1 - The Trading Process Flashcards
What is the basic function of the market?
To bring together buyers and sellers
Capital market necessary for:
Economic growth and development
Companies need capital to fund projects
Secondary market
Price Discovery:
process of determining the price for an asset through the interaction of buyers and sellers
Investing linked to:
rationale to buy or sell
to exploit undervaluation
Trade Decision:
concerns how to execute the investment decision, in which markets, at what prices and times, and through which agents
- acquisition of information
- routing of the order
- execution of the trade
- confirmation, clearance and settlement
Buy Side:
people and institutions who use financial services
Sell Side:
those who provide financial services
Examples of Utilitarian Traders
Investors
Borrowers
Asset exchangers
Examples of profit motivated traders
Speculators
Arbitrageurs
Real Assets:
represent ownership of tangible things
Financial Assets:
are instruments that represent ownership of real assets and cash flow they produce
Derivative contracts:
derive their values from other instruments values
Orders:
instructions to trade, given to brokers and/or exchanges
Limit order:
instructs broker to trade at best price available but do not violate limit price condition
- do not buy at a price above the limit price
- do not sell at a price less than the limit price
Limit orders may not execute.
Standing limit orders supply liquidity by allowing others to trade when they want
Market orders:
buy/sell orders that are to be executed immediately at the market price
Properties or market order:
- Consumption of liquidity
- Have market impact when brokers move prices to find liquidity
- Execution near certain but execution maybe uncertain
Stop orders:
price contingent orders
- activate when their price contingency is met
- almost always market orders
- typically are use to close losing positions
Duration orders:
- Day order
- Good till canceled order
- Fill or kill order
- Immediate or cancel orders
Bargaining:
negotiation process over contract terms (e.g price & quantity) that occurs between a buyer and a seller
- useful when dealing in large sizes
Auction:
competitive market process involving multiple buyers, multiple sellers, or both
- useful and cost effective method for pricing a security with an unknown value
Walrasian auction:
simultaneous auction where each buyer submits to the auction his demand and each sellers submits his supply for a given security at every possible price
- e.g. opening and closing auctions on ASX
Dutch (english) auction:
descending (ascending) auction
First-Price sealed- bid auctions:
Have all bidders simultaneously submit sealed bids
- Winner is one who submits highest bid
- Winner facers ‘winner’s curse’ problem if value is unknown
Continuous double auctions - NYSE, ASX
- Buyers submit bids (max buy prices) and sellers submit offers (min sell price)
- Bids and offers are ranked by their price levels
- Transaction occurs when the highest bid and lowest offer match
Development in Markets
Late 90s and early 2000s saw most world stock exchanges demutualize and go public
- Profit motives led to need for growth and subsequently mergers
Past decade development:
- Numerous new entrants in market: Alternative Trading Systems
- Markets have become fragmented: Chi-X in Australia
- New types of traders focusing on speed and technology
- Innovation in the way trading is done
