Week 3 - Market structure II

Question 1

Why is there a need for single price opening auction?

Answer 1

Aggregates all pricing information for a market when it was closed

Question 2

Why is there a need for closing auctions?

Answer 2

Aggregates pricing information for a market and removes market manipulation

Question 3

What are the ASX’s two trading platforms?

What are their characteristics?

Answer 3

Tradematch
- Information is public and order books exist

Centerpoint
- Information is hidden

Both use Price-time priority

Question 4

What are the two exchanges in Australia?

Answer 4

1. ASX
2. Chi-x

Question 5

What are the characteristics of the Chi-x stock exchange?

Answer 5

It uses derivative pricing

Uses lit & dark venue

Price-visibility-time priority

Question 6

What were the obligations of NYSE specialists?

Answer 6

Affirmative obligations to offer liquidity

Negative obligation-yield to public orders

Question 7

What are Alternative Trading Systems (ATS)?

Answer 7

Trading venues that are not registered with SEC as an exchange

They centralise, cross, match and execute trades

Question 8

What are the different types of ATS?

Answer 8

1. Electronic communication networks
2. Dark pools / Crossing networks
3. Internalised crossing networks
4. Voice-brokered third party matching

Question 9

What are dark pools?

How can they be classified?

Answer 9

Trading venues where assets are traded without showing information to other participants

classified by:
1. Execution algorithm
2. Operator

Question 10

Explain how dark pools are classified by execution algorithm

Answer 10

Dark pools can be:
1. Mid-quote executed (one-sided)
- Between buy/sell prices
2. Dark pool order book (two-sided)
- Any price between best quotes

Question 11

What type of pricing methods are used in mid-quote executed markets?

Answer 11

One-sided markets use derivative pricing

Question 12

What are the benefits to dark pool venue operators?

Answer 12

1. Reduced costs of determining + updating costs
2. Advertisers have a reduced incentive to aggressively price products

Question 13

How do dark pools benefit traders?

Answer 13

1. Personal orders not visible in limit order book
2. Lower transaction fees
3. Hide trade intentions

Question 14

What issues are associated with dark pools?

Answer 14

1. Limited price discovery
2. Price manipulation
3. Principle-agent problems

Question 15

What is a national best bid and offer (NBBO)

Answer 15

Defined:
consolidated quote system (CQS) that compiles each markets best bid/offer

Highest bid is known as National Best Bid (NBB)

Lowest offer know as National Best Offer (NBO)

Question 16

What is a lit-venue non-displayed order?

What are the different types?

Answer 16

Orders in a lit venue that are fully/partially hidden from other market participants

Types:
1.. Iceberg
- only peak of the order is visible, rest of order is hidden
- Once visible segment clears it is refilled by hidden segment and time stamp resets
Peak = volume of order visible to market

2. Hidden
   - Whole order is hidden from other participants (peak = 0)

Question 17

What are pegged orders?

Answer 17

An order that uses derivative pricing

Usually pegged to NBB, NBO or Midpoint

Question 18

What are discretionary orders?

What are their benefit?

Answer 18

Essentially a limit order but set within a price range

Discretionary amount = range

Once within range = Marketable and acts as market order

Benefit:
- Counteracts competitor repricing