Trading Flashcards
Market Order
execute trade immediately at best possible price; time > price
price uncertainty
Limit Order
trade at limit price or better; price > time
- buy: price < limit price
- sell: price > limit price
execution uncertainty
Effective Spread
2 * | execution price - midquote |
eff spread > quoted spread = bad trade
lower spread = higher liquidity
Market Quality Characteristics
- liquidity (larger bid-ask spreads)
- transparency
- assurity of completion
Dealer Market
quote-driven market
dealer has an inventory of securities and trades at bid/ ask prices; liquidity, credit risk
Trader Market
quote-driven market
prices set by supply and demand; lower liquidity
electronic crossing network, auction market, automated auctions
Brokered Market
broker acts as trader’s agent to find counterparties for trades
anonimity
VWAP
volume weighted average price
+ easy, simple, fast, small trades
- can be “gamed”, doesn’t consider delayed/ unfilled orders or trade volume
IS
implementation shortfall; emphasis on speed, limits costs
+ identify costs/ trade offs, cannot be “gamed” (considers delays; cannot delay trade to make profit)
- more complicated, need data
Explicit Trade Costs
fees, commisions
Implicit Trade Costs
delay/ slippage = | BP* - DP | * # shares executed later
market/ price impact = | EP - DP or BP* | * # shares executed at EP
opportunity cost = | CP - DP | * # shares canceled
Trader Types
- info motivated: time; market order
- value motivated: price; limit order
- liquidity motivated: time; market order
- passive: price; market order
Trading Tactic
- liquidity at any cost: info motivated
- costs not important: many
- need trustworthy agent: not info motivated
- advertise to draw liquidity: not info motivated
- low cost whatever liquidity: passive, value motivated
Algorithmic Trading
- logical participation
- break up orders to exc at better price: VWAP, TWRR, % volume
- implementation shortfall
- opportunistic
- specialized = hunter, market on close, smart routing
Best Execution Characteristics
- related to inv decision
- only assessed after the trade
- ongoing process (including disclosure and record retention)