Module 36.3: Order Execution and Validity Flashcards

1
Q

What is the bid price and offer price?

A

bid price = the price at which a dealer will buy a security

offer / ask price = the price at which a dealer will sell a security

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2
Q

what is the relationship between trading volume and the bid-ask spread?

A

more liquid securities have market quotations with bid-ask spreads that are lower and therefore have less transaction costs

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3
Q

What are execution instructions, validity instructions, and clearing instructions?

A

execution - how to trade

validity - specify when the order can be filled

clearing - how to settle the trade

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4
Q

what is a market order vs. limit order (execution instructions)?

A

market order - instructs broker to execute the trade immediately at the best possible price

limit order - places a minimum execution price on sell orders and a maximum execution price on buy orders

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5
Q

what is an iceberg order?

A

when only part of the transaction is displayed to the public, part of the order is hidden from view.

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6
Q

What is a stop loss order?

A

only trade when a certain price is met, usually used to prevent losses or to protect profits.

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7
Q

why would a trader enter into a stop buy order?

A

1) a trader with a short position could attempt to limit losses from an increasing stock price
2) it is often said “you don’t get paid for being right until the market agrees with you”.

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8
Q

What are indications of interest in the IPO process? What is the process called?

A

when a bank finds investors who agree to buy part of the issue.

Process of gathering indications of interest is called “book building”

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9
Q

What is an underwritten offering vs. best effots?

A

underwritten - the investment bank agrees to buy all unpurchased shares

best efforts - not obligated to buy unpurchased sales.

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10
Q

What is the concern of an investment bank in an underwritten offer?

A

conflict of interest exists. should get price as high as possible for client, but would prefer to keep price low enough that all shares sell.

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11
Q

What is a call market structure vs. continuous?

A

stock is only traded at specific times, potentially very liquid when in session because all traders are present.

continuous market trades can occur t any time and the price is set by either the auction process or be dealer bid-ask quotes.

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12
Q

what are quote-driven markets?

A

transact with dealers who post bid and ask prices (market markers).

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13
Q

what are order-driven markets? What are order matching rules and trade pricing rules?

A

executed using trading rules, which are necessary because traders are usually anonymous.

order matching rules - establish an order precedence hierarchy.

trade pricing rules - used to determine the price.

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14
Q

What are brokered markets?

A

brokers find the counterparty to execute the trade. valuable when the trader has a security that is unique or illiquid.

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15
Q

Why do buy side traders value transparency?

A

it allows them to better understand security values and trading costs.

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16
Q

What are the four characteristics of a well functioning financial system?

What is operationally efficient vs. informationally efficient?

A

1) investors can save for the future at fair rates of return
2) creditworthy borrowers can obtain funds
3) hedgers can manage their risks
4) traders can obtain the currencies, commodities, and other assets they need.

operationally - if market can perform above functions at low trading costs

informationally - prices reflect all information in timely fashion.

17
Q

What are the 8 characteristics of the financial intermediaries of a well functioning financial system?

A

1) organize trading venues
2) supply liquidity
3) securitize assets
4) manage bansk that use depositor capital
5) manage insurance firms that pool unrelated risks
6) manage investment advisory services that assist investors
7) provide clearinghouses that settle trades
8) manage depositories that provide for asset safety

18
Q

What are four problems that could persist in financial markets without regulation?

A

1) Fraud & Theft - advisors can take advantage of unsophisticated investors
2) Insider Trading
3) Costly information
4) Defaults

19
Q

What are the five things market regulators should do to prevent problems?

A

1) protect unsophisticated investors
2) require minimum standards of competency to make it easier for investors to evalute performance.
3) prevent insiders from exploiting other investors
4) require common financial reporting requirements
5) require minimum levels of capital so market participants will honor long term commitments.