Lecture 3 Flashcards
There was One specialist for each stock what obligations do they have?
- Affirmative obligations to offer liquidity - traders of last resort. (if you can’t find a counter party to ask they will have to trade give you a bid and offer)
- Negative obligations – yield to public orders. (if you have the same price as public order you give the priority to the public order )
Why do specialists pay the price?
To pay for informational advantage
What 3 brokers on NYSE?
- House Broker / Commission Brokers
- Independent Brokers
- Floor Traders / Competitive Traders
What are House Broker / Commission Brokers?
- Represent brokerage houses and deal with the public and handle orders originate off the floor
- Nowadays they tend to handle large and complex executions needed by institutional customers
What are Independent Brokers?
- Known as $2 brokers or broker’s broker
* They are able to execute complex orders which require skills and reputation on the floor
What are Floor Traders / Competitive Traders?
•They trade in stocks on the floor for an account in which there is an interest.
The role of the specialist has been passed on to:
designated market makers (DMMs)
Do specialists still have advantages?
•DMMs no longer possess trading advantages as they have no special access to order books
What are Alternative Trading Systems (ATS)?
Trading venue that is not registered with the SEC as an exchange. It centralizes, crosses, matches and executes trading interest.
-they are not regulated like other exchanges
famous example of Alternative Trading Systems (ATS)?
liquidnet famous excample
Types of ATS:
- Dark Pools and “Crossing Networks”;
- Electronic Communication Networks (ECNs);
- Internalization Crossing Networks (big banks)
What is liquidity? definition
Liquidity refers to an asset’s ability to be easily purchased or sold without causing significant change in the price of the asset.
•Assets can be easily traded with low transactions costs at any time with little impact on the asset’s price.
Black (1971) describe liquidity as:
- Able to buy and sell SMALL AMOUNTS at the bid ask price immediately
- Investors can buy or sell large amount over longer time period given two conditions:
- All trader un-informed (no special information )
- Genuine long time period
- Investor can buy or sell large block of stock immediately but at a premium or discount that depends on size of the block.
A market is liquid if:
uniformed traders can quickly buy or sell large size amounts when they want at low transaction costs
Kyle (1985) - Liquidity dimensions:
Width:
Depth:
Relativity:
Width: the cost per unit.
Depth: the size available at a given cost.
Resiliency: time that passes before traders recognize uninformed traders have caused prices to change.
