Execution of Portfolio Decisions Flashcards
a compare market orders with limit orders, including the price and execution uncertainty of each; b calculate and interpret the effective spread of a market order and contrast it to the quoted bid–ask spread as a measure of trading cost; c compare alternative market structures and their relative advantages; d compare the roles of brokers and dealers; e explain the criteria of market quality and evaluate the quality of a market when given a description of its characteristics; f "explain th
Market Microstructure
“the market structures and processes that affect how the manager’s interest in buying or selling an asset is translated into executed trades”
Order Types
- Market orders
- Limit orders
Market order
instruction to execute an order promptly in the market at the best price available
Features:
- immediacy of execution
- price uncertainty
Limit order
instruction to trade at the best price available but only if the price is as good as the limit price specified in the order
Buy orders: trade price must not exceed the limit price
Sell order: trade price must be atleast as high the limit price
- execution uncertainty
Market not held order
where the order is handles by the agent of the trader in executing trades
“Not held” means the trader is not required to trade at any specific price or time interval
Participate (do not initiate) order
broker to be low key and wait for and respond to the initiative of more active traders
Best effort order
discretion on the agent to trade only when the market is favourable
Undisclosed limit order
reserve, hidden or iceberg order.
instruction not to show more than a max quantity of the unfilled order
Market on open order
to be executed on when the market opens
Special types of trades
Principal trade
Portfolio trade
Types of Market
Quote driven market
Order driven market
Brokered market
Quote driven market
execute trade with a dealer
price by the trader is bid-ask spread
dealer
business entity that is ready to buy/sell to complete the trade
bid ask spread
bid price - ready to buy, ask price - ready to sell
Role of Broker and Dealers
Broker - agent of the trader
- Execution of trade
- Representing the order
- Finding the opposite side of a trade - act as a dealer if he/she cannot find the opposite side - compensated - high costs
- Supplying market information
- Providing discretion and secrecy
- Providing other support services
- Supporting the market mechanism
Dealer - adversarial relationship with the trader.
