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Questions and Answers
What is the primary characteristic of an order driven market?
What is the primary characteristic of an order driven market?
How do transactions occur in a market working with fixing?
How do transactions occur in a market working with fixing?
Which market structure includes the involvement of a market maker but is otherwise organized like an order driven market?
Which market structure includes the involvement of a market maker but is otherwise organized like an order driven market?
What is a key feature of a quote driven market?
What is a key feature of a quote driven market?
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What is NOT a characteristic of market microstructure?
What is NOT a characteristic of market microstructure?
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What is the equilibrium price in a market?
What is the equilibrium price in a market?
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In a continuous market, trades occur when?
In a continuous market, trades occur when?
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What is a characteristic of a fragmented market?
What is a characteristic of a fragmented market?
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What led to the introduction of automated systems in trading?
What led to the introduction of automated systems in trading?
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Which of the following represents the bid-ask spread?
Which of the following represents the bid-ask spread?
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What does a limit order specify?
What does a limit order specify?
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What type of information contributes to market transparency?
What type of information contributes to market transparency?
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Which of the following is NOT a cause of market fragmentation?
Which of the following is NOT a cause of market fragmentation?
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Study Notes
Market Microstructure
- Understanding how trading rules affect market efficiency, liquidity and information asymmetry
Main Structures of Financial Markets
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Order driven market - Orders are routed to an order book and transactions result from the crossing of buy and sell orders.
- Ex: Tadawul, Euronext Paris, Shanghai, Tokyo, Island
-
Quote driven market - Prices are determined from quotations made by market makers.
- Ex: LSE (before 1999), NASDAQ (before 2002), FX
-
Mixed/Hybrid structures - Markets that have features of both order driven and quote driven markets,
- Ex: LSE, NYSE, NASDAQ
Continuous vs. Fixing Markets
- Continuous market - Orders are executed continuously and trades occur at any time of the trading day.
- Fixing market - The trading day is divided into periods, and transactions take place sequentially at the end of each period at the same price, which is the equilibrium price between buyer and seller orders.
Centralized vs. Fragmented Markets
- Centralized market- All orders are processed in the same location.
- Fragmented market- Orders can be transmitted to different locations and assets can be traded at different prices at the same time.
Causes of Market Fragmentation
- Cross listing
- Transactions through bilateral negotiations
- Alternative trading systems (e.g., Multilateral Trading Facilities)
- Block trades
Automation
- Order submission, execution of transactions, and payment, and settlement of securities can be automated.
Transparency
- Information regarding the order book, initiator of orders, and characteristics of transactions are made available in a transparent market.
Bid-Ask Spread
- The difference between the highest price a buyer is willing to pay (bid) and the lowest price a seller is willing to sell (ask).
- In an order driven market, the spread is given by the order book and corresponds to the difference between the best selling limit order price (ask) and the best buying limit order price (bid).
Order Types
- Limit order - An order specifying a price above (or under) which the investor is not ready to buy (or sell).
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Description
Test your understanding of market microstructure concepts, including different market structures and trading mechanisms. This quiz covers order-driven, quote-driven, and hybrid markets, along with continuous and fixing market dynamics. Enhance your knowledge of how these elements affect market efficiency and liquidity.
