As one of the largest and most complex financial markets in the world, the U.S. securities market has always attracted much attention. This article analyzes the structure, trading, clearing and settlement and process of the U.S. securities market in detail through 20 figures, helping readers deeply understand its unique mechanism and operating logic, and providing valuable reference for investors.
The world’s finance looks at the United States, Asia’s finance looks at Hong Kong, China, and the finance of Chinese mainland looks at Big A. Big A and Hong Kong stocks have talked to everyone. It’s just the difference: the world’s largest and most complex financial market – U.S. stocks, not to mention it, like there are no hard dishes in the Manchu and Han banquets, and it can’t be upgraded and not decent enough, it’s uncomfortable! There can be no big names in the financial industry in the Manchu and Han banquets. So today we will talk about: US securities markets, exchanges, trading mechanisms, etc.
The depth of the article may be shallow, please don’t laugh around the stove and say that the hearth has changed (the hearth does its best, strives to write this article with depth and breadth, and adheres to the usual style of the hearth). The main reason is that this piece is far away from us, has little information, and is difficult to find, and even more rare is that it is all in English, and the road is coming; Although things are difficult to do, they will be done, just do it.
Please think about it for 20 seconds: What do you think the U.S. securities market looks like? What are the regulators and what are their responsibilities? What is the trading mechanism? What are the product types? Is there any difference from the domestic securities system? What is the custody and settlement system for US stocks? The technical system is like this? Let’s take these questions.
Please move the small bench and make tea, let’s start with the US stock market! Cut in little by little, unfold piece by piece, and gradually go from beginner to mastery. The article may have shortcomings, welcome to give me more comments, leave feedback and supplements, if there are any mistakes, please correct them, we will see you in the comment area. The main focus is on “sharing and communication”, and there is no character to learn and progress together.
1. U.S. securities market
1.1. Structure of the U.S. securities market
1.1.1. Why the first module around the hearth starts from the U.S. securities market, mainly to let everyone first have a cognition or understanding of the structure of the U.S. securities market, exchanges, participants, and support systems, without saying much, directly the above figure, as shown in the figure below:
1.2. American stock exchange
1.2.1. From the above figure, it can be clearly seen that the structure of the U.S. securities market is composed of the U.S. Securities and Exchange Commission (SEC), the National Market System (NMS) of the U.S. Exchange, the U.S. Financial Industry Regulatory Authority (FINRA), etc., let’s talk about the U.S. stock exchange, as shown in the figure below.
Knock on the blackboard to draw the key points:
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1. From the above figure, the Nasdaq exchange is classified into the OTC market, and a lot of information has been checked and it is also classified as an OTC market, in fact, the essence of NASDAQ is still : the OTC market, mainly its market structure includes the mixed characteristics of OTC and OTC trading. It is also caused by the complexity of the Nasdaq exchange business and its distance from us.
2. After looking at the chart of the U.S. stock exchange, it is estimated that the OTC market in the United States will be a little dizzy, one will be OTCQX market, the other will be OTC pink sheet market, the over-the-counter market (OTC) in the United States and the domestic over-the-counter market have certain similarities in functional positioning and structure, but there are significant differences in specific market stratification, regulatory rules and liquidity, so let’s combine the two to talk.
OTC Pink ≈ China’s regional equity market (fourth board): low threshold, high risk, loose information disclosure, low liquidity, suitable for professional investors or M&A targets.
OTCQB ≈ New Third Board basic layer: requires a certain degree of financial transparency, but insufficient liquidity, serving small and medium-sized enterprises: all for growth stage enterprises, with loose financial requirements; Hierarchical management.
OTCQX ≈ New Third Board Innovation Layer/Beijing Stock Exchange: Strong compliance and close to the transition stage of the on-market market.
1.3. Participants
A perfect securities market needs many and different participants to participate in the division of labor in an orderly manner to jointly promote the development of the market, in order to avoid too many words, it is convenient to view the hearth, using a combination of pictures and texts to communicate with the participants of the U.S. securities market, as shown in the figure below. (Note: It is similar to the participants in our country, but there are also significant differences)
More than 80% of the trading volume of the U.S. securities market comes from institutional dominance, which means that the U.S. stock market is dominated by institutions, unlike Big A, which is mainly dominated by retail investors;
- Capital flow path: individual → broker → market maker/exchange → listed company → shareholder dividends/capital appreciation;
- Regulatory logic: SEC makes rules → FINRA/FINRA self-discipline → Exchange enforcement → Investor protection (SIPC insurance)
Summary: Through the study of the above modules, it can be seen that the US capital market system is huge, complete and diverse. There are both unified and centralized national markets and regional and small local trading markets, so that enterprises of different sizes and needs can use the capital market for equity financing and obtain development opportunities. It has strongly promoted the innovation and growth of the U.S. economy, and at the same time, good policies and experience are worth learning from other countries.
2. U.S. securities trading
With the study of the knowledge of the U.S. securities market, now let’s understand the knowledge related to U.S. stock trading, of course, mainly talk about the main trading system of U.S. stock trading, which is too detailed to talk about, and the knowledge structure of this piece of knowledge is also limited.
2.1. Securities trading
It mainly sorts out the differences between the core trading rules between US stocks and A-shares, mainly from the 14 dimensions of trading hours, rise and fall limits, short selling rules, market participant rules, disclosure and compliance, entrusted orders, and settlement cycles, as shown in the figure below.
2.2. Transaction process
The trading process involves multiple roles such as exchanges, electronic communication networks (ECNs), market makers, companies, etc., which is convenient for everyone to organize around the stove as shown in the figure below.
Stocks listed on the New York Stock Exchange that send orders directly to the exchange, another exchange (such as a regional exchange), or a company that is a “market maker”. A “market maker” is a company that is ready to buy or sell shares listed on an exchange at a public offer. As a way to attract orders from a broker, some regional exchanges or market makers will pay your broker a fee to route your order to that exchange or maker—perhaps a penny or more per share for your order.
For stocks traded on the over-the-counter (OTC) market, such as the Nasdaq, the broker may send orders to the “Nasdaq market maker” in the stock. Nasdaq market makers also pay brokers for order flows. The broker may send your order as a “limit order” to the Electronic Communication Network (ECN), which automatically matches buy and sell orders at a specified price. A “limit order” refers to an order to buy or sell a stock at a specific price.
The broker may send the order to another department of the broker’s company to fill the company’s own inventory. It is called “internal digestion”. In this way, the brokerage may make money on the “spread” – that is, the difference between the purchase price and the sale price.
The picture comes from the official website of the U.S. Securities and Exchange Commission (SEC): www.sec.gov
2.3. Transaction method
2.3.1. Instruction type
- Market Order
- Limit Order
- Stop Order
- Stop-limit Order
- Day Order
- Until the order is filled, the order is good-til-cancelled
2.3.2. Trading hours
2.3.3. Transaction unit and method
- Minimum unit: 1 share (no “lot” concept), some brokerages support odd lot trading (such as 0.1 shares)
- T+0 trading: Same-day buying can be sold on the same day, but the account net assets need to be ≥ $25,000, otherwise it is limited to 3 intraday transactions per day.
- Short selling mechanism: short selling is allowed, subject to the call up rule (short selling price must be higher than the latest price)
Summary: The U.S. securities trading system is here for the time being, and there are still many things that are not involved, such as: day trading, insider trading, block trading, margin trading, short selling trading, online trading, etc., and we will talk about it piece by piece when we have the opportunity.
3. U.S. securities clearing and settlement
The U.S. securities clearing and clearing system is centered on a central counterparty (CCP) and securities depository, forming a highly intensive infrastructure, and the main players include: the U.S. Depository Trust and Clearing Corporation (DTCC) and the Federal Reserve Clearing System.
The Financial Stability Regulatory Commission of the U.S. Department of the Treasury designates the Central Securities Depository Corporation (DTC), the National Securities Clearing Corporation (NSCC), and the Fixed Income Clearing Corporation (FICC) as systemically important financial market utilities.
3.1. U.S. Securities Depository and Clearing Corporation
3.1.1. U.S. securities custody and settlement business
- Clearing services, settlement and asset services, investment product services, data and depository services
- Underwriting services: assisting with the issuance of new securities, central depository and electronic bookkeeping systems, custody of 3.8 million securities, operation of electronic bookkeeping systems and networking with direct registration systems for share transfers
- Settlement services: help with securities transfer and end-of-day fund settlement
- Asset services: effectively handle bond repayment and dividend distribution
3.1.2. Types of US DTC depository securities
Common and preferred stock, corporate bonds, municipal bonds
Short-term commercial paper, money market instruments
investment trust products and depository certificates
Closed-end funds, exchange-traded funds (ETFs), global stocks, warrants
3.1.3. Central Clearing Counterparty (CCP)
The main role of the central clearing counterparty is to provide risk management If one party fails to perform the settlement according to the agreed conditions, the central clearing counterparty shall also advance its receivable securities or funds to the non-compliant party in accordance with the clearing rules.
3.1.3.1. Core functions of CCP
Centralized risk management:
Counterparty substitution and netting (Netting): Through multilateral netting, the actual settlement amount and number of transactions are significantly reduced, reducing systemic risk.
Default risk prevention and control:
Margin System: Requires participants to pay an Initial Margin and Variation Margin to cover potential losses. Default Fund: A pool jointly funded by CCPs and participants to deal with default losses in extreme cases.
3.1.3.2. Risk management
3.1.4. Clearing and settlement flow chart
3.1.4.1. Individual investor clearing and settlement transaction process
3.1.4.2. Institutional investor clearing and settlement transaction process
3.1.5. Domestic investment clearing and settlement process
1. Domestic investors participating in U.S. stock securities investment need to open an account, bind a bank card, transfer funds, securities transactions, etc. Individuals have a $50,000 annual foreign exchange purchase quota, but specific channels may be required to invest in foreign securities.
2. The main accounts involved are similar to domestic accounts, but the functions and details are very different, as shown in the figure below:
Summary: The U.S. securities clearing and clearing is temporarily talked about here, and there are still many things that have not been involved, the content of this piece is complex and grand, and the ability to surround the hearth is limited can only be talked about here, and we will talk about it piece by piece when we have the opportunity.
Finally, let’s end the U.S. securities clearing and clearing system with the core differences between China and the United States.
4. Recommendation of learning materials
The U.S. securities market, listing and issuance, trading, clearing, information disclosure, policies and regulations, etc., are far away from domestic users, and the information is in English, so to do a good job in investment, please learn the rules related to U.S. stocks, then this knowledge is obtained in this way, generally by reading books, going to the official website, etc.
4.1. Study bookbox
1. “Memoirs of a Stock Maker”: Based on the life of Wall Street legend Jesse Livermore, it tells Livermore’s speculative career in the stock market through first-person narration. This book is not only a personal biography, but also a classic on investment philosophy, market psychology and trading strategies. Jesse Livermore is a legend in the history of American stock trading, known as “the famous Wall Street bear”, “the first person in the US stock market in a century”, and “the world-recognized speculative genius”. 2. “Smart Investor”: Benjamin Graham’s classic, which lays the theoretical foundation for value investing, is highly recommended by Warren Buffett.
3. “Walking on Wall Street”: Introduces modern investment theory, emphasizing index fund investment and long-term holding strategies, suitable for ordinary investors
4.2. Related websites
U.S. Securities Administrators
1. U.S. Securities and Exchange Commission: https://www.sec.gov
2. U.S. Financial Industry Administration: https://www.finra.org U.S. Stock Exchange
1. New York Stock Exchange: https://www.nyse.com/index
2. Nasdaq: http://www.nasdag.com/
3、BATS：http://www.batstrading.com/
4、Direct Edge：http://www.directedge.com/
The main OTC equity trading market in the United States
1. Pink sheet market: http://www.otcmarkets.com
2. Bulletin board market: http://www.otcbb.com
