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Investment Environment: 1 > Chapter 9 > Flashcards

Chapter 9 Flashcards

1
Q

Liquid markets

A

Caused by price transparency

Also have lower transaction costs

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2
Q

Explicit and Implicit costs of transactions

A

Implicit:
Bid Offer spread - higher spreads more illiquid
Price impact of trade: large orders shift price
Opportunity cost, chance to wait for price to fall

Explicit:
Broker fees 
Stamp duty (0.5%)
Takeover panel £1 on >£10k orders 
FX movements
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3
Q

SETS

A

Continuous order book execution system for FTSE and liquid AIM shares

Had order driven but market makers to increase liquidity

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4
Q

SETSqx

How many market makers needed?

When do market makers make offers?

When do continuos order book trades be executed?

A

Hybrid. Continuous order book execution with market maker help

No minimum amount needed

Market makers make offers throughout day from 8-4:35

Central order book execution occurs at 8,9,11,2,4:35

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5
Q

SEAQ

A

For shares to illiquid for SETS and SETSqx. Quite driven shares

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6
Q

Main UK dealing systems

International Order Book

A

Order book driven system for international depositary receipts

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7
Q

Main UK dealing systems

European Quotw Service

A

Quote driven service for European securities

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8
Q

MAin UK dealing systems

Order book for retail bonds (ORB)

A

Order book driven service for gilts, super national bonds and corporate bonds

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9
Q

What does LCH Clearnet do

A

Central counterparty (CCP) for all transactions on SETS

Managed default risk for both parties buyer and seller

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10
Q

Dealing (principal)

Vs

Broker (agent)

Or

Dual capacity

A

Dealing - the firm is taking a position itself. Buy low sell high.

Broker - acting on behalf of the client. Will earn commission not the difference between buy and sell price

Dual capacity - can act as both at discretion

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11
Q

Market makers, what do they do?

Gilt market maker name
Bond market maker name

A

Create liquidity and a certain buyer and seller

Bond MM - FIMMs
Gilt MM - GEMMs

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12
Q

Inter dealer broker -

Benefit
What they are
How they provide info
What it acts as

A

Registered with exchange to provide intermediary services for buyer and seller

Anonymous buying and selling

Acts as CCP

Creates Risk-less principal transactions

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13
Q

Explain process of Stock Borrowing and Lending Intermediary:

SBLI

A

Market maker sells 1000 shares of a security they don’t own

They have T+2 to provide

Contact SBLI

Large institutional investor (pension fund for example) will lend the stock to the market maker for a fee (collateral needed) via the SBLI.

SBLI is the middle man

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14
Q

Quote driven market?

What is it?

Example of market on LSE

A

Quote driven requires price makers, such as market makers to state their buy and sell price

Prices will show on screen and transactions made over the telephone

Benefit is there is continuous liquidity (always a buyer and seller)

SEAQ is quote driven

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15
Q

Order driven market

What is it?
Any in UK?
Open outcry market?

A

Order driven markets have no MArket makers or price makers

Simple submit orders and wait for execution

No certainty if liquidity as stock is sold or bought if a price can be matched

Open outcry market is order driven.

None in UK, US NYSE offers this type of trading. London’s Metal Exchange offers open outcry in derivatives.

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16
Q

Hybrid systems (order driven and quote driven)

Explain

A

Both quote and order driven

SETS is an example

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17
Q

Order Limit Order:

At best order:

A

Order limit order states both price and how many shares. It will buy up all shares at that price until amount reached. If not available, say only half, it will buy and leave offer on SETS until execution can be made

At Best Order: states amount of shares wanted but not a price. Wants the best price. If want 10,000 shares. 9,000 listed at 210p they will he bought them next 1,000 at best price.

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18
Q

The role of market makers

How many?
When must they provide quotes
What’s the Exchange Market Size?

A

Provide liquidity

Must be at least two

Must provide quotes in Mandatory Quote Period

The exchange market size is the average shares traded in a day. The market maker just make offers on or above this number

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19
Q

MTFs

Recognised by MiFID? What does this mean?

Benefit

Order or quote driven?

A

Multi lateral trading facility

Pre and post sale disclosures as well as price transparency

Not recognised by regulator so easy to set up

Order driven

Sits between OTC and exchanges

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20
Q

Dark Pool

What is it?

Benefits?

A

Execution service for buyers and seller

Large investors can list orders for large quantities without listing a price or who they are.

This aims to reduce impact on price with large orders

Due to lack of transparency, these are considers over the counter

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21
Q

High Frequency Trading

Advantages

Disadvantages

Regulation?

A

Advantages:
Higher liquidity
Lower commissions in market

Disadvantages:
Higher market volatility = systematic risk

MiFID II ability to:
Slow down flow of orders
Adopt minimum tick sizes
Provide environment to test algorithms.

22
Q

High Frequency Trading Strategies (4)

Market Making -

Ticker tape trading -

Event arbitrage -

Statistical arbitrage -

A

Market making - algorithm is programmed to buy and sell closely around current price

Ticker tape trading - algorithm is programmed to analyse information being released at the moment of release. For example, if a large order is being placed. It will act on information

Event arbitrage - acts on recurring events before humans can act/notice them

Statistical arbitrage - programmed to identify price discrepancies among assets and trading on mispricing

23
Q

BOND MARKET

GEMMs - Gild edged market makers

Who regulated them

Who do they register with?

What do they do?

A

GEMMs are market makers for government gilts

They buy government gilts and sell on the market to brokers. Not oblifged to offer to other GEMMs

Register with DMO, Debt Managwment office

Regulated by FCA

24
Q

BOND MARKET

Broker Dealer:

What do they do?

A

Trade gilts as agent or principal

They have dual capacity

25
Q

BOND MARKET

Inter Broker Dealer (IBD)

What are they what do they do?

A

Act as intermediary between LSE firms to offset positions for gilts

Use GEMMs and Equity MM and act as middle man

26
Q

Why do the government issue gilts?

A

To fund public sector net cash requirement

PSNCR

27
Q

Issuance of Gilts: Primary Issuance

Who manages gov debt

What % are index linked gilts (ILGs)

Methods of issuing gilts?

A

DMO manages government debt headed by treasury

15% are index linked

Auction gilts or Tap method (slower release)

28
Q

Gilts settled T+ what?

A

T+1

29
Q

Can retail clients buy gilts?

A

Yes, but through a broker

30
Q

Where can investors buy gilts?

A

Through DMO auction or on LSE

31
Q

Where are most gilts traded?

A

Through e trading between member firms.

GEMMs provide liquidity but majority done on the above

32
Q

What is a private placing on corporate bonds

A

A select few of professional clients are offered bonds

33
Q

Corporate Bond Underwriting?

A

Where the bank ensures the issuer of bonds will have a certain amount sold. Even if the underwriter (usually The bank has to buy some if not all the bonds themselves)

34
Q

What is a Bought Deal in an open offer of corporate bonds?

A

Where the lead bank buys all the bonds and sells to the rest of the syndicate (banks)

35
Q

What is a fixed price re offering with corporate bonds

A

Where lead bank and syndicate buy the bonds and sell them at a fixed price for a period of time to the market

36
Q

What can have the longer maturity, gilts or corporate bonds

A

Corporate bonds, maturities of up to 100 years

37
Q

What’s a Eurobond?

A

Where the denomination of the bond is different from that in the issuing country

Dollar bond in London

38
Q

Where are Eurobonds held

Examples

A

International central securities depositories (ICSDs)

Examples are euroclear and Clearstream

This is called immobilisation

39
Q

Two main types of issuance for Eurobonds!

A

Bought deal? Where lead bank sells all bonds to syndicates

Fixed price re offer - where lead and syndicate bugs all bonds and then sells for fixed price for fixed period

40
Q

Eurobonds are most commonly traded where

A

OTC

BUT, exchanged becoming more popular

41
Q

Who regulated international bond market?

A

ICMA, international capital market association

42
Q

Settlement of European bonds is reported to where and is T+ ?

A

Reported to ICMA and is T+1

Settlement then is T+2

43
Q

Outcry derivatives is what?

A

Face to face, ‘crying out’ shouting orders.

This still occurs on MYMEX and LME.

44
Q

Derivatives is mainly exchanged how?

A

Through screen based exchange on Universal Trading Platform created by ICE Futures Europe

45
Q

Are OTC Derivative trades subject to MiFID pre and post trade rules

A

No but there are reports required

46
Q

Why are OTC derivatives good and what are they

A

Over counter trades between to eligible counter parties done by telephone or on screen based

Guarantor not involved (LCH Clearnet or ICE Clear Europe) so credit worthiness is important!

Good because they are flexible and can he change for hedge purposes

47
Q

Who oversees Derivatives market?

A

ISDA, international swaps and derivatives association

48
Q

Regulation of the derivatives market is done by whom!

A

European Markets Infrastructure Regulatiojn

49
Q

CREST settlement time for:

Corporate Bonds + Equities

Gilts

A

T+2

T+1

50
Q

Explain initial markets in relation to Clearing Houses

A

initial margins is a good will payment from members of clearing house

Reduces risk of the clearing house

If a member defaults it can use the initial margin to cover shortfall

Prices are always changing and the risk of the CH is always changing so members may receive margin bills to cover this

51
Q

Explain variable margin in the case of clearing houses

A

Variable margin is profit and loss on derivative

Losers pay clearing house and clearing house send that winners
F

Investment Environment: 1 (4 decks)

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