The Practical Guide to Wall Street: Equities and Derivatives

CHAPTER 3

Cash Market

INTRODUCTION

The cash market refers to the buying and selling of stocks either on an exchange or in “upstairs” transactions negotiated directly between brokers and clients. Regardless of his or her area of specialization, every member of the sales and trading division must have a detailed understanding of how the underlying cash market functions. The practical knowledge of how the markets work, and the ability to use that knowledge to service client requests, is an important part of the value salespeople and traders add.

In this chapter we look first at the structure of the market and how buyers and sellers are matched off to complete trades, and then examine the various roles within the equities sales and trading business and how they work together to service the customer business. While our focus here is on single stocks, the market structure, as well as the division of responsibility between traders and salespeople, is similar across all equity products and the concepts presented here are applicable to the sales and trading of derivatives as well.

HOW A STOCK EXCHANGE FUNCTIONS

The concept of a stock exchange is the same as that of any other market—it is a place where buyers and sellers come together to trade. In this case, the goods traded are financial assets: the shares of public companies. However, due to the central importance of a smoothly functioning stock market for the health of the national financial system, there are some important characteristics ...