Securities Makets-How Securities are traded.pdf

Securities Markets: How securities are traded 1  Market Microstructure Market microstructure involves an understanding and analysis of how trading rules affect market efficiency, liquidity and information asymmetry....

Securities Markets: How securities are traded 1  Market Microstructure Market microstructure involves an understanding and analysis of how trading rules affect market efficiency, liquidity and information asymmetry. 2 Main structures of financial markets Order driven market versus quote driven market Continuous market versus fixing Centralized market versus fragmented market Automation Transparency versus opacity 3  Order driven market/quote driven In an order driven market, all investors can announce prices at which they want to buy or sell (via brokers) Orders are routed to an order book Transactions result from the crossing of buy and sell orders placed by investors Tadawul, Euronext Paris, Shanghai, Tokyo, Island 4 Order driven market/quote driven A quote driven market is a market in which prices are determined from quotations made by market makers LSE (before 1999), NASDAQ (before 2002) , FX 5  Mixed / hybrid structures These structures are organized like an order driven market but with the presence of a market maker The market maker manages the order book and can enter his own orders LSE, NYSE, NASDAQ 6  Continuous market/fixing In a market working with fixing: The trading day is divided into several periods During each period, investors can place, modify or cancel orders without any transaction taking place Transactions take place sequentially at the end of every period All transactions take place at the same price. This price is the equilibrium (between buyer orders and seller orders) which maximize the transaction volume The executed orders are: Buyer orders which have limit price higher or equal to the equilibrium price Seller orders which have limit price less than or equal to the equilibrium price 7  Continuous market/fixing In continuous market, orders are executed continuously and trades occurs at any time of the trading day Orders are executed at different prices A transaction takes place when an order is placed at a price which is equal to or better than the best price proposed at the opposite side of the order book 8  Centralized market/fragmented In a centralized market, all orders are addressed to the same location for trading (computer for example) In a fragmented market, the order flow is transmitted to different locations. In a fragmented market, the asset can be traded in the same moment at different prices. 9  Causes of fragmentation Cross listing Transactions through bilateral negotiations on the phone or electronic network Alternative trading system as Multilateral Trading Facilities Block trades 10  Automation The increase of the transaction volume and the growth of the transactions costs, lead the market authorities to introduce a system that allows automation of : Order submission Execution of transactions Payment and settlement of securities 11  Transparency Information concerning the order book Information concerning the initiator of orders Information concerning the characteristics of transactions Transactions through bilateral negotiations on the phone or electronic network Block trades Hidden orders 12  Bid-Ask Spread The bid-ask spread is the difference in price between the highest price a buyer is willing to pay (Bid) for an asset and the lowest for which a seller is willing to sell it (Ask) In an order driven market, the spread is given by the order book and corresponds to the difference between the best price associated with a selling limit order (ask price) and the best price associated with a buying limit order (bid price) 13  Order types Limit order : is an order that specify a limit price above (under) which the investor is not ready to buy (sell) E.g. buy 100 shares at price no higher than 30 € per share Market order : is an order which do not specify any limit price E.g. buy 100 shares at any price Stop order: the order is executed only if the stop price has been met. When the stop price is reached, a stop order becomes a market order. A buy stop order is entered at a stop price above the current market price. A sell stop order is entered at a stop price below the current market price. Hidden order (iceberg order): allows you to submit an order (generally large order) without publicly disclosing the order information (can not be seen by other traders) 14  Conclusion Several market organizations Trading rules affect market efficiency, liquidity, information asymmetry, transparency and investors’ behavior More than one price Many types of orders Use of different trading rules during the trading day 15 Thank you for your attention 16