2 - Market Structures Flashcards
Market structure:
trading rules and trading systems used by market
- affects information asymmetry in market and who trades profitably
Sessions
- Call
- Continuous
Execution systems
- Quote-driven
- Order-driven
- Hybrid
Information Systems
- Information collection
- Order routing/presentation
Quote driven Markets
In pure quote markets, public traders cannot arrange trades among themselves
- dealers supply liquidity
- dealers quote bid/ask prices
Order-driven markets
All traders issue orders to the exchange
Brokered markets
Trade initiators contacts broker - who then finds counter parties
Item traded is somehow unique and when dealers are unwilling to hold inventories
Hybrid markets
Most common: dealer-specialist
- order-driven auction markets in which the specialist must provide liquidity under some circumstances
Information systems
bring info in/out
- info collection systems
- info distribution systems
- order routing systems
- order presentation systems
Order presentation systems
manage exchange of info about orders
- open outcry auctions (oral auctions)
- board-based trading systems
- screen based trading systems
Order books
- manage and store info about standing orders:
- electronic or paper based
Hold extremely valuable info
- front running opportunities
- arbitrage
Traders need to leave standing limit orders in the order books for order-book matching to work
- some traders do not want to show their orders
Price steps
minimum price multiples for a security
- depends upon the market price of security
Transparency Markets
report complete information to the public quickly
- Ex ante: market quickly reports all quotes and orders to the public
- Ex post: market quickly reports all trades to the public
Order precedence rules
Facilitate matching of buy orders with sell orders
Time precedence
All orders ranked by their arrival times
Increase in tick size makes:
time precedence more important
Price priority rule
- Pricing determine the trade prices
- Pricing rules vary across exchanges & sessions
- Call/periodic markets use uniform pricing
- collect orders for batch processing
- Call/periodic markets use uniform pricing
Uniform pricing rule
Used at market open, in many exchanges and after trading halts
All matched orders executed at same price
- maximises commission
Discriminatory pricing rule
trade price is limit price of standing limit order
Derivative pricing rule
matching orders executed at prices determined elsewhere
