Week 2 - Market Structure 1

Question 1

How does market structure affect traders?

Answer 1

• Determines what trader can do & know
• Determines information asymmetry
• Affects who can trade profitably
• Affects trading strategies

Question 2

How does market structure affect traders?

Answer 2

• Determines what trader can do & know
• Determines information asymmetry
• Affects who can trade profitably
• Affects trading strategies

Question 3

Describe the types of trading sessions

Answer 3

1. Call sessions
   - Trades only occur when the market is called
2. Continuous Sessions
   Trade match marking occurs continuously

Question 4

What type of sessions occur on the ASX?

Answer 4

Opens with call session then switches t continuous session until close

Question 5

What are the four types of execution systems

Answer 5

1. Quote driven
2. Order driven
3. Brokered
4. Hybrid

Question 6

What are the types of information systems?

Answer 6

1. Information collection
2. Information distribution
3. Order routing
4. Presentation systems

Question 7

What is a quote-driven market?
What are its characteristics & issues?

Answer 7

Market structure that makes trader interact solely with a dealer
- Dealer provides the liquidity
- Dealer holds inventory
- Dealer quote their bid/ask prices
- Traders cannot trade amongst themselves

Issues:
Information asymmetry

Question 8

What is an order-driven market?

Answer 8

Market structure where traders only interact with each other
- No intermediary

Question 9

What is a brokered Market?
What are its characteristics

Answer 9

Market structure where a trader contacts a broker to find a counterparty.
- Very low liquidity
- Broker holds no inventory

Question 10

What is a hybrid market?

Answer 10

A market that contains elements from various different structures

Commonly contains dealer specialists
= order-driven markets where specialists provide liquidity under special conditions (IPO)

Question 11

What are information systems?
What are the different types?

Answer 11

Information systems:
Bring information in/out of markets

Types:
1. info collection
2. info distributions
3. Order routing systems
4. Order presentation systems

Question 12

What are order presentation systems?
What are the different types?

Answer 12

Order Presentation Systems:
Manage information regarding orders

Types:
1. Open outcry (oral) auctions
2. Board-based trading systems
3. Screen based trading systems

Question 13

What are order books?
Why are they important?

Answer 13

Order books:
Store and manage information about standing orders

Important because the information allows for:
Front running opportunities
Arbitrage

Question 14

What are price steps?
What does the ASX use?

Answer 14

Price steps:
The minimum price multiples for a security.

ASX:
0.1¢ - 99¢ = min 0.1¢
99¢ -199.5¢ = min 0.5¢
200¢ - 99900¢ = min 1¢

Question 15

Describe the two types of market transparency.
Which is more common?

Answer 15

Pre-Trading transparency
- Markets that quickly report all information regarding quotes/orders

Post-Trade Transparency
- Quickly reports all trades to public

Pre-trade is more common

Question 16

What type of market structure uses trading rules?
What types of markets fall under this structure?

Answer 16

Order-driven Markets

Types:
1. single price auctions
2. continuous electronic auctions
3. crossing networks

Question 17

What are the order precedence rules?

Which are primary and secondary?

Answer 17

Defined:
Ranking system of orders to match the best bid/sell orders

1. Price Priority (primary)
   - Highest bid, lowest sell
2. Time precedence (secondary)
   - oldest first unless periodic market
   - tick size matters in periodic
3. Displayed-order Precedence (second)
   
   • displayed orders first
4. Size precedence (secondary)
5. Public order precedence (secondary)

Question 18

What order precedence does the ASX use?

Answer 18

Price-time Priority

Question 19

What are the characteristics of price-priority markets?

Answer 19

1. self-enforcing
2. delivers the best economic outcome

Question 20

Describe the uniform pricing rule

What market uses uniform pricing rule?

Answer 20

Defined:
When all matched orders are executed at the same price

Call/periodic Markets
- used at openings of equity markets
Follows price-priority rules to achieve the largest volume possible

Question 21

What are the ASX’s opening price principles?

Answer 21

1. Maximise volume
2. Ex demand (lowest surplus)
3. Market pressure
4. Reference price

Question 22

What is discriminatory pricing rules?

What market uses them?

Answer 22

Prices are determined when an incoming order is matched with a standing limit order

Continuous trading markets

Question 23

Where are derivative pricing rules used?

Describe derivative pricing and its issues

Answer 23

Crossing networks

Prices are derived from else where

Issues:
stale prices
informed traders
price manipulation

Question 24

How is trading conducted on the ASX?

Answer 24

ASX Centre point

• Matches orders at mid point of national best bid and national best offer
• Trades only execute against other centre point orders
• Traders submit quantities
• Uses derivative pricing