4. Stock market

Question 1

What are trading systems?

Answer 1

• ATSs (alternative trading systems)
• MTFs (multilateral trading facilities) allow buyers and sellers of securities to deal directly with each other.
• ECNs (electronic communication networks) are a subset of ATSs/MTFs that allow brokers and traders to trade without the need of the middleman.

Question 2

Why are ECNs better than other types of systems?

Answer 2

• Transparency: everyone can see unfilled orders
• Cost reduction: smaller spreads
• Faster execution
• After-hours trading

Question 3

What are ECNs downsides?

Answer 3

• Don’t work as well with thinly-traded stocks
• Many ECN competing for volume, which can be confusing
• Major exchanges are fighting ECNs, with an uncertain outcome

Question 4

What errors exist in valuation?

Answer 4

• Problems with Estimating Growth
• Problems with Estimating Risk
• Problems with Forecasting Dividends