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finc302 - applied investments > **6. Transaction Costs** > Flashcards

**6. Transaction Costs** Flashcards

1
Q

Direct T-costs

A

Brokerage commissions, spreads, margin interest, etc.I

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2
Q

Indirect T-costs

A

Price impact, price slippage, execution risk, price improvement, etc.

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3
Q

Market order to buy

A

Instructs the broker to buy at the best price available - executed at the lowest ask price

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4
Q

Market order to sell

A

Instructs the broker to sell at the best price available @ highest bid price

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5
Q

Limit order to buy

A

instructs the broker to buy at the limit price or below

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6
Q

Limit order to sell

A

instructs the broker to sell at the limit price or above

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7
Q

Submitter of a limit order is a

A

market marker

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8
Q

Submitter of a market order is a

A

price taker

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9
Q

Brokers execute customers order by ____

A

sending limit and market orders to centralised limit order book (CLOB)

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10
Q

NYSE is a ____ market, limit orders are quoted against the spread quoted by _____

A

Specialised market, the designated market maker (DMM)

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11
Q

Drawbacks on limit orders

A

Once the price hits the limit, the order will be executed

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12
Q

Buy limit orders will be executed on ___ news

A

Bad (price going down)

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13
Q

Sell limit orders will be executed on ___ news

A

Good (price going up)

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14
Q

Marketable limit orders can be executed ___

A

immediately

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15
Q

marketable limit order to buy is an order to…

A

buy at or above the current best ask price

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16
Q

marketable limit order to sell is an order to…

A

sell at or below the current best bid price

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17
Q

Bid

A

Price people want to buy (highest on top)

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18
Q

Ask

A

Price people want to sell (lowest on top)

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19
Q

Stop-loss orders

A

Placed with a broker to buy or sell a specific stock once the stock reaches or breaks through a specified stop price - designed to limit an investor’s loss on a position

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20
Q

Stop-limit orders

A

Triggers submission of a limit order
Stop price - price that activates the limit order and is based on the last trade price
Limit price - price constraint required to execute the order once triggered

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21
Q

Is there a guarantee with a stop-limit order?

A

No - as both stop and limit price required

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22
Q

Trailing stop order

A

sets the stop price at a fixed amount below the market price with an attached trailing amount (e.g. 10%)

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23
Q

Price priority, time priority and quantity priority

A

Gives precedence to buyers with highest bid price and sellers with lowest ask price

If there are multiple orders at the same price, then order with an earlier time trades first

Orders at same price will get partial execution in proportion to the size of their order

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24
Q

NASDAQ gives precedence to traders with

A

Highest quantity (for orders at the same price)

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25
Q

NYSE uses … allocation model

A

parity/priority

26
Q

Parity Priority Model

A

Rewards the person who sets the best price as they offer deep liquidity - price setter will receive full allocation of their shares and remaining shares at same price from other buyers will be split equally

27
Q

Bid Ask Spread Percentage

A

Ask - Bid/Bid

28
Q

Fair Price

A

Middle price of bid ask spread

29
Q

Part of the bid-ask spread is kept by the…

A

market maker who is handling the transaction

30
Q

Why doesn’t all of the bid ask spread go to the market maker? (3)

A
  • some traders might be able to trade at mid-spread prices
  • Spreads can move in volatile markets
  • market makers might have to give up some of the spread due to price improvements
31
Q

Bid ask spread compensates the market makers for… (3)

A
  1. riskiness of holding inventory (29%)
  2. costs associated with processing orders (expenses etc.) (61%)
  3. adverse information cost (10%)
32
Q

Bid-ask spread is low for…

A

less volatile stocks, stocks with high trading volume and stocks with higher prices than their peers

33
Q

Relative bid-ask spread

A

Ask - bid/price

34
Q

Low priced stocks have _____ spreads

A

large

35
Q

DMM post prices at which they will ____

A

buy or sell a specific security

36
Q

Bid-ask bounce effect

A

Prices of securities bounces back and forth between bid and ask prices as some traders are buying at ask prices from DMM and others are selling at bid price to DMM

37
Q

Margin money

A

cash investors deposits to borrow a margin loan from broker to buy stock

38
Q

How margin account works?

A

Deposit money into your account, place the order with the broker and the broker will lend you up to 50% of the value of the trade/stock, your trade/stocks will remain with the broker as collateral

39
Q

Maintenance margin

A

Amount of equity an investor must maintain in the margin account - U.S. federal law requires that investors equity in the margin account should not fall below 25%

40
Q

Margin call

A

Margin account falls below maintenance, investor receives a call to deposit additional money to return the account to maintenance - this is a courtesy not legal requirement

41
Q

Price impact is part of ….

A

transaction costs

42
Q

What is price impact?

A

When prices move against you while you are trading (up when buying and down when selling)

43
Q

Why is there price impact? (2)

A

Markets are not completely liquid
Informational - large trades attract the attention of other traders due to this potentially being related to new information

44
Q

Sunshine Trade

A

Trade involving a large block of stock that is publicised to the market before the order for the trade is made

45
Q

Why do sunshine trades exist?

A

to reduce price impact by illiquidity

46
Q

A stand in the market on NZX

A

Bid to buy (never to sell) a large block of stock during a pre-specified time window, to avoid price impact, can be on or off market

47
Q

Bidders in large stands are required to bid on market for at least

A

1/5 of the target purchase

48
Q

Price Slippage

A

Occurs when execution price of a trade is different from its requested price (e.g. orders could not be matched at preferred prices) - typically occurs in highly volatile fast moving markets

49
Q

Negative slippage

A

Investor places order to buy at $X –> order executed at price more than $X -

50
Q

Positive Slippage

A

Investor places order to sell at $X –> order executed at a price more than $X

51
Q

Price improvement

A

Amount of savings a trader may receive on trade compared to the price quoted at the time the order was priced

52
Q

Faster you order is executed, _____ likely to get a price improvement

A

less

53
Q

Magnitude and frequency of price improvements are _____ for stocks with wide spreads, fewer trades and smaller trade sizes

A

Greater

54
Q

Block trades

A

Large trading off-market order made by institutional investors of at last 10,000 shares or at a total market value of more than $200,000

55
Q

In NZ a stand in the market is also a____

A

private order

56
Q

Stands in the market in NZ take a long time to be ____

A

filled

57
Q

Off-market trade in NZ is similar to

A

Block trade

58
Q

When should you short sell?

A

When you expect the share price to go down

59
Q

Short-sell process (4)

A
  1. borrow shares from broker
  2. sell shares
  3. buy back (typically at lower price)
  4. return shares to broker
60
Q

How would you short sell for the purpose of hedging?

A

Write a short put option

61
Q

Uptick rule

A

you cannot short sell a stock if the price has ticked down

finc302 - applied investments (13 decks)

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