Market Structure Flashcards
what is a derivatives exchange?
provides a marketplace where someone can buy and sell futures, options and other contracts of specific quantities of a
commodity or financial instrument at a specified price with delivery set at a specified time in the future.
what is the biggest derivatives exchange in Europe?
Euronext, spanning the major cities in Europe, uses Optiq which allows trading on multiple markets and uses secure financial transaction infrastructure, trades cleared by LCH or EuroCCP.
what are the three broad categories of exchange members?
brokers: may only trade for third parties
dealers: can deal on their own accounts and others if they are authorised
broker-dealers: can trade on their own accounts and for third parties
what are the different types of clearing exchange members?
general members: can clear their own principal trades, on
behalf of their clients and on behalf of other non-clearing member
Individual members: only able to clear their own principal trades and trades on behalf of their clients
what are OTC markets?
decentralised markets in which participants trade securities directly between themselves, trading is conducted electronically or via telephone
who acts as a market maker in OTC markets and how?
dealers by quoting bid and offer prices for securities
what is the relationship between prices in an OTC market and participants?
trades can be executed without others being aware of the price it was completed at
what is the effect of transparency on regulation in OTC markets?
less transparent, less regulation
what is the utility offered by OTC markets?
those that are hedging can gain from it as the margining process is eliminated and settlement happens on a much more infrequent basis
what can OTC banking teams do for their clients?
high touch trading services, trading and sales desks provide direct trading advice to clients often on a 24/7 basis
what is the nature of pit trading?
traders quote bid and offer prices for contracts by shouting and sending hand signals face to face, used by the LME
what is the nature of screen-based markets?
orders are placed directly onto an electronic order book via traders’ computer terminals
how does telephone trading take place?
client calls their broker, who has a direct line to their trader, who quotes a price.
How does ICE trading take place?
trading takes place on its own designated platform, via applications that are embedded in ICE Connect that includes both online and mobile trading
what do customer order specify in a traditional open outcry system?
- the asset
- whether it is a buy or sell order
- the size of order (number of contracts or lots)
- the expiry month, and
- price conditions (if any).
that is the nature of screen-traded systems?
Orders are input and
then executed and reported by the system. trades are already matched when the order book links together a buyer and a seller.
what is a limit order?
stipulates a required price level, if the trade can be executed at a better price than stated, then it will be
what is a market order?
order to buy or sell immediately, doesn’t outline a set price, will be executed at the best price available.
what is a market-if-touched order?
a combination of a limit order and a market order. Initially, the trade
specifies a limit. If the market trades at or through the price, the order becomes a market order and will be executed at the best prevailing price.
what is an opening/closing order?
order with or without a set price that is executed during the opening or closing period, if it cant be then it is cancelled
what is a good ‘til cancelled order?
instruction accompanying an order and defines the period of validity for an order
what is an immediate or cancel order?
fill or kill, execute it all at once or cancel if not achievable with market conditions
what is a stop (or loss) order?
designed to limit trading losses, closes the position if the price moves against the trader, triggered when the market trades at the stipulated price
what is a stop limit order?
order stipulates two prices within which the stop order operates. Once the stop price is reached, a stop limit order becomes a limit order that will be
executed at a specified price (or better).
what is a day order?
order to buy or sell a security that automatically expires if not executed on the day
the order was placed
what is a correction declaration?
where the exchange allows a brokerage firm to submit a declaration of a mistake being made and wrong trades may be reversed
what is a cross trade?
where a match has been established by negotiation prior to entry in the system as long as the orders are entered in seperately
what are block trades?
large transactions made between an exchange member and a wholesale client to transact bilaterally agreed transactions without delay. exchange determines size and products, must be reported between 5 mins- 1 hour
what are basis trades?
simultaneous exchange of a financial asset or instrument together with an appropriate offsetting number of futures contracts
what does a FLEX facility allow?
gives any exchange member the freedom to customise trades with respect to price and expiration date- combines this with clearing and other advantages of exchange trading
what are the main advantages of OTC markets?
- products can be unique
- degree of confidentiality
- counterparty risk is mitigated by regulatory reporting
- lighter on back office teams
what are the main disadvantages of OTC trading?
- lower liquidity
- cost is proportional to the degree of tailoring of the OTC structure
what is novation?
the process by which the clearing house becomes a counterparty to all trades
what does acting in principal mean?
member is carrying out the trade on their own behalf and will be subject to profits and losses on those trades
what does acting as an agent mean?
firm is carrying out the trade on behalf of clients
what is dual capacity?
when a member firm is able to trade on their own accounts and also on behalf of clients
what does opening/closing trades do?
either create or offset a position in the market and either incur or extinguish rights and obligations
what is cross trading?
when a brokerage firm matches the buy order of one client against the sell order of another when one is non-competitive with price
how is the liquidity of a derivatives contract measured?
volume (cumulative number of contracts traded so far each day)
open interest (number of contracts for any delivery month that remain open)
what is an audit trail?
record of transaction, assists in the resolution of disputes and promotes confidence in an exchange
how can derivatives exchanges regulate their members?
by knowing what trades have been executed by their members
what is the process involved with trade registration?
once a deal has taken place the position will need to be allocated to a relevant account, trade details will be reported to the exchange’s admin system who will match all inputs
what does pre-registration involve?
a member firm allocating a deal to a second member, know as allocation
what are the 3 different types of accounts trades can be assigned to?
- house
- segregated
- non-segregated
why is it important that exchanges publish accurate open interest data?
so observers and investors can make judgements in respect of their positions and trading strategies
why are give-up trades performed?
to separate the execution and the clearing function
what is the requirements for OTC trade reporting?
it must be inputted into the participant’s internal trade reporting system and be recorded by the risk management system
how do exchanges disseminate trade reporting information?
through a price feed to it’s members, and making this info available to quote vendors
what do price screens generally include?
bid and offer price, volume traded and open interest plus information on the opening and closing price
