EMH, the prices offered by corporations in the securities market reflect the asset’s intrinsic value, and the investors can provide capital in exchange for the asset’s ownership. Having a securities market makes it easier to effectively and efficiently raise capital. Having a variety of investors and issuers of securities is also an advantage because of the better strategic and optimal allocation of resources by both parties. Even if the investors have different levels of risk aversion, the securities market offers them different security instruments. EMH implies that investors cannot beat the market because the stock price contains all information that could predict performance.
Evaluate if the presence of dark pools enhances or reduces capital market efficiency.
In dark pools, investors can trade a large block of stock without market impacts because there is no need to show their orders to anyone else. Dark pools enhance capital market efficiency because there is additional liquidity for certain securities by getting them to list on the exchanges. Dark pools allow for trading execution privately, which is good because public markets overreact and underreact due to news coverage and market sentiment. With dark pools, there is reduced fear of front running, hence large trades can be executed before the devaluation of prices by breaking them into smaller trades. Algorithmic trading and high-frequency trading (HFT) increase market efficiency because of the fast pricing of information into securities. Therefore, we can conclude that dark pools increase market efficiency because they facilitate HFT.
Finally, find a real-life company that has made raised capital in 2020 and discuss the method used. If possible, try to select a company that a fellow student has not already selected.
Chipper Cash, launched in 2018, facilitates cross-border payment across Africa and raised $30 million through seed funding. The three rounds of Series funding in the year 2020 raised $143.8 million. This was an outside investment, where a company offers investors the opportunity to invest cash in exchange for equity.
Beattie, A. (2021, March 10). What Was the First Company to Issue Stock? Investopedia. https://www.investopedia.com/ask/answers/08/first-company-issue-stock-dutch-east-india.asp
Sharma, A., & Kumar, A. (2019). A review paper on behavioral finance: study of emerging trends. Qualitative Research in Financial Markets, 12(2), 137–157. https://doi.org/10.1108/qrfm-06-2017-0050
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