Week 2 - Market Structure 1 Flashcards
How does market structure affect traders?
- Determines what trader can do & know
- Determines information asymmetry
- Affects who can trade profitably
- Affects trading strategies
How does market structure affect traders?
- Determines what trader can do & know
- Determines information asymmetry
- Affects who can trade profitably
- Affects trading strategies
Describe the types of trading sessions
- Call sessions
- Trades only occur when the market is called - Continuous Sessions
Trade match marking occurs continuously
What type of sessions occur on the ASX?
Opens with call session then switches t continuous session until close
What are the four types of execution systems
- Quote driven
- Order driven
- Brokered
- Hybrid
What are the types of information systems?
- Information collection
- Information distribution
- Order routing
- Presentation systems
What is a quote-driven market?
What are its characteristics & issues?
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
What is an order-driven market?
Market structure where traders only interact with each other
- No intermediary
What is a brokered Market?
What are its characteristics
Market structure where a trader contacts a broker to find a counterparty.
- Very low liquidity
- Broker holds no inventory
What is a hybrid market?
A market that contains elements from various different structures
Commonly contains dealer specialists
= order-driven markets where specialists provide liquidity under special conditions (IPO)
What are information systems?
What are the different types?
Information systems:
Bring information in/out of markets
Types:
1. info collection
2. info distributions
3. Order routing systems
4. Order presentation systems
What are order presentation systems?
What are the different types?
Order Presentation Systems:
Manage information regarding orders
Types:
1. Open outcry (oral) auctions
2. Board-based trading systems
3. Screen based trading systems
What are order books?
Why are they important?
Order books:
Store and manage information about standing orders
Important because the information allows for:
Front running opportunities
Arbitrage
What are price steps?
What does the ASX use?
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¢
Describe the two types of market transparency.
Which is more common?
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
What type of market structure uses trading rules?
What types of markets fall under this structure?
Order-driven Markets
Types:
1. single price auctions
2. continuous electronic auctions
3. crossing networks
What are the order precedence rules?
Which are primary and secondary?
Defined:
Ranking system of orders to match the best bid/sell orders
- Price Priority (primary)
- Highest bid, lowest sell - Time precedence (secondary)
- oldest first unless periodic market
- tick size matters in periodic - Displayed-order Precedence (second)
- displayed orders first
- Size precedence (secondary)
- Public order precedence (secondary)
What order precedence does the ASX use?
Price-time Priority
What are the characteristics of price-priority markets?
- self-enforcing
- delivers the best economic outcome
Describe the uniform pricing rule
What market uses uniform pricing rule?
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
What are the ASX’s opening price principles?
- Maximise volume
- Ex demand (lowest surplus)
- Market pressure
- Reference price
What is discriminatory pricing rules?
What market uses them?
Prices are determined when an incoming order is matched with a standing limit order
Continuous trading markets
Where are derivative pricing rules used?
Describe derivative pricing and its issues
Crossing networks
Prices are derived from else where
Issues:
stale prices
informed traders
price manipulation
How is trading conducted on the ASX?
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
