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Securities > Chapter 5 > Flashcards

Chapter 5 Flashcards

1
Q

Trading Venues?

A

Facilitate the purchase and sale of listed instruments.

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2
Q

What does a Stock Exchange do?

A

Provides liquidity to potential and existing investors.

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3
Q

Price Formation?

A

Where exchanges aggregate and integrate trading activity on their systems. So the price at which trades are executed is the market price at any given time.

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4
Q

What is a Broker?

A
  • Arrange deals for clients / facilitate transactions.
  • Provide advice on what to buy for a commission.
  • Act as Agent.
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5
Q

What is a Dealer?

A
  • Buys and sells shares, sometimes from clients.
  • Act as Principal.
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6
Q

What is a Broker-Dealer?

A

Acts as an agent and on principal.

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7
Q

In recent years there has been a proliferation in ATSs (compared to a traditional national exchange). What is an ATS?

A

Alternative Trading System - internalise customer’s trades by executing against customer trades or their own inventory.

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8
Q

What are the 3 ways of trading equities under MiFID?

A
  • Stock exchanges.
  • MTFs.
  • SIs.
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9
Q

What is an MTF?

A

Multi-lateral Trading Facility - systems operated by a market operator that bring together third party buying interests.

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10
Q

What is a SI?

A

Systematic Internaliser - firms dealing on their own account.

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11
Q

What is OTC?

A

Over The Counter - buying and selling securities outside of official exchanges.

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12
Q

What is a Dark Pool?

A

Trading systems where the stocks are traded without the order price being displayed until after the trade is completed.

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13
Q

What are Private Transactions?

A
  • Offering securities to a subset of investors.
  • Not general public.
  • No need for disclosures usually in IPOs and no prospectus.
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14
Q

What are Private Placements?

A
  • Funding round of securities sold without an IPO.
  • No prospectus.
  • Small number of private investors.
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15
Q

What is a Frontier Market?

A

Markets less developed and liquid than emerging markets.

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16
Q

Quote Driven?

A
  • MM set a min number of shares to buy or sell at a quoted price.
  • More liquid - MM offer two way pricing.
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17
Q

Order Driven?

A
  • Investors indicate a num of shares to buy or sell at a specified price.
  • Illiquid - orders have to be matched.
  • Commonly used in equity markets.
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18
Q

What is an order book?

A

A book of orders waiting to be matched.

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19
Q

What is a Hybrid System?

A

A trading system that’s both quote and order driven. E.g. LSEs exchange trading service (SETSqx).

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20
Q

What is Principal?

A
  • Firms purchasing shares for it’s own accounts. Aim to for it to increase its value before selling.
  • Dealers only act on principal.
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21
Q

What is Agent?

A
  • Arranges deals on behalf of others.
  • Brokers.
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22
Q

What’s a Broker Dealer?

A

Dual capacity to buy and sell shares for themselves or others.

23
Q

What is a Market Maker?

A
  • Provides liquidity to the market by offering bid and ask prices to firms wishing to buy or sell shares.
24
Q

How does a firm become a Market Maker?

A
  • Apply to the exchange - provide prices at which it’s willing to purchase shares.
  • Have sufficient resources to handle increased levels of risk.
  • Receive steady stream of business.
25
Q

What’s an Inter-Dealer Broker?

A
  • Exchange member.
  • Acts as an agent between dealers.
  • Settles on principal to keep dealers anonymous.
  • Can’t take on its own principal positions.
26
Q

What are the reasons for Algorithmic Trading?

A
  • Removes emotion.
  • Preservation of strategy - strategy remains consistent regardless of market volatility.
  • Speed, accuracy and reduced cost.
27
Q

One issue of Algorithmic Trading?

A

A data glitch and lack of oversight can lead to errors which are costly.

28
Q

What is HFT?

A

High Frequency Trading - computers processing orders based on algorithms.

29
Q

Characteristics of HFT?

A
  • Responds rapidly to market movements.
  • Places hundreds / thousands of small quantity orders.
30
Q

Cons of HFT?

A
  • Uses market manipulations - places offers just above market price and cancels them when buy order is ordered.
  • Exploits ordinary investors.
  • Systemic risk due to price movements - can spill over to different exchanges.
31
Q

What is Latency?

A

Time taken for systems to interact with the market. Lower = better.

32
Q

How do firms improve latency?

A

By moving closer to data centers.

33
Q

What is Prime Brokerage?

A

A suite of services offered to hedge fund clients.

34
Q

What are the Prime Services?

A
  • Secs lending and Borrowing.
  • Custody.
  • Access to OTC markets.
  • Rehypothecation.
  • Core settlement.
  • Cash management.
  • Leveraged trade execution.
35
Q

What is Secs lending and borrowing for?

A

Hedge funds to cover their short positions.

36
Q

What is Custody services?

A

Safekeeping and asset servicing clients assets for a fee.

37
Q

What’s meant by access to OTC markets?

A

PB will be a counterparty / find a third party to take the order side of trades for instruments that are not traded on an exchange (e.g. swaps).

38
Q

What is Core Settlement?

A

Making sure that purchased securities are in the clients name, and that any cash is received in a timely manner.

39
Q

What is Cash Management?

A

Maximising the returns on clients cash.

40
Q

What’s meant by Leveraged Trade Execution?

A

Execute clients trades that are partly financed by borrowed funds.

41
Q

What is Rehypothecation?

A

As well as holding collateral and charging a fee, PB has the right to recharge, dispose of and use customers assets that are subject to security. This is down to Right to Rehypothecation.

42
Q

What is Right to Rehypothecation?

A

Customers assets becomes the property of the PB. Assets are used to lend or sent to third parties for cheaper financing.

43
Q

What are the priority of trades on the order book?

A

Price then time. Price being the highest buying price and lowest selling.

44
Q

How is the opening price determined at the beginning of each day?

A

Using an Uncrossing Algorithm.

45
Q

How does the Uncrossing Algorithm work?

A
  1. Member firms place orders.
  2. Overlapping orders on the book are executed at the same price which maximises the number of shares traded. Simultaneously, an opening price is calculated.
  3. Once OP is calc, orders are automatically matched and executed.
46
Q

Why might trades not automatically be executed?

A

Price of trade > price tolerance level away from the previous trade price.

47
Q

What is the usual price tolerance level?

A

Between 5% and 25%.

48
Q

How do you get access to the order book?

A

On Bloomberg.

49
Q

Who gets to interact with the order book?

A

Members of the exchange, usually only Broker-dealers.

50
Q

What must non-members do to see beyond the nearest bid/ask prices?

A

Pay an additional subscription.

51
Q

What is a Trading Halt?

A

Suspension of securities on a listed exchange.

52
Q

How are trades settled that have occurred but not settled at the time of suspension?

A

Settled as normal.

53
Q
A

Securities (12 decks)

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