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
