Latin American Capital Markets

INTERNETTECHNOLOGY AND THE DEVELOPMENT OF SECURITIES MARKETS 73websites that allow investors to trade shares not listed on a stock exchange. More recently,some brokers have begun to conduct electronic initial public offering (IPO) distributionswhereby they accept customers' electronic indications of interest in IPOs.Certain intermediaries also conduct online auctions on behalf of issuers and take bidsover the Internet, permitting issuers to more accurately price their securities in an IPO. 6Internet Use by ExchangesThe past few years have witnessed an increase in the use of the Internet by conventionalsecurities exchanges to disseminate information to the public and to advertiseproducts and services. Most notably, the Internet is being utilized as a means for investorsto route orders to a market, either directly or through an intermediary.TheInternet and Internet-related technology are also behind the advent of "direct trading,"as evidenced by issuer and third-party electronic bulletin boards. An issuer bulletinmarket is essentially a forum for investors to advertise offers of securities. Athird-party bulletin market is similar to an issuer bulletin market, except that it is establishedand maintained by someone other than the issuer On either type of market,transactions between buyers and sellers are effected wholly independently of thebulletin market. 7 These bulletin markets have the potential to decrease transactioncosts.They also may be an effective means of facilitating transactions in the securitiesof emerging companies, which often do not have liquid markets. 8An additional development is the emergence of closed Internet markets.These websites trade contracts among members—generally a group of companies6 "Initial Public Offerings: Dutch Auctions Give Firms New Path to Public Markets," Investor's Business Daily, A-8 (Feb.8,2001).7 A securities transaction on an electronic bulletin system is often carried out as follows. A prospective buyer or sellerposts a message on the bulletin system. Normally, investors are required to input an indication of interest to purchaseor sell the security at a certain price, the trading amount, and contact information.Then another investor who seesthe information on the bulletin system contacts the buyer or seller The two parties negotiate over the Internet orphone and, after agreeing on the terms, exchange funds and securities independently of the issuer and its transferagentThe appropriate documentation is then submitted to the issuer's transfer agent in order to transfer record ownershipfrom the seller to the buyer In some jurisdictions, to avoid triggering various regulatory requirements, the issueror third party does not play any role in effecting the transactions and does not receive compensation for creatingor maintaining the system. In addition, the issuer or third party does not participate in any purchase or salenegotiations; does not provide advice as to whether an investor should buy or sell the security; and does not receive,transfer, or hold funds or securities as part of its operation of the system.The issuer may be required to keep recordsof all quotes entered into the system and make them available on request to the regulator and any market on whichthe securities are listed.8 The securities of emerging companies generally are not traded actively in an organized market (regulated exchangesor organized over-the-counter markets) and often do not satisfy the listing requirements of those markets.Copyright © by the Inter-American Development Bank. All rights reserved.For more information visit our website: www.iadb.org/pub