Introduction to Financial Markets (2) Flashcards
Why are most financial markets currently ELECTRONIC?
PRICE EFFICIENCY
EASE AND EQUALITY OF ACCESS
VOLUME
Which is the most important classification criteria?
CHARACTERISTICS OF THE INSTRUMENTS TRADED
- Money Markets (ST < 1 year, low risk, high liquidity)
- Capital Markets (LT debt market; stock market, higher risk)
TRADING PHASE
- Primary
- Secondary
Phases of any operation?
- TRANSACTION
- SETTLEMENT AND COMPENSATION
- REGISTER
offer high quality conditions so that operators choose that market (fees, liquidity…)
What are the main TRANSACTION COSTS?
IMPLICIT COSTS
related to liquidity, due to mishandling, not the optimal
EXPLICIT COSTS
real and directly charged to the current account
- there is much competition among brokers
- broker fee is not including the others that the market charges
- commission rates are set freely, law only stipulates a max of 2.5%
- the commission charged is shared between the market, the entity that performed the operation and the broker.
ALL COSTS MUST ADD TO THE EFFECTIVE VOLUME OF THE OPERATION
What is the DEPTH of the market?
Number of shares or effective volume available on each side.
What is the BID-ASK SPREAD?
Is the difference between Best Buy and sell price, shows the cost of buying and immediately selling it.
Greater spread = Less liquidity
What FEES can we identify in the market?
TRADITIONAL FEES
The market charges to liquidity makers and takers
MARKET-TAKER FEES
Charge only to the customers who TAKE liquidity. Offers a rebate to providers, stimulates trending activity.
TAKER-MAKER FEES
Charges to the liquidity provider (MAKER) while offer a rebate to the taker.
What TYPES of markets can we differentiate?
NOT CONTINUOUS; NOT ELECTRONIC
Markets that only open for a short time every day, based on access to privileged info – corros market; rumours market
NOT CONTINUOUS; ELECTRONIC
Electronic auction markets, such as the stock market opening and closing markets (Eq P, info about the P of the asset, reference P)
CONTINUOUS; NOT ELECTRONIC
Open all day, generally have a parallel electronic market. This systems are increasingly significant (NYSE, German Derivatives Market…)
CONTINUOUS; ELECTRONIC
Almost every share, bond and derivatives market, all work with LOB (Reuters screen) although their transparency and organisation can be greater or smaller
Develop on CONTINUOUS MARKETS
PRICE-DRIVEN MARKETS
Markets with market makers, who provide liquidity
(POSSIBLE COLLUSION)
ORDER-DRIVEN MARKETS
markets that allow for anyone to place orders aka anyone can provide liquidity
(NO GUARANTEE OF EXECUTION)
Why has competition between markets increased?
- MARKET LIBERALIZATION
- BUSINESS GLOBALIZATION
- DEVELOPMENT OF INFORMATION TECHNOLOGY
- LEGISLATIVE CHANGES
- competition
- fragmentation - TECHNOLOGICAL CHANGES (controversy)
- algorithm trading
- HFT (2/3 of all transactions, small profit margins which add up to millions)
What do we mean with BAD HFT?
Exploit the lack of regulation and ability to detect and take advantage of market inefficiencies
FRONT RUNNING
buy and quickly sell at a slightly higher P
QUOTE STUFFING
market manipulation, flood of info which makes other participants lose good deals
QUOTE SPOOFING
market manipulation, placement of overpriced offers (instantly cancelled) which create the illusion of higher D&P, then they sell real orders at a higher P
What do we mean with GOOD HFT?
They place and purchase orders continuously.
Investment in infrastructure - CO-LOCATION
decreases risk and transaction costs
increases liquidity
What regulations are intended to control HFT?
Europea Stock Exchange Act - MiFiD 2014
- Automatic “Trading Stops”
- “Tick Size” (min amount +/- P)
- Financial transaction tax
further?
- limits on the amount of cancellations
- minimum holding period
- NO co-location aka no privileged access
