Equities: Market Organization and Structure Flashcards
Functions of the market x3 =
- allow market participants to do the things they want to (save, borrow, trade, raise capital)
- determine rates of return (interest rates) that balance demand for borrow and the supply of savings
- allocate capital efficiently
ATS =
alternative trading systems. aka ECN (electronic communication networks) or MTF (multilateral trading facility)
serve the same trading function as exchanges but have no regulatory function
ATS that do not reveal current client orders are called DARK POOLS
Short selling =
seller must pay all dividends or interest to the lender that they would have otherwise received - payments-in-lieu
short seller must deposit a portion of the short selling proceeds with broker - the broker may pay a portion of the interest from the proceeds to the short seller as the short rebate rate
Call money rate =
rate paid by investor to buy on margin - generally higher than the government bill rate
lower for large investors with better collateral
Margin call price formula =
if the maintenance margin is 25%, you must have 25% of the current price of the security in the margin account (not 25% of the original market price)
Execution instructions =
market order
limit order
volume instructions
all or nothing
hidden order or specify display size/iceberg order
Limit Orders =
limit buy order above the best ask/limit sell order below the best bid are said to MARKETABLE/AGGRESSIVELY PRICED - at least part of the order will execute immediately
limit buy/sell order between the best ask and best bid is MAKING A NEW MARKET/INSIDE THE MARKET
orders waiting to execute are STANDING LIMIT ORDERS
a limit buy order at the best bid/sell order at the best ask are said to MAKE THE MARKET
outside of this is FAR FROM THE MARKET
Validity Instructions =
Stop (loss) orders - protect profits/prevent losses
a stop sell order will trigger when the market falls below a certain price
a stop buy order will trigger when the market rises above a given price (used to cover a short, or to buy a stock that is undervalued but which you are waiting for the market to realise this)
REINFORCE MARKET MOMENTUM - execution prices are often unfavourable
Clearing instructions =
instructions to the trader as to how to clear and settle a trade.
ie is a sale a short sale or a long sale
for a short sale the broker must confirm the security can be borrowed and for a long sale confirm that it can be delivered.
IPO vs Private Placement =
issuance costs are less with a private placement
offer price is lower as the securities cannot be resold in the public markets
DRP, DRIP =
dividend reinvestment plan
allows existing shareholders to use their dividuends to buy new shares from the firm at a slight discount
Call markets =
‘continuous market’
potentially very liquid when in session
all trades, bids and asks are declared and one negotiated price is set that clears the market
used for smaller markets but also to set opening prices and prices after trading halts on major exchanges
Continuous markets =
trades occur at any time the market is open.
Price set by either auction process of by dealer bid-ask quotes
Quote, order and broker driven markets =
Quote driven: dealers make markets (OTC), holding an inventory of securities and posting a bid-ask
Order driven: orders are executed using trading rules (exchanges, automated trading systems)
ie, price priority, uniform pricing rule, discriminatory pricing rule, derivative pricing rule
Brokered market: brokers find the other half of a trade for their client. Esp valuable for large trades of illiquid securites where dealers won’t hold in inventory
Efficiencies of a functioning market =
operational efficiency
informational efficiency
allocational efficiency
