Lecture 2 Flashcards
What are advantages of a SPAC compared to an IPO?
Faster path to going public
Access to experienced sponsor (management team)
Price certainty because only two parties negotiating
Guaranteed capital and liquidity
What is a SPAC and how does it work?
SPAC is created by a group of investors called sponsor.
SPAC goes public through an IPO.
Funds raised are put in a trust account.
Search for appropriate private company to merge with.
If found, private company is merged into SPAC, therefore going public.
No appropriate company after two years, money + interest back to investors.
Name the two most important types of orders.
Market order - executed immediately
Price-contingent - investors specify the price to buy/sell
What is the spread in trading?
The difference between a bid and ask price, these amounts are captured by HFTs.
What is High Frequency Trading?
Due to technology, liquidity has increased and therefore, spreads have decreased. HFTs are ‘gaming’ the market in doing anything they can do to be first in the market. When an investor wants to buy for $15 and another investors wants to sell for $5. Normally, the order will be filled in the middle and the buyer will buy for $10 and the seller will receive $10, which means $5 profit for each. However, once the HFTs see this transaction, they quickly buy the order for $5 and sell it to the other investor for $15, making $10, which is the spread. However, nowadays these amounts are much smaller. Check Chipotle example.
What kind of trading opposes HFT trading?
IEX trading, they use an intentional delay on all trades which means the HFT firm cannot outpace other traders
What is a short sale?
A trade that profits from a decline in the price of a stock or security. It is the opposite of a long position. In a short sale, you borrow a stock which you immediately sell and you buy back that stock in the future for a hopefully lower price.
Describe the period before the Financial Crisis in 2008.
Also known as The Great Moderation; a time in which the US had a stable economy with low interest rates and a tame business cycle with only mild recessions, then came a boom in the housing market.
