The secondary market is where securities that have sold out of the primary market commence trading on their own merit. The proceeds of secondary market transactions go from investor to investor. The current market value of the underlying security is determined by investor demand and supply of the shares. The secondary market consists of the following exchanges and markets: The national exchanges are the New York Stock Exchange (NYSE) and the American Stock Exchange (AMEX). In addition to the national stock exchanges, there are four regional exchanges: The Boston Stock Exchange, the Chicago Stock Exchange, the Pacific Exchange and the Philadelphia Stock Exchange. There’s also

the Cincinnati Stock Exchange, which, despite its name, is a purely electronic market (like NASDAQ) with its headquarters in Chicago. NASDAQ (National Association of Securities Dealers Automated Quotation System) consists of two specific sectors, the National Market System Securities, such as Apple, Microsoft, Intel, etc., and the small cap portion of NASDAQ, which consists of medium size companies in specific areas of industry. The national and regional exchanges are considered to be auction markets where buyers and sellers meet in the market.

The over the counter market is a negotiated market. The OTC uses a market maker system to facilitate transactions. There is no actual physical location for the OTC market, as it is comprised of an elaborate information and technological communication system that brings the buyer and the seller together. If an investor wants to purchase an OTC stock, they will contact their broker and in turn, the broker views the NASDAQ screen to determine who the market makers are in that particular security. Not all broker/dealers make a market in every OTC security. In fact some broker/dealers occasionally make a market in only one security. FINRA regulates the OTC market and broker/dealers are considered to be members of FINRA.

The bid and ask for a security that trades in the OTC/NASDAQ markets is the highest bid price they are quoting and the lowest asking price. Buyers of the stock go to the dealer with the lowest asking price. Sellers of the security in turn go to the dealer with the highest bid price. The difference between the bid and ask prices on an OTC security is known as the spread for the security. If a dealer does not make a market in a security that their customer wants to purchase, they act as an agent for the customer and find the market maker who does make the market in the stock. For their effort in finding the security for their client, the broker/dealer earns a commission.

If the broker/dealer makes a market in the security their client wants, they can sell the security right out of their own inventory. For this effort, the broker/dealer earns a markup. Broker/dealers take on various roles in the OTC market. They act as either a Dealer in a principal transaction when they take securities out of their inventory or they act as Broker in an agency transaction when they do not make a market in a security, and have to contact other market makers. Inside Price If the highest bid for a security is set at $30 by ABC Brokerage, and the lowest ask is set at $30.50 by XYZ Brokerage, the inside market for the security is $30 X $30.50.

If an investor wants to buy the stock, their broker goes to XYZ Brokerage to purchase the security at $30.50 (the lowest asking price). If an investor wants to sell the stock, they go to ABC Brokerage and sell the stock at the highest bid of $30. NASDAQ level II quotes gives the list of each market maker and their current quoted inside prices for securities they make markets in. Spread The spread for a stock is the difference between the highest bid price and the lowest ask price for the security. In the previous example, the spread is $.50 on the highest bid/lowest ask of $30 x $30.50.

Market Maker A market maker is the broker dealer on the OTC market who is willingly making a market in the underlying security. The market maker maintains an inventory in the OTC stock and publishes a quote on the level II screen of the NASDAQ. The investor who is looking to either buy or sell the stock that the market maker is making a market in enters an order with their broker who in turn checks the level II NASDAQ screen to determine which market maker(s) to contact for the shares.

Much like a Market Maker on the NASDAQ, the “Specialist” on the NYSE floor determines the spread on the securities in which he makes a market. The highest bid and lowest ask determines the spread on the stocks that he makes the market on. If a specialist has an offer to buy 400 shares of LAT stock at $21.50 on his book and an offer to sell 500 shares of LAT stock at $21.71 on his book, then he would quote the market to be: $21.50 X $21.71 4 by 5. What he is saying in his quote is that he has an offer to buy 400 shares at $21.50 and an offer to sell 500 shares at $21.71 for LAT stock. The spread on the LAT stock is thus .21 of a point.

Market Orders A market order is an order entered by a customer who is willing to take the existing price for a security in the market. There are no set limits on the price they are seeking. Market orders should be executed within a “reasonable time frame” (15 minutes is a good rule of thumb). If the customer enters a market order to buy 100 shares of LATITUDE stock at 11:00 a.m. they can expect to receive the existing market price for LAT at no later than 11:15 a.m.

Limit Orders Limit orders are orders that have been entered with a prescribed price attached to them. Limit orders can be entered to buy a security below the current market price or to sell above the current market price. Limit orders away from the market are placed on the specialist book. When the limit price is reached, the specialist executes the order and reports the transaction back to the entering broker.

Order Ticket Terminology A market order is an order to purchase or sell a security at the best possible price available in the market. Market orders should be executed within fifteen minutes of being entered. A limit order is an order placed with a qualifying price. The customer has designated a specific price that will trigger the execution of the order. The order remains open until executed or cancelled. A day order is a limit order entered for the day. It can be executed at the price limit set or will cancel at the close of the market if the price is not attained. A good ‘til cancelled (GTC) order is a limit

order that remains open until it is either executed or cancelled by the customer. GTC orders must be renewed every 30 days by the stockbroker. A buy order is an investor's agreement to go "long" the shares or purchase the stock. A "short" order indicates that the investor has agreed to sell the shares.

An all or none order is an order to purchase or sell at a specific price. The entire order must be filled at that price, or not at all. No partial execution allowed. Several attempts to execute the order are allowed. An immediate or cancel order is an order to purchase a security at a specific price. If a partial fill of the order can be executed at the price designated, it will be done, and the remaining part of the order will be cancelled. A fill or kill order is an order to purchase or sell a security at a specific price. The entire order must be filled at the designated price. Only one attempt to fill the order is allowed.

A not held order is a market order that gives discretion over time to the floor broker. The client has agreed not to hold the floor broker responsible for his decision as to when the market order will be filled. The idea behind this type of order is the belief that the floor broker knows best when the order can be executed at the best possible price. With a discretionary order, the broker has determined the security and the number of shares to be purchased for the customer. If the customer chooses the security and size of the trade, it is considered non-discretionary. Security, size, time, and price are the four decisions that can be made in entering a trade.

An at the close order is an attempt to execute the order at a price as close to the closing price for the day as possible. Selling short is selling a security without actually owning the stock. An investor borrows the security from the broker/dealer for delivery. The investor hopes that the stock declines in value and can eventually cover at the lower market price for the attainable profit. A sell stop order is used by a customer to protect against the potential loss from holding a long position in a security. Sell stop orders are entered below the current market price as protection.

A buy stop order is an order that is used to protect against an increase in the price of a stock to cover a short position. These orders are entered above the current market price as protection. For instance, a customer enters the following GTC order: Buy 100 shares of LAT @ $55 Stop LAT stock is trading in the market at $50. If the price of LAT stock reaches $55 the order will automatically become a market order and will be executed at the best possible price available for the client. This price may be above $55 or below $55. Either way, the order becomes a market order and will be executed as soon as possible for the client.

If the client enters a buy stop above the current market price for a security, they may be protecting themselves against a loss on a short sale of the stock. If a customer enters a sell stop order they are doing so to protect against a decline in the market on a long stock position that they are holding. A stop limit order is an order entered by a client to buy or sell a security at a specific price or better. Once the limit price has been triggered the order must be executed at that price or better for the customer. This is a combination of a stop order and a limit order.

The difference between a stop order and a stop limit order is quite simple. Once the limit price has been reached on a stop order it automatically becomes a market order. Once the limit price has been reached on a stop limit order, it remains a limit order and must be executed at the limit price or better. The risk on a stop limit order is that the order may never be filled. If the order reaches the limit price, but then goes right through that price, and never better than that price, the order will never be executed for the client. Example: Buy 100 shares of LAT 30 stop 30.50 limit.