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IMC Unit 1 > Chapter 9 > Flashcards

Chapter 9 Flashcards

1
Q

Stock Market

A

Concentrate liquidity for trading in one place for equity markets

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2
Q

Broker Dealers (Dual)

A

Deal with dual capacity, either as a principal (own money) or agent (OBO)

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3
Q

Market Maker

A

Liquidity providers that volunteers to exchange to provide continuous liquidity through two way pricing on a list of securities

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4
Q

SBLI Services

A

Stock Borrowing and Lending Intermediary
Assisted stock lending, enables shorting
Custodian firm that’s been approved to lend out its stock to short sellers

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5
Q

IDB Services

A

Inter dealer broker
An agent between two brokers as they don’t want to trade face to face in case of information leakage

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6
Q

Local

A

Trader acting on their own behalf, self-employed

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7
Q

Order Driven

A

High natural liquidity without market maker intervention
Limit order at which they’re willing to trade
Uses electronic trading

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8
Q

Quote Driven

A

Less natural liquidity
Market makers provide pricing through bid/offer spreads
Binding up to certain volumes
Screen (other firms can see quotes) and phone based

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9
Q

Hydrid System

A

Platform that sits between order and quote driven
Medium liquidity
SETSqx
Limit orders only, no continuous order book trader

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10
Q

Liquidity

A

Exchange provides a liquid venue, a centralised marketplace
Standardisation of contracts, particular derivatives
Clearing and settlement services

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11
Q

Transparency

A

Firms can see others trading on the exchange
Exchange publishes pricing to support valuations
Firms on exchange are regulated, both by state regulator and the exchange itself
Pre- and post-trade disclosure requirements on firms

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12
Q

Dealing Costs

A

Purchase or sale:
- Commission (% on total share value exchanged)
- Stamp duty (0.5%, if via CREST (electronic) then rounded to nearest 1p, if paper-based round up to nearest £5)
- Takeover panel levy (£1 on transactions over £10k)

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13
Q

SETS

A

Electronic order book system of the LSE (equities)
High liquidity trading venue
All official list and most AIM shares
Auction periods at pre-open (07:50), midday (12:00) and pre-close (16:30)
Auctions create valuations points for the stock
No automatic execution during the auction

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14
Q

Matching

A

Computer program post-auction to create a price where the maximum volume of securities can change hands
Random time of completion so that continuous order trading cannot be guessed at

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15
Q

NMS

A

Normal market size, or exchange market size, for each of the securities on the exchange for the minimum volume request

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16
Q

Limit Order

A

Request to buy or sell at or exceeding the price included on the order
Executor cannot execute outside of these limits

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17
Q

At Best Order

A

Buy or sell a volume at the best available price on the market

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18
Q

Order Priority

A

If price and volume can be met, then the oldest existing pricing is then executed as a first priority

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19
Q

Touch Strip

A

Highlights best available prices on a ticker that are available on the exchange

20
Q

MIFID Directive

A

Opened up multiple trading venues to find liquidity

21
Q

MTF

A

Multi-lateral trading facility
Hosted by an authorised firm on a website, like an order book, outside of a traditional exchange
Operated by regulated firms who cannot take their own positions
Improves liquidity and transparency relative to OTC markets

22
Q

OTF

A

Organised Trading Facility
Similar to an MTF, operated by regulated firm, but with discretionary execution
OTF operator can take their own positions
Better liquidity and price discovery

23
Q

Dark Pool

A

MTF but with exemptions on pre- and post-trade transactions under MIFID
Highly liquid markets with OTC confidentiality to move larger volumes with less impact

24
Q

Systematic Internaliser

A

Investment firm that provides many exchange services
Matching through internal tools that does not go through the main exchange but is a mini-exchange and reporting is required

25
Q

Gilts

A

UK government bonds
When there is a need to borrow, gilts are issued by the government (DMO - an executive agent of HM Treasury)

26
Q

GEMMs

A

Gilt-edged market markers are firms which support the issuance of new gilts
Also known as primary dealers, typically investment banks
- Registerered with Debt Management Office (DMO)
- Expected to participate in DMO auctions
- Quote firm bid/offer spreads during mandatory pricing period (MQP)
- Must partipate in Gilt auctions

27
Q

PSNCR

A

= Government spending - Taxation receipts
Public sector net cash requirement is covered by gilts issued by the government
Managed by DMO through their auctions

28
Q

Bond Trading (LSE)

A

Quote driven, trade reporting as close to real time as possible

29
Q

Bond Trading

A

OTC e-trading systems, commonly referred to as Straight Through Processing (STP)
Settlement via CREST at T+1

30
Q

Strips

A

Large denominations of gilts designated as strippable into smaller denominations to make them easier to trade on the secondary markets or a zero coupon bond
Permitted parties:
- GEMMS
- HM Treasury (DMO)
- BofE

31
Q

Corporate Bonds

A

Issued by companies that want to raise via debt rather than equity
- Private placement (small volumes to insti/prof investors)
- Underwriting (bought deal or fixed price reoffer)
- Bought deal (one IB buys whole issue)
- Fixed price reoffer (IB syndicate buys bonds)
Only raise on the initial deal on issue, rather than on the secondary market trading
Mainly trade OTC, some over LSE SEAQ and ORB
Settlement is T+2

32
Q

Eurobond / International Bonds

A

International bonds denominated in euros outside its country of origin
e.g. UK company issues $ bonds anywhere outside of the US = euro (dollar) bond
Gross annual coupon
Regulated by International Capital Market Association
Reporting is T+1
Settlement is T+2

33
Q

Domestic Bonds

A

Issued in home market in local currency from local issuers
e.g. UK company issues £ bonds in the UK

34
Q

Foreign Bonds

A

Issued away from home market in the issuing market local currency
e.g. UK company issues $ bonds in the US

35
Q

Derivatives

A

Exchange traded derivatives
Agency and principal trading
e.g. LME and the ICE Futures
- Speculation for taking on risk
- Hedging for reducing risk
- Arbitrage for risk-free profit due to anomolies

36
Q

OTC (Derivatives)

A

Bespoke contracts
Limited liquity tends to lead to slower execution
Less stringent regulation on the instrument but limitations around investor usage, increasing through EMIR
Exposed to default risk
Confidential reporting
Negotiated pricing or under an RFQ
Custom and specific hedges can be curated

37
Q

Derivatives (ETD)

A

Standardised contracts
More liquid than OTC contracts
Margin required which mitigates counterparty risk
Exchanges subject to significant regulation
Transaparency and reporting requirements
Best execution pricing
Hedges based on standardised contracts and need to be actively managed to continue derisking portfolio

38
Q

EMIR

A

European Markets Infrastructure Regulation, equivalent to US Dodd-Frank
Regulated OTC derivatives
- All OTC derivatives trades to be reported to trade respository
- All financial and non-financial counterparties to adequately manage risk (reconciliations and collateral)
- Requirement to use central counterparty where mandatory clearing is in effect

39
Q

Novation

A

OTC trades register at the clearing house or CCP (central counterparty)
CCP novates the trade to split OTC trade into a buy and sell with the CCP from either side of the transaction
Clearing house is the guarantor and requests initial margin from the two sides of the transaction
Faciliates closing out trades ahead of physical delivery of the derivative contract

40
Q

Initial Margin

A

Returnable good faith deposit on execution

41
Q

Variation Margin

A

Daily receipts and payments or unrealised P&L
An adjustment to the initial margin

42
Q

Derivative Settlement

A

Transfer securities from seller to buyer and cash in the other direction
Most held in central securities depositories (CSDs) which are electronic registers of assets

43
Q

CREST

A

Central securities despository (CSD) operated by Euroclear
Operates delivery vs payment transactions
Calculates SDRT
Equity & Corporate Bonds = T+2
Gilts = T+10

44
Q

SDRT

A

Stamp Duty Reserve Tax
Electronic stamp duty

45
Q

CREST CCSS

A

Courier and sorting services
Operates delivery for physical securities via stock transfer forms

46
Q

Developed Markets

A

Countries with formal regulatory authorities
High income economies with size generally governed by market capitalisation of companies
Free (highly liquid) and transparent markets
Costs are reasonably competititive with explicit fees

47
Q

Emerging Markets

A

Lax regulations and incidents of financial crime
Markets with capitalisation of less than 2% of world market
Quality of instruments and transparency standards are lower
Inefficient pricing with abnormalities

IMC Unit 1 (10 decks)

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