Chapter 4 - Assessing returns on Shares

Question 1

Describe the difference between order-driven and quote-driven dealing

Answer 1

Order driven:-
* Stockbroker places an order to buy or sell a specified number of shares at a particular price
on a matching order system

• SETS, which stands for Stock Exchange Electronic Trading System, is an order based
  system on the London Stock Exchange (LSE)

Quote driven:-
* Firm two way prices are quoted by the market
makers, normally on a computer screen

• Trades are then conducted through the market
  makers who receive orders from brokers
• The prices quoted will be a bid price for sellers (the
  price at which the market maker is
  prepared to buy from them) and an offer price for
  buyers (the price at which the market
  maker is prepared to sell to them)
• The highest bid price and the lowest offer price is
  known as the “touch price”

Question 2

What are MiFID and MTF’s?

Answer 2

MiFID stands for Market in Financial Instruments Directive.

It is a European Union (EU) directive. MiFID aims to provide a harmonised regulatory regime for
financial services across the European Economic Area (EEA) which comprises the full EU member
states plus Norway, Iceland and Liechtenstein.

MiFIDs two main objectives are to increase competition and assist consumer protection.

MiFIDs main coverage is Authorisation, regulation and passporting - firms authorised in their home
state are able to use the MiFID passport to provide services in another EEA states.

• Client categorisation – clients are categorised into “Eligible Counterparties” “Professional Clients” and “Retail Clients”
• Client order handling - firms have to act in their client’s best interest, especially when aggregating orders from different clients
• Pre-trade transparency - companies have to provide information on the best price levels (order matching systems) and best bids and offers (market maker quote system)
• Post trade transparency - the price, volume and time of all trades in listed shares must be published unless they qualify for delayed publication
• Best execution - firms should be able to show they have taken reasonable steps to secure the best deal for their client when executing orders to buy/sell securities.
  This will include cost/speed/size/likelihood or execution and settlement/ other matters to achieve best result
  for client

Multilateral Trading Facilities (MTFs) are alternative trading facilities enabled by MiFID and which
compete with established Recognised Investment Exchanges (RIEs). They differ from RIEs in as
much as they do not act as counterparties to transactions and they do not facilitate listings.

MTFs aim to offer lower costs and speedier execution than RIEs.

Examples of MTFs currently include:
Chi-X Europe
BATS Europe