CFA 45: Market Organization and Structure Flashcards
information-motivated traders
trade to profit from information that they believe allows them to predict future prices
primary captial markets (primary markets)
markets in which companies and governments raise capital (funds)
secondary market
where investors sell securities to others
money markets
trade debt instruments maturing in one year or less
capital markets
trade debt instruments of a duration longer than one year
traditional investment markets
include all publicly traded debts and equities and shares in pooled investment vehicles that hold publicly traded debts and/or equities
alternative investment markets
include hedge funds, prive equities, commodities, real eastate securities and real estate properties, securitized debts, operating leases, machinery, collectibles, and precisous gems; investments are often hard to trade and value
warrant
attached option that gives its holder the right to buy the underlying stock of the issuing company at a fixed exercise price until the expiration date; EXERCISE PRICE is the price that the warrant holder must pay to buy the security
forward contract
An agreement between two parties in which one party, the buyer, agrees to buy from the other party, the seller, an underlying asset at a later date for a price established at the start of the contract.
counterparty risk
The risk taht the other party to a contract will fail to honor the terms of the contract
futures contract
A variation of a forward contract that has essentially the same basic definition but with some additional features, such as a clearinghouse guarantee against credit losses, a daily settlement of gains and losses, and an organized electronic or floor trading facility.
clearinghouse
An entity asscociated with a futures market that acts as middleman between the contracting parties and guarantees to each party the performance of the other.
initial margin
The amount that must be deposited in a clearinghouse account when entering into a futures contract.
maintenance margin
The minimum amount that is required by a futures clearinghouse to maintain a margin account and to protect against default. Participants whose margin balances drop below the required maintenance margin must replenish their accounts.
variation margin
Additional margin that must be deposited in an amount sufficient to bring the balance up to the initial margin requirement.
swap contract
An agreement between two parties to exchange a series of future cash flows.
interest rate swap
A swap in which the underlying is an interest rate. Can be viewed as a currency swap in which both currencies are the same and can be created as a combination of currency swaps.
commodity swap
A swap in which the underlying is a commodity such as oil, gold, or an agricultural product.
currency swap
A swap in which each party makes interest payments to the other in different currencies.
equity swap
A swap transaction in which at least one cash flow is tied to the return to an equity portfolio position, often an equity index.
option contract (option)
A financial instrument that gives one party the right, but not the obligation, to buy or sell an underlying asset from or to another party at a fixed price over a specific period of time. Also referred to as contingent claim or option contract.
call option
An option that gives the holder the right to BUY an underlying asset from another party at a fixed price over a specific period of time.
put option
An option that gives the holder the right to SELL an underlying asset to another party at a fixed price over a specific period of time.
European-style option contract
Said of an option contract that can only be exercised on the option’s expiration date.
American-style option contract
Said of an option contract that can be exercised at ANY time up to the option’s expiration date.
block brokers
A broker (agent) that provides brokerage services for large-size traders.
investment banks
Financial intermediaries that provide advise to their mostly CORPORATE clients and help them arrange transactions such as intial and seasoned securities offerings.
exchanges
Places where traders can meet to arrange their trades.
alternative trading systems (ATS)
electronic communications networks (ECNs)
multilateral trading facilities (MTFs)
Trading venues that function like exchanges but that do not exercise regulatory authority over their subscribers except with respect to the conduct of the subscribers’ trading in their trading systems.
dark pools
Alternative trading systems that do not display the orders that their clients send to them.
dealers
A financial intermediary that acts as a principal in trades.
liquidity
The ability to purchase or sell an asset quickly and easily at a price close to FAIR MARKET VALUE. The ability to meet short-term obligations using assets that ar the most readily converted into cash.
broker-dealer
A financial intermediary (often a company) that may function as a principal (dealer) or as an agent (broker) depending on the type of trade.
special purpose vehicle (SPV)
special purpose entity (SPE)
A non-operating entity created to carry out a specified purpose, such as leasing assets or securitizing receivables; can be a corporation, partnership, trust, limited liability, or partnership formed to facilitate a specific type of business activity.
depository institutions
Commerical banks, savings and loan banks, credit unions,, and similar institutions that raise funds from depositors and other investors and lend it to borrowers.
arbitrageurs
Traders who engage in arbitrage.
long position
A position in an asset or contract in which one owns the asset or has an exercisable right under the contract.
short position
A postiion in an asset or contract in which one has sold an asset one DOES NOT OWN, or which a right under a contract can be exercised against oneself.
margin loan
Money borrowered from a broker to purchase securities.
call money rate
The interest rate taht buyers pay for their maring loan.
initial margin requirement
The margin requirement on the first day of a transaction as well as on any day in which additional margin funds must be deposited.
financial leverage
The extend to which a company can effect, through the use of debt, a proportional change in the return on common equity that is greater than a given proportional change in operation income; also, short for the financial leverate RATIO.
total return variables
Depends on: price change of purchased security, dividents or interest paid by the security, the interest paid on the margin loan, and commissions paid to buy AND sell the security.
maintenance margin requirement
The margin requirement on any day other than the first day of a transaction.
margin call
A request for the short to deposit additional funds to bring their balance up to initial margin.
orders
A specification of what instrument to trade, how much to trade, and whether to buy or sell.
execution instructions
Instructions that indicate how to fill an order.
validity instructions
Instructions which indicate when the order may be filled.
clearing instructions
Instructions that indicate how to arrange hte final settlement (“clearing”) of a trade.
bid
The price at which a dealer or trader is willing to buy an asset, typically qualified by a maximum quantity.
ask (offer)
The price at which a delaer or trader is willing to sell an asset, typically qualified by a maximum quantity.
bid size
The maximum quantity of an asset that pertains to a specific bid price from at trader.
ask size
The maximum quantity of an asset that pertains to a specific ask price from a trader. For example, if the ask for a share issue is $30 for a size of 1,000 shares, the trader is offering to sell at $30 up to 1,000 shares.
best bid
The highest bid in the market.
best offer
The lowest offer (ask price) in the market.
market bid-ask spread
The difference between the best bid and the best offer.
market order
Instructions to a broker or exchange to obtain the best price immediately available when filling an order.
limit order
Instructions to a broker or exchange to obtain the best price immediately available when filling an order, but in no event accept a price higher than a specified (limit) price when buying or accept a price lower than a specified (limit) price when selling.
behind the market
Said of prices specified in orders taht are worse than the best current price; e.g., for a limit buy order, a limit price below the best bid.
standing limit orders
A limit order at a price below market and which therefore is waiting to trade.
marketable limit orders
A buy limit order in which the limit price is placed above the best offer, or a sell limit order in which the limit price is placed below the best bid. Such orders generally will partially or completely fill right away.
limit order book
The book or list of limit orders to buy and sell that pertains to a security.
all-or-nothing (AON) orders
An order that includes the instruction to trade only if the trade fills the entire quantity (size) specified.
hidden orders
An order that is exposed not to the public but only to the brokers or exchanges that receive it.
display size
The size of an order displayed to public view.
iceberg orders
An order in which the display size is less than the order’s full size.
day orders
An order that is good for the day on which it is submitted. If it has not been filled by the close of business, the order expires unfilled.
good-till-cancelled orders (GTC)
An order specifying that it is valid until the entity placing the order has cancelled it (or, commonly, until some specified amount of time such as 60 days has elapsed, whichever comes sooner).
immediate or cancel orders (fill or kill)
An order that is valid only upon receipt by the broker or exchange. If such an order cannot be filled in part or in whole upon receipt, it cancels immediately.
good-on-close orders (market-on-close)
An execution instruction specifying that an order can only be filled at the close of trading.
good-on-open orders
An execution instruction specifying that an order can only be filled at the opening of trading.
stop order (stop-loss)
An order in which a trader has specified a stop price condition.
initial public offering (IPO)
The first issuance of common shares to the public by a formerly private corporation.
book building
Investment bankers’ process of compiling a “book” list of indications of interest to buy part of an offering.
accelerated book build
An offering of securities by an investment bank acting as principal that is accomplished in only one or two days.
underwritten offering (firm commitment offering)
A type of securities issue mechanism in which the investment bank guarantees the sale of the securities at an offering price that is negotiated with the issuer.
lead underwriter
The lead investment bank in a syndicate of investment banks and broker-dealers involved in a securities underwriting.
best effort offering
An offering of a security using an investment bank in which the investment bank, as agent for the issuer, promises to use its best efforts to sell teh offering but does not guarantee that a specific amount will be sold.
private placement
Typically a non-underwritten , unregistered offering of securities taht are sold only to an investor or a small group of investors. It can be accomplisthed directly between the issuer and the investor(s) or through an investment bank.
shelf registration
Type of public offering that allows the issuer to file a single, all-encompasssing offering circular that covers a series of bond issues.
liquid market
Said of a market in which traders can buy or sell with low total transaction costs when they want to trade.
call market
A market in which trades occur only at a particular time and place (i.e. when the market is called).
continuous trading market
A market in which trades can be arranged and executed any time the market is open.
brokered markets
A market in which brokers arrange trades among their clients.
quote-driven markets
A market in which dealers acting as principals facilitate trading.
order-driven markets
A market (generally an auction market) that uses rules to arrange trades based on the orders that traders submit; in their pure form, such markets do not make use of dealers.
order precendence hierarchy
With respect to the execution of orders to trade, a set of rules that determines which orders execute before other orders.
price priority
The principle that the highest priced buy orders and the lowest priced sell orders execute first.
secondary precendence rules
Rules that determine how to rank orders placed at the same time.
uniform pricing rule
All trades execute at the same price. The market chooses the price that maximizes the total quantity traded.
discriminatory pricing rule
A pricing rule used in continuous markets in which the limit price of the order or quote that first arrived determines the trade price.
crossing networks
Trading systems that match buyers and sellers who are willing to trade at prices obtained from other markets.
derivative pricing rule
A pricing rule used by crossing networks in which a price is taken (derived) from the price that is current in the asset’s primary market.
brokered market
A market in which brokers arrange trades among their clients.
complete markets
Informally, markets in which the variety of distinct securities traded is so broad that any desired payoff in a future state-of-the-world is achievable.
operationally efficient
Said of a market, financial system, a=or an economy that has relatively low transaction costs.
informationally efficient markets
A market in which asset prices reflect new information quickly and rationally.
allocationally efficient
Said of a market, a financial system, or an economy that promotes the allocation of resources to their highest value uses.
objectives of market regulation
control fraud; control agency problems; promote fairness; set mustually beneficial standards; prevent undercapitalized financial firms from exploiting their investors by making excessively risky investments; ensure that long-term liabilities are funded
