Page 103 - DCOM304_INDIAN_FINANCIAL_SYSTEM

Indian Financial System

Notes There are two types of market creators-dealers and brokers. Dealers stand ready to buy
and sell at quoted prices. They hold on to the securities until someone else comes along
wishing to buy them. In contrast, brokers do not themselves buy or sell the securities.
They, instead of buying the securities, would find someone willing to buy them.
2. The secondary market can be wholesale and retail. The wholesale market is the market in
which professionals, including institutional investors trade with one another. Transactions
in this market are usually large. The retail market is the market in which the individual
investors buy and sell securities.
3. Exchanges in the wholesale secondary market for capital securities may take place in
either of the two markets, viz., Over-The Counter market (OTC) and organized exchange
market. Where the organisation is more structured and communication is often face-to-
face, the market is known as an organised exchange. Generally, the secondary market for
government securities is an OTC market, and that the secondary market for corporate
equities consists of both OTC markets and exchanges. The wholesale market for bonds in
the US is principally an OTC market; fewer than 10% of all issues traded in the stock
exchanges.
Thus, an organised exchange market is characterised as auction market that uses floor
traders who specialise in particular stocks. Exchange rules govern trading to ensure the
efficient and legal operation of the exchange and the exchange board constantly reviews
these rules to ensure that they result in competitive trading. In about 90% of trades, the
specialist matches buyers with sellers. In the other 10%, the specialist may intervene by
taking ownership of the stock themselves or by selling stock from inventory.

Notes Unlike organised exchanges, OTC markets have market makers. Rather than trading
stocks in an auction format, they trade on an electronic network where bid and ask prices
are set by market makers.

4. In the secondary market, only those securities, which are listed in the stock exchanges, are
traded. Unlisted securities are not permitted to be dealt in the market.
5. Transactions in the secondary market must accord to the rules and bylaws framed by the
stock exchange to regulate its day-to-day operations.

6.1 Objectives and Functions of Secondary Market

The primary objectives of a secondary market are to provide marketability to existing securities
and to facilitate the acquisition of capital by corporate enterprises. In order to accomplish these
objectives, the secondary market performs the following functions:

1. To provide for a regular market: The secondary market provides for a ready and continuous
market where those desiring to deal in securities assemble to buy and sell securities
during the business hour. This enables investors to liquidate their investments quickly
and with the least possible loss. High marketability of securities enhances their value and
facilitates the use of these securities as collateral for loan.
2. To provide stability in prices of securities: Through the mechanism of regular purchase
and sale of securities, the secondary market ensures continuity and stability in share price
which is an essential requirement of liquidity. Bulls, bears and stock brokers operating in
the market deal in securities with extreme the expected changes in security prices and buy
or sell securities accordingly to take price advantage. For instance, speculators expecting

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