CH3: Market Structure Flashcards
14 questions (40 cards)
1
Q
Euronext exchange
A
- Europes largest exchange operating in Amsterdam, Brussels, Lisbon, Paris, and London (refered to as __countries above_ ice markets)
Trading platform is Optiq which allows for transactions on multiple markets. - Utilisesd LCH SA or EuroCCP as teh central counterparty
*
2
Q
ICE Clearing
A
- 6 entities make it up: ICE clear EU, ICE clear US, ICE clear singapore, ICE clear netherlands trading a variety of derivatives
- ICE clear credit does credit derivs
- ICE clear NGX clears natural gas an energy derivs for North America
3
Q
NASDAQ Group
A
- US based and runs exchanges in 7 EU countries in Nordic and Baltic regions
- Trades a wide group of futures, options on a large group of UAs.
- main clearing systems are Genium INET and SECUR
- Nasdaq Options Market (NOM) - options mkt running on INET technology
4
Q
Key UK exchanges are characteristics
A
- ICE Futures Europe - electronic, trades energy prods, equity indexes, single stock futures, short term IRs, bond futures, currency futures. Cleared via ICE Clear EU
- LSE derivatives - Electronic, trades standard and electronic futures and options of FTSE 100, FTSE SUPER LIQUID and Norweigian OBX indicies. Trades cleared by CCP Clearing with LCH
- London Metal Exchange - electronic and open outcry. Trade a variety of non ferrous metals in F&O which help set global commod prices. Also offer futures on some precious, car battery and ferrous metals. Cleared via LME Clear
5
Q
Key US exchanges are characteristics
A
- Chicago Mercantile Exchnage (CME) - electronic platform (CME Globex), trades futures on a wide range of commods, short term IRs, FX, equity indicies, weather, real estate. Trades processed via CME Direct
- Chicago Board of Trade (CBOT) - CME Group member, electronic via EOS trader and CME direct and some open outcry for options. Trades futures and has an agreement with SGX to trade some of it’s shit. Cleared under teh JADE Agreement with front end clearing (FEC).
- Chicago board options exchange (CBOE) - Largest US options exchange established under CBOT. Exchange traded options that are cleared by the options clearing corporation. Trades some VIX futures. FIrst exhcnage to sell FLEX options and LEAPS
- New York Mercantile exhcnage (NYMEX) - CME group - Electronic via CME globex and Nymex clear port for OTC contracts. F&O on a wide range of assets, spreads on oil types. All trades are processed via the exchange’s clearing house
- NASDAQ (PHLX) - Both floor trading and electronic on PHLX XL. trades std and FLEX options. Cleared on the exchanges clearing house
- ICE FUTURES US = Electronic of many contracts on many assets. Cleared via ICE clear US
6
Q
EU Exchanges
A
7
Q
EUREX
A
- Electronic
- worlds largest derivs exchange
- Trades F&O (standard and FLEX)
- Cleared via Eurex Clearing AG
8
Q
Euronext Exchanges (Amsterdam, Brussels, Lisbon, Paris, Oslo, Dublin, London)
A
- Electronic trading on Optiq
- Trades F&O on FX, swaps, equitiies and commods
- Clears via Euronext Clearing
9
Q
MEFF
A
- Spain
- Sub of BME group, trading through MEFF deriv trading platform.
- Trades F&O
- Cleared through it’s own clearing house
10
Q
NASDAQ Nordics
A
Runs all 8 electronic exchanges in Nordic, baltic and caucasian regions
11
Q
Singapore exchange (SGX)
A
- trading via SGX QUEST
- trades F&O
- Cleared via SGX cderivatives clearing
12
Q
Osaka Securities exchange (OSE)
A
- Part of japan exchange group (JPX)
- Physical and electronic
- F&O and normal JPN shares trading
- Cleared via the exchanges clearing house
12
Q
A
13
Q
Tokyo Stock Exchange (TSE)
A
- Part of JPX group
- Trades F&O
- Trading via Tdex+ system
14
Q
Korea Exchange (KRX) - future mkts devision
A
- Traded electronically via the exchanges auto tradin system.
- Trades F&O and certificates of deposit.
- Cleared via the KRX clearing house
15
Q
Emerging market exchanges in physical copy
A
16
Q
Exchange membership strucuture and trading rights
A
Most exchanges give access to exchanges via membership.
Firms can join under 3 catagories
1. Broker - third party trades only
2. Dealer - principal trades only
3. Broker-dealer - principal nad agent trades
The regions where firms want to clear business also play a part in memebership as most exchanges have clearing houses which act as a CCP.
17
Q
Clearing membership - general and individual
A
- General clearing members - clear principal trades, agent trades and trades for non-clearing member firms
- Individual clearing member - Only able to clear principal trades and trades on behalf of clients
GCM’s are typically required to have greater fin resources as they are trading on behalf of clients in their name.
Some exchanges have Clearing members (act like GCMs) and Trading members (TMs) who act like ICMs.
18
Q
OTC mkt structure and trading - high touch services
A
- Dealers act as mkt makers giving bid offer spreads
- Trades can be executed directly between 2 parties and teh price does not need to be disclosed to the mkt- reduced visibility and liquidity
- OTC mkts are favoured for hedging because of the less stringnet margin requirements
- High touch trading services - 24 hour sales desks providing trading advice to clients - incuded in the higher cost OTC commission charge
*
19
Q
Trading environment - pit trading
A
- Pit trading = open outcry quote driven system - face to face trades
- Orders are shouted aloud or given hand signals for price transparency
- LME uses pit trading during it’s most liquid times, has 4X 5 min sessions where only a specified type of product can be traded
- CBOT and NYSE also use pit trading but it reduced massively during covid
- LME has a ring (pit) trading membership which is very sought after due to limited physical space in the trading venue
- CME and CBOT only really use open outcry for highly complex products
20
Q
Electronic trading
A
- Trades placed into an electronic order book and are executed anonamously in an order driven system
- Some exchanges have their own designated trading platofrms
- Ones teh system recievs an order it records it in the central order book where the trade will be matched with an oposing buy/sell order.
- Trade details are then fed into the clearing system. for big exchange groups - if a trade is placed in ICE London, it wil go to ICE Clear and then be novated to ICE clear europe which will take care of settling the trade.
21
Q
Principles of order flow in open outcry system
A
Customers will specify the following in an open outcry order
* The asset
* Buy or Sell
* Size of the order (no. contracts or lots)
* Expiry month
* Price conditions (if any)
THis is then passed by a telephine or electronically to the edge of the trading floor where a booth clerk passes the trade to a trader in the pit.
Many pit traders prop trade as well as execute for clients
- The details of the trade are then passed from the trader, to the booth clerk, who confirms the trade to their office by entering details into a matching system
- This is then agreed with the counterparty on the trading floor to esnure all the details are correct before the trade is sent for clearing
22
Q
Order types typical in deriv markets
A
- Limit orders - Only settle at a given price or better, less likely to execute if the price never reaches the level specified
- Marekt orders - execute at the current mkt price, likely to execute
- Marekt if touched (MIT) - Combination of limit and markeet orders. A price is specified but if the price trades at the specified price or through it, teh order becomes a market order.
- Opening order - Price can be stipulated or not, to be executed within the first 2 mins of mkt open. If not it is cancelled
- Closing order - executes towards mkt close
23
Q
Order types with time or quantity requirements
A
- Good until cancelled - order that is valid until the client instructs it to be cancelled
- Good for the day - order is valid for a day and then is cancelled if not filled
- Fill or kill - execute the order immediately or cancel
- Stop loss order - buy/sell if the price moves above/below a stipulated price to prevent losses
- Stop limit order - like a stop loss but once the price is met the order becomes a limit order that is to be executed at a second specified price or better
- Day order - cancel if the trade hasn’t been executed on the same day it was placed
Some exchanges will allow brokers to reverse trades if they have made a genuine mistake in teh order.
24
Cross trading
* Cross trades = match has been established for a trade by negotiation between counterparties before being entered into the system.
* Allowed on some exchanges as long as they are enetered as seperate buy/sell orders
* Stratergies for this are spreads, straddles, strangles and synthetics
25
Block trades - reporting times, ICE and HKEX specifics
* Large transactions made between an exchange member and a wholesale client allowing bilateraly agreed transactions to be traded immediately, with a set price and certainty of execution.
* Block trading facilities complement central markets.
* Each exchange determines which products can be block traded and the size of a trade that makes it big enough to be a block trade
* ICE futures min. is 100 contracts for short sterlingand gilt futures. 500 contracts required or FTSE futures.
* Reported between 5 mins and an hour
* Can be negotiated outside of the order book as long as they are reported to the exchange once agreed.
* HKEX marks block trades by putting 'INT' next to the trade in the order book. 100 contracts for stock F&O=block trade and so is 500 contracts for individual stock options
26
Basis trades
* Simultaneous transaction of a financial asset for an offsetting number of futures contracts.
* Privately negotiated between 2 parties
* Can be negotiated outside of the order book as long as they are reported to the exchange at a later date.
* FLEX facility combines OTC and exchange traded products, allowing you to customise price/expiration date of ex traded prods
* FLEX trading facilities can increase trading volumes
27
Advantages of OTC mkts
* Products can be unique/fit specific needs of the client
* Confidentiality if the client negotiates the terms using a broekr dealer. As the price doesn't have to be disclosed to the market, clients can request a quote for the whole order - **called risk pricing**
* Reduced counterparty risk as OTC trades have to be reported to a regulated facility, offering some oversight.
* OTC's are not fully anonymous as they have to be done on a Alternative Trading system and reported to regulators
* OTC trades tend to be lighter on back office teams as there are no daily margin requirement and require less stringent controls.
28
Disadvantages of OTC markets
* Typically lower liquidity
* Difficult/expensive to exist or offset as they are less fungible compared to ETDs
* Cost is proportional due to the degree of customisation of the product and so is illiquidity
* Lack of daily margining increases credit risk
29
Principal and agent functions
* Principal = trades from it's own book and will incur profit and loss
* Agent = trades on behalf of clients (a broker) and the client is responsible for profit and loss
* Broker dealers can do both
30
Cross trading - signed off by whom
* When brokerages match a buy and sell order when one is non competitive (no specified price) off mkt
* Only allowed in the US when following CFTC regulations
* Cross trades happen when:
1. broker has a buyer and seller for a contract at a given price
2. Broker is willing to deal with a client as principal
* Can be trasnacted off market from the broker-dealer's own book but for price transparency has to be done in the mkt.
* Strict rules: open outry markets need cross trades to be signed off by pit officials (observers). Each exchange has different rules
31
Open and closing trades
* Opening trades = Create a position in the mkt, exposing holder to profit/loss. Opened by buying or selling for shorts
* Closing trades = Trades that offset an exisiting open position that close out any outstanding obligations and profit/loss is crystalised
32
Volume and open interest - measure a contract’s what?
* BOTH MEASURES OF A DERIVATIVE'S LIQUIDITY
* Volume = Shows cumulative number of contracts traded so far each day. Usually reported for each product and it's expiry month.
* Open interest = Shows total number of contracts for any delivery month that remain open. These contracts will either be closed out or taken delivery of. Indiciates liquidity as most contracts are closed before expiry. **contracts with the highest open interest is generally the nearest to expiration and is called the front month contract.
33
Open interest calculation
Sum of all open long positions
or
Sum of all open short positions
NOT the sum of both, either one or the other
34
Audit trails of transactions
Track and trace a contract's life from start to finish.
Since most contracts are dealt online, it is a requirement that transacting firms hhave Order Audit Trail System (OATS) to track orders.
Helps resolve disputes
35
Trade registration and clearing mechanisms - process
Allocates the trade to the relevant account (whether that be the firm or the client)
1. Trade details are reported in the admin system that is used by the exchange (like CME direct or DME direct)
2. The system matches a buy and a sell order so there are 2 opposing actions recorded.
3. System is vital in open outcry mkts due to the risk of human error. This helps reduce errors due to audit trails
36
3 types Client accounts
Trades are assigned to 1 of 3 types of accounts
1. House - proprietary trades for the firm
2. Segregated - trades that teh firm is registering on behalf of a segregated client. Most exchanges and regulators require client assets to be held in sgregated accounts to protect client assets in case the firm defaults.
3. Non-Segregated - Client trades are not segregated and are not protected from defaults. Omnibus accounts are numbered to reflect the assets in the accounts and are only allowed if the client consents to it.
37
Pre registration/allocations and give ups - how is risk reduced
* Pre-registration = a member firm indicates that a deal should be allocated to a second member (AKA allocation)
* Give ups = sending a trade to anotehr member of the exchange. The member who recieves the trade is called the give-in
Both parties in this case run the risk of the other party not executing their obligation. **master give-up agreements** reduce the risk by setting legal agreements between parties and guaranteeing compensation if one doesn't perform their action.
Give ups are allocated on Euronext clearing for euronext trades and on CME it is done on the GPS (give up payment system).
38
Purpose of give up trades
Seperate the execution and clearing function of a trade.
Useful if a client wants to execute with one specific exchange memebr but clear with their usual clearing agent.
Also help increase annonymity and reduce conflicts of interest
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