CHAPTER 17: ORDERS AND TRADE EXECUTION Flashcards
Equities that are not listed on either a physical or electronic exchange are referred to as
OTC Equities or non-exchange-traded securities.
True or False. U.S. government bonds, some corporate bonds, and certain derivates products, are also traded in the OTC market through various dealer-to-dealer networks.
True
Also called an order memorandum, is a record of a customer’s instructions regarding the execution of a buy or sell order.
An order ticket
This is often executed between the bid and offer with both customers paying the firm a commission.
Agency Cross
A brokerage firm that executes a customer order by locating another party willing to take the other side of the transaction.
Is performing a _______.
Agency Cross
is a financial institution or individual that actively quotes both a buy and a sell price for a financial instrument (e.g., stocks, bonds, or derivatives) in order to facilitate trading and maintain liquidity in the market.
- profit from the bid-ask spread, which is the difference between the buy and sell prices.
Market Maker
A _ firm that executes a customer order by taking the other side of the transaction itself.
Dealer. (Acting as a principal)
The dealer profits by purchasing securities from customers at one price and selling those securities to other customers at a higher price.
Customer wants to sell (dealer is buying) therefore dealer performs a mark down
Customer wants to buy (dealer is selling) therefore is charged a mark up.
When a firm buys a security and brings it into its inventory to fill preexisting customer orders, it’s capacity is considered to be a
Riskless principal
Ex: 10 customer market orders to purchase 100 shares of stock that the dealer doesn’t maintain in its inventory, the firm may choose to buy 1,000 shares as principal from another dealer and then resell the securities to its customers at the same price with a markup included.
refers to the act of facilitating the buying or selling of goods, services, or financial assets between two or more parties. In other words, a broker acts as an intermediary or middleman between buyers and sellers to help them execute a transaction.
Brokering a trade
When a firm buys securities for or sells securities from its own inventory, it’s acting as a _
dealer (principal)
A dealer that always stands ready to buy or sell a specific stock is called a _ in that stock and assumes risk by taking the other side of the trade.
market maker
if a dealer (market maker) is quoting a stock at $20.00 - $20.25, it’s willing buy stock at $_ per share and sell it for $_ per share to other dealers.
if a dealer (market maker) is quoting a stock at $20.00 - $20.25, it’s willing buy stock at $20 per share and sell it for $20.25 per share to other dealers. The $.25 difference between the bid of $20.00 and the ask of $20.25 is the spread—a source of profit for the market maker.
In a _ trade, rather than charging a markup, the dealer profits by charging a different price for the securities
net-basis trade
Any dealers that execute net-basis trades with customers are subject to both disclosure and consent requirements. In a net basis trade, a firm’s profit is not disclosed on the customer’s confirmation; however, in a riskless principal trade, the markup must be disclosed.
The _ role includes maintaining liquidity, promoting a fair and orderly market,
and resolving trade imbalances that result from a temporary lack of supply or demand in a particular
security.
Designated Market Maker’s (DMM)
The DMM must buy for and sell from its own account (acting as a dealer) to make the market
fair and orderly. In doing so, the DMM must be a buyer when there are no buyers and be a seller when
there are no sellers. The result of these actions is a narrowing of the spread between transactions.
The _ is the only member that’s allowed to continuously buy and sell stock on a principal basis (i.e., make a market). In return for this privilege, the _ must stand ready to buy when there’s an excess in selling interest.
The DMM is the only member that’s allowed to continuously buy and sell stock on a principal basis (i.e., make a market). In return for this privilege, the DMM must stand ready to buy when there’s an excess in selling interest.
is a type of order where the trader gives the broker discretion over the price and time of execution. The broker is expected to use their judgment to obtain the best possible price for the trader, considering market conditions and the trader’s objectives.
Not-held Orders
is an electronic trading system used by the New York Stock Exchange (NYSE) to facilitate the trading of stocks and other financial instruments
The Super Display Book (SDBK)
_ orders can be accepted on the DMM’s book because they have a specified price, and the order will only be executed when the market reaches that price. This allows the DMM to maintain an orderly book with a record of active limit orders waiting for execution.
However, _ orders and _ orders cannot be accepted on the book because they require immediate execution. _ orders must be executed as soon as they are received, and _ orders leave the execution to the broker’s discretion. In both cases, these orders do not have a specific price that can be recorded on the DMM’s book, so they must be handled separately and executed immediately. This ensures that the orders are executed in a timely manner, prioritizing the trader’s objectives of speed or discretion over price.
Open limit orders can be accepted on the DMM’s book because they have a specified price, and the order will only be executed when the market reaches that price. This allows the DMM to maintain an orderly book with a record of active limit orders waiting for execution.
However, market orders and not-held orders cannot be accepted on the book because they require immediate execution. Market orders must be executed as soon as they are received, and not-held orders leave the execution to the broker’s discretion. In both cases, these orders do not have a specific price that can be recorded on the DMM’s book, so they must be handled separately and executed immediately. This ensures that the orders are executed in a timely manner, prioritizing the trader’s objectives of speed or discretion over price.
True or Fals. By trading during imbalances, the DMM is maintaining liquidity in the market for that stock
True
True or False. Since a DMM may not compete with public orders, it may only
bid for stock higher or offer stock lower than the prevailing market price to reduce the spread.
TRUE
For example,
if a quote is 40.00 bid and 40.10 offered, the DMM may bid 40.01 or higher and offer 40.09 or lower.
is a practice that may be carried out by a designated market maker (DMM) on a stock exchange like the New York Stock Exchange (NYSE). It involves the DMM guaranteeing an execution price for a floor broker’s client order, usually in the context of an opening or closing auction. The DMM essentially “stops” or “locks” the stock at a specific price for the order, providing price certainty to the client.
- Members are required to report to their customers that the order was stopped if
both members agree to the terms. - If an order is executed at a less favorable price than the agreed upon
price, the member that agreed to the stop is liable for the difference
“Stopping Stock”
A DMM is able to stop stock if it’s for a public order, but not for its own account or an account for
another member firm.
Most debt securities trade in these dealer-to-dealer settings (often referred to as over-the-counter
[OTC] markets), including:
- corporate bonds
- municipal bonds
- U.S. government and government agency securities
The person responsible for maintaining the broker-dealer’s inventory and trading the firm’s proprietary account is typically called a
“proprietary trader” or “prop trader.”
The stated price at which market makers are willing to buy or sell
securities is considered their _
The stated price at which market makers are willing to buy or sell
securities is considered their firm quote
