The UK Equity Market Flashcards
MiFID allows for three types or order execution venues. What are these?
Regulated markets
Multilateral trading facilities (MTFs)
Systematic internalisers
MiFID II introduces another trading venue on top of MiFID. What is this?
Organised trading facility (OTF)
What is the main regulated market in the UK?
London Stock Exchange
It offers two market models for trading UK shares - SETS and SETSqx
Briefly explain what SETS is?
- Known as Stock Exchange Electronic Trading Service.
- It’s an Electronic order driven trading platform that maintains an order book
- Used to trade stocks including FTSE all shares, FTSE 100, FTSE 250 and FTSE small cap constituents
- Exchange traded funds (ETFs) and exchange traded products (ETPs) are also traded on SETS
- Also includes most liquid AIMs and Irish securities
Explain the concept of “Liquidity” in SETS
- Supported by diverse participants.
- Market makers are continuously providing quotes ensuring that there are always buyers and sellers at different price levels.
Explain how SETS are “order driven”
- Continuous order booking trading where buyers and sellers submit their orders directly
- Need to simply match up the prices and not sizes.
- Orders are matched based on price and time priority - creating transparency
Explain the concept of EMS in SETS
- EMS is exchange market size
- EMS is set by the London Stock Exchange and it is based on the avg daily volume and price volatility of a stock. (High EMS = high liquidity for a stock)
- It is the “normal market size” for orders.
- Market makers quoting prices should be quoting bid/offer prices at atleast 1 x EMS
Explain the concept of Auctions on SETS
- Conducted at opening (7:30am) and closing of the day (4:30pm) to get a open and close price
- Matching bid/offer are executed in a limited timeframe (10min at open and 5min at close)
- These periods of time are known as the “call period”
- Goal is to find the most popular price via the matching algorithm.
- At the end of the call period, orders that are matched are executed - known as uncrossing
Explain the concept of uncrossing trade in an auction in SETS
It’s where buyers on the bid and sellers on the ask/offer match together in a single trade at the end of an auction period.
Briefly explain SETSqx
- Combination of electronic order booking trading where and quote driven market making
- Trading platform for stocks that are less liquid and NOT traded in SETS
- Several uncrossings take place daily for order book execution through auctions at 8am, 9am, 11am, 2pm and closing.
Briefly explain the concept of SEAQ
- Quote driven system used to trade fixed income & less liquid AIM securities (not traded in SETS)
- Execution of trades happens between market participants and market makers
- NOT A TRADING SYSTEM but, tells us where to go when we want to trade on the prices we see on the screen
- Liquidity is given by the market makers and we know who they are.
What are the two ways in which international securities are traded on the LSE?
- International order book
- European Quoting Service (EQS)
Briefly explain “International Order Book” with regards to trading international securities on LSE
- Trading international securities in the form of depository receipts
- Not trading securities individually
- E.g. ADR/ GDR - American/ Global Depository receipts
Briefly explain “European Quoting Service” with regards to trading international securities on LSE
- For European Union liquid securities (except those traded on SETS and SETSqx)
- Quote-driven market making and trade-reporting platform
- Market makers enter non-electronically executable quotes during the mandatory quote period
Explain two main pointers of the European Trade Reporting Service provided by LSE to allow clients to meet their post-trade reporting obligations
- On-exchange off-book trade publications - for all trades regulated under the exchange’s rules
2 OTC (over the counter) trade publications/ for any unregulated trades executed away from the exchange’s markets.
