Thousands of market participants are involved in trading stocks, options, government bonds, and other financial products in the United States. These participants include exchanges at which orders to buy and sell are executed, broker-dealers who present those orders on behalf of their customers, clearing organizations that ensure that ownership is transferred, and banks that process payments for securities transactions. Although many organizations are active in the financial markets, some organizations, such as the major exchanges, clearing firms, and large broker-dealers are more important for the overall market’s ability to function because they offer unique products or perform vital services. The participants in these markets are overseen by various federal securities and banking regulators whose regulatory missions vary. Financial markets also rely heavily on information technology systems and extensive and sophisticated communications networks. As a result, physical and electronic security measures and business continuity planning are critical to maintaining and restoring operations in the event of a disaster or attack. Customer orders for stocks and options, including those from individual investors and from institutions such as mutual funds, are usually executed at one of the many exchanges located around the United States. Currently, stocks are traded on at least eight exchanges, including the New York Stock Exchange (NYSE), the American Stock Exchange, and the NASDAQ. Securities options are traded at five exchanges, including the Chicago Board Options Exchange and the Pacific Stock Exchange. Trading on the stock exchanges usually begins when customers’ orders are routed to the exchange floor either by telephone or through electronic systems to specialist brokers. These brokers facilitate trading in specific stocks by matching orders to buy and sell. For stocks traded on NASDAQ, customers’ orders are routed for execution to the various brokers who act as market makers by posting price quotes at which they are willing to buy or sell particular securities on that market’s electronic quotation system. Some stocks traded on NASDAQ can be quoted by just a single broker making a market for that security, but others have hundreds of brokers acting as market makers in a particular security by buying and selling shares from their own inventories. Orders for options are often executed on the floors of an exchange in an open-outcry pit in which the representatives of sometimes hundreds of brokers buy and sell options contracts on behalf of their customers. The orders executed on the various markets usually come from broker- dealers. Individual and institutional investors open accounts with these firms and, for a per-transaction commission or an annual fee, the broker- dealer buys and sells stocks, bonds, options, and other securities on the customers’ behalf. Employees of these firms may provide specific investment advice or develop investment plans for investors. Although some firms only offer brokerage services and route customer orders to other firms or exchanges for execution, some also act as dealers and fill customer orders to buy or sell shares from their own inventory. In addition to the exchanges, customers’ orders can also be executed on electronic communications networks (ECN), which match their customers’ buy and sell orders to those submitted by their other customers. The various ECNs specialize in providing different services to their customers such as rapid executions or anonymous trading for large orders. After a securities trade is executed, the ownership of the security must be transferred and payment must be exchanged between the buyer and the seller. This process is known as clearance and settlement. Figure 1 illustrates the clearance and settlement process and the various participants, including broker-dealers, the clearing organization for stocks (the National Securities Clearing Corporation or NSCC), and the Depository Trust Company (which maintains records of ownership for the bulk of the securities traded in the United States). The Options Clearing Corporation plays a similar role in clearing and settling securities options transactions. After options trades are executed, the broker-dealers on either side of the trade compare trade details with each other, and the clearing organization and payments are exchanged on T+1. Banks also participate in U.S. securities markets in various ways. Some banks act as clearing banks by maintaining accounts for broker-dealers and accepting and making payments for these firms. Some banks also act as custodians of securities by maintaining custody of securities owned by other financial institutions or individuals. The market for the U.S. government securities issued by the Department of the Treasury (Treasury) is one of the largest markets in the world. These securities include Treasury bills, notes, and bonds of varying maturities. Trading in government securities does not take place on organized exchanges. Instead, these securities are traded in an “over-the-counter” market and are carried out by telephone calls between buying and selling dealers. To facilitate this trading, a small number of specialized firms, known as inter-dealer brokers (IDB) act as intermediaries and arrange trades in Treasury securities between other broker-dealers. The use of the IDBs allows other broker-dealers to maintain anonymity in their trading activity, which reduces the likelihood that they will obtain disadvantageous prices when buying or selling large amounts of securities. Trades between the IDBs and other broker-dealers are submitted for clearance and settled at the Government Securities Clearing Corporation (GSCC). After trade details are compared on the night of the trade date, GSCC provides settlement instructions to the broker-dealers and their clearing banks. Settlement with these banks and the clearing organization’s bank typically occurs one business day after the trade (T+1) with ownership of securities bought and sold transferred either on the books of clearing banks or the books of the Federal Reserve through its Fedwire Securities Transfer System. Two banks, JPMorgan Chase and the Bank of New York, provide clearing and settlement services for many major broker- dealers in the government securities market. Many of the same participants in the government securities markets are also active in the markets for money market instruments. These are short- term instruments that include federal funds, foreign exchange transactions, and commercial paper. Commercial paper issuances are debt obligations issued by banks, corporations, and other borrowers to obtain financing for 1 to 270 days. Another type of money market instrument widely used for short-term financing is the repurchase agreement or repo, in which a party seeking financing sells securities, typically government securities, to another party while simultaneously agreeing to buy them back at a future date, such as overnight or some other set term. The seller obtains the use of the funds exchanged for the securities, and the buyer earns a return on their funds when the securities are repurchased at a higher price than originally sold. Active participants in the repo market include the Federal Reserve, which uses repos in the conduct of monetary policy, and large holders of government securities, such as foreign central banks or pension funds, which use repos to obtain additional investment income. Broker-dealers are active users of repos for financing their daily operations. To facilitate this market, the IDBs often match buyers and sellers of repos; and the funds involved are exchanged between the government securities clearing organization and the clearing banks of market participants. According to data reported by the Federal Reserve, repo transactions valued at over $1 trillion occur daily in the United States. Payments for corporate and government securities transactions, as well as for business and consumer transactions, are transferred by payment system processors. One of these processors is the Federal Reserve, which owns and operates the Fedwire Funds Transfer System. Fedwire connects 9,500 depository institutions and electronically transfers large dollar value payments associated with financial market and other commercial activities in the United States. Fedwire is generally the system used to transfer payments for securities between the banks used by the clearing organization and market participants. Another large dollar transfer system is the Clearing House Inter-bank Payments System (CHIPS). CHIPS is a system for payment transfers, particularly for those U.S. dollar payments relating to foreign exchange and other transactions between banks in the United States and in other countries. Although thousands of entities are active in the U.S. securities markets, certain key participants are critical to the ability of the markets to function. Although multiple markets exist for trading stocks or stock options, some are more important than others as a result of the products they offer or the functions they perform. For example, an exchange that attracts the greatest trading volume may act as a price setter for the securities it offers, and the prices for trades that occur on that exchange are then used as the basis for trades in other markets that offer those same securities. On June 8, 2001, when a software malfunction halted trading on NYSE, the regional exchanges also suspended trading although their systems were not affected. Other market participants are critical to overall market functioning because they consolidate and distribute price quotations or information on executed trades. Markets also cannot function without the activities performed by the clearing organizations; and in some cases, only one clearing organization exists for particular products. In contrast, disruptions at other participants may have less severe impacts on the ability of the markets to function. For example, many of the options traded on the Chicago Board Options Exchange are also traded on other U.S. options markets. Thus if this exchange was not operational, investors would still be able to trade these options on the other markets, although certain proprietary products, such as options on selected indexes, might be unavailable temporarily. Other participants may be critical to the overall functioning of the markets only in the aggregate. Investors can choose to use any one of thousands of broker-dealers registered in the United States. If one of these firms is unable to operate, its customers may be inconvenienced or unable to trade, but the impact on the markets as a whole may just be a lower level of liquidity or reduced price competitiveness. But a small number of large broker-dealers account for sizeable portions of the daily trading volume on many exchanges and if several of these large firms are unable to operate, the markets might not have sufficient trading volume to function in an orderly or fair way. Several federal organizations oversee the various securities market participants. The Securities and Exchange Commission (SEC) regulates the stock and options exchanges and the clearing organizations for those products.