History

Established in 1875, the Bombay Stock Exchange is Asia's first stock exchange.

In 12th century France the courratiers de change were concerned with managing and regulating the debts of agricultural communities on behalf of the banks. Because these men also traded with debts, they could be called the first brokers. A common misbelief is that in late 13th century Bruges commodity traders gathered inside the house of a man called Van der Beurze, and in 1309 they became the "Brugse Beurse", institutionalizing what had been, until then, an informal meeting, but actually, the family Van der Beurze had a building in Antwerp where those gatherings occurred;^[6] the Van der Beurze had Antwerp, as most of the merchants of that period, as their primary place for trading. The idea quickly spread around Flanders and neighboring counties and "Beurzen" soon opened in Ghentand Amsterdam.

In the middle of the 13th century, Venetian bankers began to trade in government securities. In 1351 the Venetian government outlawed spreading rumors intended to lower the price of government funds. Bankers in Pisa, Verona, Genoa and Florence also began trading in government securities during the 14th century. This was only possible because these were independent city states not ruled by a duke but a council of influential citizens. The Dutch later started joint stock companies, which let shareholders invest in business ventures and get a share of their profits - or losses. In 1602, the Dutch East India Company issued the first share on theAmsterdam Stock Exchange. It was the first company to issue stocks and bonds.

The Amsterdam Stock Exchange (or Amsterdam Beurs) is also said to have been the first stock exchange to introduce continuous trade in the early 17th century. The Dutch "pioneered short selling, option trading, debt-equity swaps, merchant banking, unit trusts and other speculative instruments, much as we know them".^[7]There are now stock markets in virtually every developed and most developing economies, with the world's biggest markets being in the United States, United Kingdom, Japan, India, China, Canada, Germany, France, South Korea and the Netherlands.^[8]

[edit]Importance of stock market

Market participants

A few decades ago, worldwide, buyers and sellers were individual investors, such as wealthy businessmen, with long family histories (and emotional ties) to particular corporations. Over time, markets have become more "institutionalized"; buyers and sellers are largely institutions (e.g., pension funds, insurance companies, mutual funds, index funds, exchange-traded funds, hedge funds, investor groups, banksand various other financial institutions). The rise of the institutional investor has brought with it some improvements in market operations. Thus, the government was responsible for "fixed" (and exorbitant) fees being markedly reduced for the 'small' investor, but only after the large institutions had managed to break the brokers' solid front on fees. (They then went to 'negotiated' fees, but only for large institutions.^{[citation needed]})

However, corporate governance (at least in the West) has been very much adversely affected by the rise of (largely 'absentee') institutional 'owners'.^{[citation needed]}

Stock market

Participants in the stock market range from small individual stock investors to large hedge fund traders, who can be based anywhere. Their orders usually end up with a professional at a stock exchange, who executes the order.

Some exchanges are physical locations where transactions are carried out on a trading floor, by a method known as open outcry. This type of auction is used in stock exchanges and commodity exchanges where traders may enter "verbal" bids and offers simultaneously. The other type of stock exchange is a virtual kind, composed of a network of computers where trades are made electronically via traders.

Actual trades are based on an auction market model where a potential buyer bids a specific price for a stock and a potential sellerasks a specific price for the stock. (Buying or selling at market means you will accept any ask price or bid price for the stock, respectively.) When the bid and ask prices match, a sale takes place, on a first-come-first-served basis if there are multiple bidders or askers at a given price.

The purpose of a stock exchange is to facilitate the exchange of securities between buyers and sellers, thus providing a marketplace(virtual or real). The exchanges provide real-time trading information on the listed securities, facilitating price discovery.

New York Stock Exchange.

The New York Stock Exchange is a physical exchange, also referred to as a listed exchange — only stocks listed with the exchange may be traded. Orders enter by way of exchange members and flow down to a floor broker, who goes to the floor trading post specialist for that stock to trade the order. The specialist's job is to match buy and sell orders using open outcry. If a spread exists, no trade immediately takes place--in this case the specialist should use his/her own resources (money or stock) to close the difference after his/her judged time. Once a trade has been made the details are reported on the "tape" and sent back to the brokerage firm, which then notifies the investor who placed the order. Although there is a significant amount of human contact in this process, computers play an important role, especially for so-called "program trading".

The NASDAQ is a virtual listed exchange, where all of the trading is done over a computer network. The process is similar to the New York Stock Exchange. However, buyers and sellers are electronically matched. One or more NASDAQ market makers will always provide a bid and ask price at which they will always purchase or sell 'their' stock.^[4]

The Paris Bourse, now part of Euronext, is an order-driven, electronic stock exchange. It was automated in the late 1980s. Prior to the 1980s, it consisted of an open outcry exchange. Stockbrokers met on the trading floor or the Palais Brongniart. In 1986, the CATS trading system was introduced, and the order matching process was fully automated.

From time to time, active trading (especially in large blocks of securities) have moved away from the 'active' exchanges. Securities firms, led by UBS AG, Goldman Sachs Group Inc. and Credit Suisse Group, already steer 12 percent of U.S. security trades away from the exchanges to their internal systems. That share probably will increase to 18 percent by 2010 as more investment banks bypass the NYSE and NASDAQ and pair buyers and sellers of securities themselves, according to data compiled by Boston-based Aite Group LLC, a brokerage-industry consultant.^[5]

Now that computers have eliminated the need for trading floors like the Big Board's, the balance of power in equity markets is shifting. By bringing more orders in-house, where clients can move big blocks of stock anonymously, brokers pay the exchanges less in fees and capture a bigger share of the $11 billion a year that institutional investors pay in trading commissions as well as the surplus of the century had taken place.^{[citation needed]}.

Information Memo 4

• The amendments redefine the term "day trading" to treat the sale of an existing position held

from the previous day as a liquidation, and the subsequent repurchase of that position as the

establishment of a new position not subject to day trading margin requirements.

• Day trading margin requirements – For day trades in equity securities, the day trading margin

requirement shall be 25 percent of either: (1) the cost of all day trades made during the day;

or (2) the highest open position during the day. If a customer's day-trading margin

requirement is to be calculated based on the highest open position during the day, the

customer's member organization must maintain adequate "time and tick" records

documenting the sequence in which each day trade is completed. "Time and tick"

information provided by the customer is not acceptable.

• Day trading buying power will be calculated based on the customer's account position as of

the close of business on the previous day. The amendments limit day trading buying power

to four times the day trader's maintenance margin excess. See Rule 431 (f)(8)(B)(iii).

• Day trading margin calls – A pattern day trader exceeding his day trading buying power

results in a special maintenance deficiency. Member organizations are required to issue a

day-trading margin call to cover the amount of the deficiency. Pattern day traders have five

business days to deposit funds to meet this day trading margin call. The day trading account

is restricted to day trading buying power of two times maintenance margin excess based on

the customer's daily total trading commitment, ["time and tick" can not be used during this

period] beginning on the trading day after the day trading buying power is exceeded until the

earlier of when the call is met or five business days. If the day trading margin call is not met

by the fifth business day, the account must be further restricted to trading only on a cash

available basis for 90 days or until the call is met. See Rule 431 (f)(8)(B)(iv)(2) & (3).

• Pattern day traders will be prohibited from utilizing cross guarantees to meet day trading

margin calls or to meet minimum equity requirements. See Rule 431 (f)(8)(B)(iv)(4).

• Deposits of funds to meet minimum equity requirements or to meet day trading margin calls

must remain in the customer's account and cannot be withdrawn for two business days. See

Rule 431 (f)(8)(B)(5).

Inquiries regarding these amendments should be directed to Albert Lucks (212) 656-5782 or

Patrice Vellecca (212) 656-2784.

Information Memo 3

ATTENTION: CHIEF EXECUTIVE OFFICER, MANAGING PARTNERS, CREDIT

AND MARGIN DEPARTMENTS, COMPLIANCE AND LEGAL

DEPARTMENTS

TO: MEMBERS AND MEMBER ORGANIZATIONS

SUBJECT: AMENDMENTS TO RULE 431 ("MARGIN REQUIREMENTS")

REGARDING "DAY TRADING"

The Securities and Exchange Commission (“SEC”) has approved amendments to Exchange Rule

431 (“Margin Requirements”) (see Exhibit A) establishing new requirements to address the

intraday risks associated with day trading in customer accounts.1 The amendments require that

equity and maintenance margin be deposited and maintained in customer accounts that engage in

a pattern of day trading in amounts sufficient to support the risks associated with such trading

activities. Margin requirements will be based on a day trader's activities during the day, rather

than on open securities positions at the end of the day. Additionally, the amendments prohibit

the use of cross guarantees and early withdrawal of account equity as these practices do not

require customers to demonstrate actual financial ability to engage in day trading. THE

EFFECTIVE DATE FOR IMPLEMENTATION WILL BE AUGUST 27, 2001.

The significant changes are summarized below:

• The term "pattern day-trader" is defined as any customer who executes four or more day

trades within five business days, provided the number of day-trades is more than 6% of the

total trades in the account during that period. See Rule 431 (f)(8)(B)(ii).

If the member organization knows, or has a reasonable basis to believe that a customer who

seeks to open an account, or seeks to resume day trading in an existing account will engage

in pattern day trading, then, the customer must immediately be considered a pattern day

trader in lieu of waiting five business days. See Rule 431 (f)(8)(B) Supplementary Material

.30.

• The minimum equity requirement for pattern day traders is $25,000. See Rule 431

(f)(8)(B)(iv)(1).

Background

Because Regulation T initial

margin requirements and NASD/

NYSE standard maintenance

margin requirements3 are calculated

only at the end of each day, a

day trader who has no positions in

his or her account at the end of the

day would not incur a Regulation

T initial margin nor a standard

maintenance margin requirement,

assuming no losses in the account

from that day’s trading. Current

NASD/NYSE initial margin provisions,

however, generally require

a customer to deposit margin of at

least $2,000, unless in excess of

the cost of the security.

Although the day trader may end

the day with no position, the day

trader’s clearing firm is at risk during

the day if credit is extended.

To address this risk, the NASD

and NYSE require day traders to

demonstrate that they have the

ability to meet the initial margin

requirements for at least their

largest open position during the

day. Specifically, under current

margin requirements, a customer

who meets the definition of day

trader under the rule must deposit

in his or her account the margin

that would have been required

under Regulation T (i.e., the 50

percent initial margin requirement)

if the customer had not liquidated

the position during the trading day.

If the customer day trades, but is

not considered a “day trader,” the

customer is still required to post 25

percent of the position held during

the day.4 Currently, this payment is

due after the risk has been incurred.

Therefore, the funds are not available

during the trading day when

the clearing firm is at risk.

Currently, if a customer’s day trading

results in a day-trading margin

call, the customer has seven days

to meet the call by depositing cash

or securities in the account.

Because day traders typically end

the day flat and this day-trading

“margin” deposit is not securing a

margin loan, the customer is not

required to leave the margin

deposit in the account and may

withdraw the deposit the day after

the deposit is made. If the customer

fails to meet a day-trading

margin call, no specific action to

the customer account is required

to be taken by the firm. There are

no securities to liquidate, as there

would be for an existing position,

because day traders typically end

the day flat.

Notes and references

Executive Summary

On February 27, 2001, the Securities

and Exchange Commission

(SEC) approved amendments to

National Association of Securities

Dealers, Inc. (NASD®) Rule 2520

relating to margin requirements for

day traders (the “amendments”).1

The amendments become effective

on September 28, 2001 and

are substantially similar to amendments

by the New York Stock

Exchange (NYSE) to its margin

rules.2

The text of the amendments and

Federal Register version of the

SEC Approval Order are attached

(see Attachments A & B). For

a detailed description of the

amendments, as well as specific

examples of certain margin

calculations under the amendments,

members should review

the attached SEC Approval Order

(see Attachment B).

Questions concerning this

Notice may be directed to Susan

DeMando, Director, Financial

Operations, Member Regulation,

NASD Regulation, Inc. (NASD

Regulation), at (202) 728-8411, or

Stephanie M. Dumont, Associate

General Counsel, Office of General

Counsel, NASD Regulation, at

(202) 728-8176.