Chapter 3: Market Structure Flashcards
To be added - exchanges
What are the 3 main types of exchange memberships?
Brokers - can trade for third parties
Dealers - can trade for their own account and other members if they are authorised
Broker-dealers - can trade for their won account and third parties
What are the 2 types of clearing house members?
General Clearing Members (GCMs) can clear:
own trades
client trades
non-member trades
Individual Clearing Members (ICMs)
own trades
client trades
How does the price mechanism work in OTC markets?
OTCs are traded electronically and are decentralised and quotes are provided by market makers.
What are markets that use pit trading and open outcry?
London Metal Exchange
Chicago Board Of Trade
New York Stock Exchange
What is a limit order?
Required price level specified. Once reached, trade is executed at that price or the best available price
What is a market order?
Order to buy or sell immediately at any price point.
What is a Market If Touched (MIT) order?
Once price level is reached, who order is executed. Slippage will not prevent the order from being executed.
What is an opening order?
An order without a price to be executed in the first 2 minutes of trading otherwise it is cancelled.
What is a closing order?
An order without a price to be executed in the last 2 minutes of trading otherwise it is cancelled.
What’s a good ‘til cancelled order?
Instruction accompanying order to specify how long a trade is valid. This type is valid until cancelled by the buyer.
What is an immediate or cancelled order?
If the whole order cannot be completed, the whole trade must be cancelled.
What is a stop (or loss) order?
When stipulated price (which Is below the current market price) is reached, the shares will be sold at highest possible price.
What is a stop limit order?
Same as a stop order, but when price reaches stipulated level, a limit order will be introduced.
What is a day order?
Order to buy or sell a security that is cancelled if not executed on the day.
What is a block trade?
Large transaction made between an exchange member and a wholesale client. These are made away from the central order book and are reported into the exchange after they have been executed.
What is a basis trade?
Exchange of a financial instrument for an offsetting amount of futures. These are dealt off exchange and are reported separately. One segment of this is the FLEX facility
What is an ATS in relation to OTCs?
An Alternative Trading System is where OTCs must be traded. ATSs are usually be set by large financial institutions.
For which derivative type does the buyer initiate delivery?
Options.
What does it mean when an exchange member acts as principal or agent in the market?
Principal - acts in the market on their own account
Agent - acts in the market on behalf of a third party
What does it mean if a member can act in dual capacity?
They can act as both a principal and agent in the market.
What is cross trading?
When a broker matched a sell and buy order of 2 of its clients. Cross trades have to be executed in the market so others have an opportunity to trade at the prevailing price.
What is on OATS?
Audit trails are required to promote confidence in exchanges. Most exchanges require members firms to have an Order Suit Trail System in order to track orders and ensure clear resolution of disputes.
What are the 3 types of client accounts?
House - benefit of clearing member - contains no client trades
Segregated - for trades registered on behalf of a client. Funds protected from member firm if defaulting
Non-segregated - for trades registered on behalf of a client. Assets are commingled. Typically numbered in an omnibus account.
