Type of financial markets Flashcards
Trade venues under MiFID and MiFID II
- Regulated markets
- Multilateral trading facilities (MTFs)
- Systematic internalisers
- Organised trading facilities (OTFs) MiFID II
This increased competition has led LSE share to fall to only 55%
Two trading systems of LSE
- SETS - electronic order book to trading FTSE stocks, ETF and ETP and liquid AIM or Irish securities. Auctions conducted at 7:50am (10 mins - opening price), 12pm (2 mins) and 4:30pm (5 mins - closing price)
- SETSqx - combines an electronic order book (Auctions at 8am, 9am, 11am, 2pm and at close) with a non-electronic quote-driven market making. Used for Illiquid stocks.
What is SEAQ?
Quote driven display system used as a price reference point for market makers.
Used for securities not on SETS or SETSqx such as fixed income and AIM
What is LCH.Clearnet?
Central counterparty to all SETS or SETS qx trades at point of execution.
Takes all risk that a clearing member defaults and collects margin for this from members
How are international securities traded?
- International Order Book - electronic order book for international securities. Leaves a receipt on LSE
- European Quoting Service (EQS) - quote driven platform supporting EU liquid securities not on SETS or SETSqx.
Order Book for Retail Bonds
LSE operates the ORB - an electronic order book similar to SETS - for UK government and corporate bonds
What are Gilts
Obligation of UK Gov and managed by DMO, used to finance shortfall in government expenditure
Issued via auction, pay gross coupons semi-annually and settlement via CREST
What are GEMMs
Gilt-edged market makers - make on demand continuous two way prices of gilts so investors always have source of liquidity
Provide a price to DMO at end of day
Open offer for sale of Corporate Bonds
Involves a syndicate of banks with a lead manager buying the bonds
Bought Deal - lead manager buys the bonds and sells to the syndicate, who can offer at varying prices
Fixed-price re-offering - lead manager and syndicate buy the bonds together and offer at a fixed price
Corporate Bonds trade in decentralised, OTC market
Private placement of Corporate Bonds
Sold directly to a number of professional investors
What is a Dual-listed company
Corporate structure where two corporations function legally as an equal, single business but retain separate legal identities and stock exchange listings
Tax advantages such as Capital Gains is avoided by not having an outright merger
Shares of DLC parent companies represent claims on same cash flows, therefore in efficient markets the stock prices should be the same
Exchange traded vs OTC markets
Exchange traded - centralises the communication of bid and offer prices for securities to all market participants who act accordingly
OTC - decentralised trading of securities, bilateral contract between two parties on how trade will be settled. Equities are ‘off-books’ or ‘upstairs’ and usually large volume so trade does not move price. ‘Bonds’ and ‘Notes’ largely traded OTC
Alternative trading venues
- MTFs - trade platforms similar to regulated markets, organised by investment firms. Compete on trading costs
- Systematic internalisers - investment firm executes client orders outside regulated market or MTF or OTF
- OTFs - platform introduced by MiFID II to capture trading in bonds and derivatives which would not be traded on regulated markets or MTFs
- Dark Pools - Neither price nor identity is displayed (pre trade transparency). Allow large trades to be completed without identity or price impact but in a market setting
Order-driven systems (e.g SETS)
Electronic order book for highly liquid securities in high volume
Market (best) orders - buyers specify a quantity of order, but not price. Therefore matched to lowest (best) price on market
Limit orders - buyers specify quantity AND price. When not fully matched, will remain on system in ‘first in first out basis’
Quote-driven systems (e.g SEAQ)
Market makers obliged to continually bid and ask prices for a given security to maintain liquidity
They must indicate firm prices up to a required volume (the ‘Normal Market Size’ set by LSE) and indicative prices past this volume.
The prices are displayed on SEAQ and a buyer will call up to strike a deal
