Listing requirements
Listing requirements are the set of conditions imposed by a given stock exchange upon companies that want to be listed on that exchange. Such conditions sometimes include minimum number of shares outstanding, minimum market capitalization, and minimum annual income.
Requirements by stock exchange
Companies have to meet the requirements of the exchange in order to have their stocks and shares listed and traded there, but requirements vary by stock exchange:
• London Stock Exchange: The main market of the London Stock Exchange has requirements for a minimum market capitalization (£700,000), three years of audited financial statements, minimum public float (25 per cent) and sufficient working capital for at least 12 months from the date of listing.
• NASDAQ Stock Exchange: To be listed on the NASDAQ a company must have issued at least 1.25 million shares of stock worth at least $70 million and must have earned more than $11 million over the last three years ([1]).
• New York Stock Exchange: To be listed on the New York Stock Exchange (NYSE), for example, a company must have issued at least a million shares of stock worth $100 million and must have earned more than $10 million over the last three years ([2]).
• Bombay Stock Exchange: Bombay Stock Exchange (BSE) has requirements for a minimum market capitalization of Rs.250 Million and minimum public float equivalent to Rs.100 Million([3]).
Ownership
Stock exchanges originated as mutual organizations, owned by its member stock brokers. There has been a recent trend for stock exchanges to demutualize, where the members sell their shares in an initial public offering. In this way the mutual organization becomes a corporation, with shares that are listed on a stock exchange. Examples are Australian Stock Exchange (1998), Euronext (2000, as of 14 June 2006 in talks to a proposed merger process with the New York Stock Exchange), NASDAQ (2002) and the New York Stock Exchange (2005).
Other types of exchanges
In the 19th century, exchanges were opened to trade forward contracts on commodities. Exchange traded forward contracts are called futures contracts. These commodity exchanges later started offering future contracts on other products, such as interest rates and shares, as well as options contracts. They are now generally known as futures exchanges.
The future of stock exchanges in the United States
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The future of stock trading appears to be electronic, as competition is continually growing between the remaining traditional New York Stock Exchange specialist system against the relatively new, all Electronic Communications Networks, or ECNs. ECNs point to their speedy execution of large block trades, while specialist system proponents cite the role of specialists in maintaining orderly markets, especially under extraordinary conditions or for special types of orders.
The ECNs contend that an array of special interests profits at the expense of investors in even the most mundane exchange-directed trades. Machine-based systems, they argue, are much more efficient, because they speed up the execution mechanism and eliminate the need to deal an intermediary.
Historically, the 'market' (which, as noted, encompasses the totality of stock trading on all exchanges) has been slow to respond to technological innovation. Conversion to all-electronic trading could erode/eliminate the trading profits of floor specialists and the NYSE's "upstairs traders."
William Lupien, founder of the Instinet trading system and the OptiMark system, has been quoted as saying "I'd definitely say the ECNs are winning... Things happen awfully fast once you reach the tipping point. We're now at the tipping point."
Congress mandated the establishment of a national market system of multiple exchanges in 1975. Since then, ECNs have been developing rapidly.
One example of improved efficiency of ECNs is the prevention of front running, by which manual Wall Street traders use knowledge of a customer's incoming order to place their own orders so as to benefit from the perceived change to market direction that the introduction of a large order will cause. By executing large trades at lightning speed without manual intervention, ECNs make impossible this illegal practice, for which several NYSE floor brokers were investigated and severely fined in recent years. Under the specialist system, when the market sees a large trade in a name, other buyers are immediately able to look to see how big the trader is in the name, and make inferences about why s/he is selling or buying. All traders who are quick enough are able to use that information to anticipate price movements.
ECNs have changed ordinary stock transaction processing (like brokerage services before them) into a commodity-type business. ECNs could regulate the fairness of initial public offerings (IPOs), oversee Hambrecht's OpenIPO process, or measure the effectiveness of securities research and use transaction fees to subsidize small- and mid-cap research efforts.
Some, however, believe the answer will be some combination of the best of technology and "upstairs trading"— in other words, a hybrid model.
Trading 25,000 shares of Lucent stock (recent quote: $2.80; recent volume: 49,069,700) would be a relatively simple e-commerce transaction; trading 100 shares of Berkshire Hathaway Class A stock (recent quote: $88,710.00; recent volume: 450) may never be. The choice of system should be clear (but always that of the trader), based on the characteristics of the security to be traded.
Even with ECNs forming an important part of a national market system, opportunities presumably remain to profit from the spread between the bid and offer price. That is especially true for investment managers that direct huge trading volume, and own a stake in an ECN or specialist firm. For example, in its individual stock-brokerage accounts, "Fidelity Investments runs 29% of its undesignated orders in NYSE-listed stocks, and 37% of its undesignated market orders through the Boston Stock Exchange, where an affiliate controls a specialist post."
Fidelity says these arrangements are governed by a separate brokerage "order-flow management" team, which seeks to obtain the best possible execution for customers, and that its execution is highly rated.
The "upstairs market"
Recent research by Kumar Venkataraman, finance professor at SMU's Cox School of Business, and Hendrik Bessembinder offers insight and evidence into new possibilities and difficult issues facing stock exchanges. In “Does an electronic stock exchange need an upstairs market?” from the July, 2003 issue of Journal of Financial Economics, the authors find that a large proportion of institutional trading in electronic exchanges is executed away from the centralized book in the informal 'upstairs market', thus presenting new challenges.
Despite the efficiencies of computerized markets, virtually every stock market is accompanied by a parallel "upstairs" market, where larger traders employ the services of brokerage firms to locate counterparties and negotiate trade terms. Upstairs markets are based on relationships. Rather than submitting an electronic order to effortlessly attract counterparties, the upstairs brokers seek out counterparties (from traders known to them who might be interested). They then negotiate transactions that might otherwise be executed at an inordinate cost or delay. An electronic trading system lowers the fixed costs of trading for relatively liquid stocks in block sizes not likely to overwhelm the current market. However, it does not allow for the informal exchange of information (?) that is important for certain types of large trades and for illiquid stocks.
In electronic markets, traders don’t get a sense of who they’re trading with, how much more the other party is trading, etc., and that information can be very important to some traders. Large (institutional) traders therefore seek other trading venues such as the 'upstairs market' to lower the risk of exposing their order positions, to ensure symmetric transfer of information, and to retain some of the give and take of the old open outcry market. Approximately 70% of block-size trade transactions are executed in the upstairs market in Paris.
The Paris Bourse provides an excellent illustration of the use of upstairs intermediation markets, because its electronic limit order market closely resembles the downstairs (electronic) markets envisioned by theorists. The best evidence from the Paris Bourse is that:
1. Upstairs brokers lower the risk of adverse selection by "certifying" block orders as uninformed (i.e., as not having access to nonpublic information).
2. Upstairs brokers are able to tap into pools of hidden or unexpressed liquidity (they frequently 'go looking' for buyers or sellers not currently in the market).
3. Traders strategically choose across the upstairs and downstairs markets to minimize expected execution costs (including slippage, etc.).
4. Trades are more likely to be routed upstairs if they are large or are in stocks with low overall trading activity.
The second result is the most novel and arguably the most important. The upstairs broker completes transactions by searching for institutional investors who may be interested in the stock, but who have not as yet formally expressed their trading intentions. It is documented that executions costs of transactions completed by the upstairs broker average only 35% of what they would have paid if completed against limit orders in the centralized electronic exchange, suggesting that trading relationship and the informal exchange of information between upstairs brokers and institutional traders helps lower execution costs. One major challenge facing electronic markets is the lack of a comparable mechanism of certification of traders and information exchange.
The Euronext market allows large transactions in some stocks to be executed outside the quotes. Such outside-the-quote transactions are not permitted in United States markets. For eligible stocks in Paris, market participants agree to outside-the-quote execution mainly for more difficult trades and at times when downstairs liquidity is lacking. These likely represent trades that probably could not have been otherwise completed, suggesting that market quality can be enhanced by allowing participants more flexibility to execute blocks at prices outside the quotes. These findings are particularly relevant to U.S. markets because quoted spreads and depths have decreased substantially in the wake of decimalization.
The upstairs market in the Paris Bourse completes two-thirds of block trading volume, compared with 20% on the New York Stock Exchange (NYSE). A likely explanation is that the NYSE floor allows large traders to execute customized strategies through a floor broker, while avoiding the risks of order exposure. If orders submitted to electronic markets do not allow block initiators to limit order exposure and trade strategically, then order flow is likely to migrate to alternative trading venues such as the upstairs market. If you’re a liquidity trader, you don’t want the system to be anonymous. If you’re an informed trader you like anonymity because you can hide in the order flow.
To compete with broker-intermediated markets, the next generation of electronic trading systems needs to include features that better meet the needs of large traders, particularly the lack of anonymity. To allow large investors to manage order exposure in an electronic exchange, a wider range of order types that include state contingent exposure and execution algorithms need to be made available. The NYSE’s recently introduced “Conversion and Parity” (CAP) orders which are intended to be “smart” orders for large lots of stocks that are executed gradually through the day, contingent on market conditions, are a step in this direction.
The future role of the specialist
The specialist trades in circumstances when others do not or will not, and therefore takes on a risk which warrants compensation. The current debate centers on the model of compensation. The specialist at the Paris Bourse is compensated in cash and with investment banking business. In contrast, the NYSE specialist is compensated in the form of privileged information on order flow. In recent months, several U.S. institutions have alleged that the NYSE trading abuses is an outcome of this compensation structure. The Paris model overcomes this criticism and presents an alternative for the NYSE to consider. Results show, however, that there continues to be a role for the specialist (or, at least, an 'upstairs trader') in electronic markets. Investors value the presence of a specialist because they can get in and out of a stock with greater ease.
8. WHAT IS ACCOUNTING?
Accounting is often characterized as «the language of business». The acceleration of change in our complex society has contributed to ever-increasing complexities in this «language», which is used in recording and interpreting basic economic data for individuals, businesses, governments, and other entities. Sound decisions, based on reliable information, are essential for the efficient distribution and use of scarce resources. Accounting, therefore, plays a very important role in our economic and social system.
Because of the wide range of accounting activity, there is no concise description of accounting. Accounting is concerned with recording, sorting, and summarizing data related to business transactions and events. Such data are to a large extent, but not exclusively, of a financial nature and are frequently, but not always, stated in monetary terms. Accounting is also concerned with reporting and interpreting the data. Accounting has been defined broadly as the process of identifying, measuring, and communicating economic information to permit informed judgments and decisions by users of the information.
Accounting is a service activity. Its function is to provide quantitative information about economic entities. The information, essentially financial in nature, is primarily provided by reports referred to as financial statements and is intended to be useful in making economic decisions. These reports are used in describing the activities and financial status of many different kinds of economic entities. They include hospitals, schools, cities, governmental agencies, and profit-oriented businesses.
The objective of financial statements is to communicate information that is useful to investors, creditors and other users in making resource allocation decisions and/or assessing management stewardship. Consequently, financial statements provide information about:
(a) an entity's economic resources, obligations and equity;
(b) changes in an entity's economic resources, obligations and equity; and
(c) the economic performance of the entity.
In making decisions about an economic entity, individuals' generally must begin by asking questions about the entity. The answers to many such questions are found in accounting reports. If, for example, the entity is a business, the managers of the business would look to accounting for answers to questions such as:
What are the resources of the business?
What debts does it owe?
Does it have earnings?
Are expenses too large in relation to sales?
Is too little or too much merchandise being kept?
Are amounts owed by customers being collected rapidly?
Will the business be able to pay its debts as they mature?
Should the plant be expanded?
Should a new product be introduced?
Should selling prices be increased?
In addition, grantors of credit such as banks, wholesale houses, and manufacturers use accounting information in answering such questions as:
Are the customer's earning prospects good? What is its debt-paying ability? Has it paid its debts promptly in the past? Should it be granted additional credit?
Likewise, governmental units use accounting information in regulating businesses and collecting taxes. Labour unions use it in negotiating working conditions and wage agreements. And last but certainly not least among the users of accounting information are individual investors, who make wide use of accounting data in their investment decisions.
Accounting and Bookkeeping
Many people confuse accounting and bookkeeping and look on them as one and the same. In effect, they identify the whole with one of its parts. Actually, bookkeeping is only part of accounting, the record-making part. To keep books is to record transactions, and a bookkeeper is one who records transactions either on a computer or manually or with a bookkeeping machine. Accounting includes much more than this. The accountant should have the ability to design the accounting system; to analyze and record complex, nonroutine transactions; and to analyze and interpret accounting information.
Accounting and Computers
Computers are used for many tasks in our modem society, including the processing of accounting data. A computer can accept and store accounting data, sort and rearrange it, perform arithmetic calculations on it, and prepare reports from the data. Furthermore, a computer can perform these functions very rapidly and with little or no human intervention. However, before a computer can do this, a set of detailed instructions must be prepared and entered into the computer to tell it how to process the data. The person who prepares these instructions must have a thorough understanding of accounting procedures and accounting principles. Thus, while computers have had a tremendous impact on accounting, they are not substitutes for understanding the fundamental concepts and principles of accounting.
FOUNDATIONS OF ACCOUNTING
Accounting contains elements both of science and art. The important thing is that it is not merely a collection of arithmetical techniques but a set of complex processes depending on and prepared for people. The human aspect, which many people, especially accountants, forget, arises because:
1. Most accounting reports of any significance depend, to a greater or lesser extent, on people's opinions and estimates.
2. Accounting reports are prepared in order to help people make decisions. Hit
3. Accounting reports are based on activities which have been carried out by people.
But what specifically is accounting? It is very difficult to find a pithy definition that is all-inclusive but we can say that accounting is concerned with.
The provision of information in financial terms that will help in decisions concerning resource allocation, and the preparation of reports in financial terms describing the effects of past resource allocation decisions.
Examples of resource allocation decisions are:
Should an investor buy or sell shares?
Should a bank manager lend money to a firm?
How much tax should a company pay?
Which collective farm should get the extra tractor?
As you can see, accounting is needed in any society requiring resource allocation and its usefulness is not confined to 'capitalist' or 'mixed' economies.
