Chapter 6 Flashcards
Market Participants
Principal -
Member firm of a stock exchange acting as principal is effectively buying shares for its own account, hoping they increase in value and then selling them on.
Described as DEALERS or MARKET MAKERS.
Agent -
Firms arranging deals on behalf of clients. Commission is charged.
Described as BROKER.
Individual firms can act in both capacities.
Dealing Rules
Best Execution -
Executing on terms that are most favourable for clients.
For retail client this is judged by price and costs.
Firms must establish an order execution policy to give to their clients.
Timely execution -
Must be prompt and executed in the order they are received.
Aggregation and Allocation -
Firms must only aggregate their own account deals with clients if this is unlikely to disadvantage clients. This must be disclosed to the client and order allocation policy has to be established.
Front Running
Dealing ahead of customers orders.
Where an investment manager has personally purchased shares in a company and subsequently encouraged his clients to purchase shares in the same company enable him to sell his shares at a profit.
This is considered market abuse. Chinese Walls must be put in place to stop conflicts of interest such as this.
Trading Venues
- Regulated Markets
- Multi-lateral trading facilities
Alternative trading systems that can be operated by firms or exchanges.
Small value, high volume trades.
They aren’t an exchange.
Open order book type venue bringing together buyers and sellers.
Subscribers can post orders to the system which will be communicated by Electronic Communication Network (ECN) to other subscribers to view and match the order. Settled using a counterparty. - Systematic Internalisers
Investment firm that deals on its own trading. Matches orders internally. Have to be transparent by showing prices before and after trading. - Organised trading facilities (OTFs)
Bring together third parties.
Includes brokers crossing systems and inter dealer broker systems and dark pools.
LSE SETS (Stock Exchange Electronic Trading System) Order Book
7:50 - 8am
Opening auction before automatic execution begins. Opening prices are calculated here.
2 minute extension to the open auction (plus 0-30 second random period) occurs if there are unexecuted market orders on the order book following opening auction.
5 minute extension plus random period occurs if the opening price is more than 5% away from last trade on previous business day.
8am - 4:30pm
SETS automatic trading takes place. Orders given priority by price and then time.
Final auction establishes closing prices.
25 minutes until 5pm
Participants can delete orders but no execution takes place in this time.
Trade Reporting
Trade reporting is automatic for LSE electronic order books.
Manually reporting trades must be done within 3 minutes of execution.
7:15am - 5:15pm is the trade reporting period.
If trade takes place between 7:15 am and 8 am, it must be reported before 8 am or within three minutes if later.
If tread takes place within the last three minutes of the trade reporting period it must be reported before 5:15 pm.
If the trade is executed outside of the trade reporting times, it must be submitted before 7:45 am the next day.
The responsibility for trade reporting is with the most senior party. If both parties are the same seniority then the selling member reports the trade.
Seniority:
Market maker
Broker dealer
Nonmember
Quote Driven and Order Driven Markets
Quote Driven
Market makers have role of executing buy and sell orders. They make money on the dealing spread.
Order Driven
Uses brokers to find other member firms to undertake the trade using electronic order driven systems.
Automatically matches a buyer and seller in chronological order by price and quantity of shares.
Types of Market Order
At best -
Specifies the number of shares to be bought or sold and is executed immediately at the best possible price.
Limit -
Investor must specify quantity and minimum price to sell our maximum price to buy. Doesn’t have to be executed immediately can remain in SETS for 90 calendar days can be partially filled.
Execute and eliminate -
Filled in whole or in part at the stipulated price with any unfilled portion of the order being automatically deleted from the system.
Fill or kill -
If the entire order cannot be filled immediately at the price stipulated by the investor, it is automatically deleted.
Iceberg -
Large limit orders with only a certain and specified portion of the order public visible.
Stop-loss -
An order that will be packed until the stock price is met. The order will then be entered for a media execution at best.
Stop limit -
An order that will be parked until the stock price is met. Order will be entered as a standard limit order.
