Lecture 3

Question 1

There was One specialist for each stock what obligations do they have?

Answer 1

• Affirmative obligations to offer liquidity - traders of last resort. (if you can’t find a counter party to ask they will have to trade give you a bid and offer)
• Negative obligations – yield to public orders. (if you have the same price as public order you give the priority to the public order )

Question 2

Why do specialists pay the price?

Answer 2

To pay for informational advantage

Question 3

What 3 brokers on NYSE?

Answer 3

1. House Broker / Commission Brokers
2. Independent Brokers
3. Floor Traders / Competitive Traders

Question 4

What are House Broker / Commission Brokers?

Answer 4

• Represent brokerage houses and deal with the public and handle orders originate off the floor
• Nowadays they tend to handle large and complex executions needed by institutional customers

Question 5

What are Independent Brokers?

Answer 5

• Known as $2 brokers or broker’s broker

* They are able to execute complex orders which require skills and reputation on the floor

Question 6

What are Floor Traders / Competitive Traders?

Answer 6

•They trade in stocks on the floor for an account in which there is an interest.

Question 7

The role of the specialist has been passed on to:

Answer 7

designated market makers (DMMs)

Question 8

Do specialists still have advantages?

Answer 8

•DMMs no longer possess trading advantages as they have no special access to order books

Question 9

What are Alternative Trading Systems (ATS)?

Answer 9

Trading venue that is not registered with the SEC as an exchange. It centralizes, crosses, matches and executes trading interest.
-they are not regulated like other exchanges

Question 10

famous example of Alternative Trading Systems (ATS)?

Answer 10

liquidnet famous excample

Question 11

Types of ATS:

Answer 11

• Dark Pools and “Crossing Networks”;
• Electronic Communication Networks (ECNs);
• Internalization Crossing Networks (big banks)

Question 12

What is liquidity? definition

Answer 12

Liquidity refers to an asset’s ability to be easily purchased or sold without causing significant change in the price of the asset.
•Assets can be easily traded with low transactions costs at any time with little impact on the asset’s price.

Question 13

Black (1971) describe liquidity as:

Answer 13

1. Able to buy and sell SMALL AMOUNTS at the bid ask price immediately
2. Investors can buy or sell large amount over longer time period given two conditions:
   
   1. All trader un-informed (no special information )
   2. Genuine long time period
3. Investor can buy or sell large block of stock immediately but at a premium or discount that depends on size of the block.

Question 14

A market is liquid if:

Answer 14

uniformed traders can quickly buy or sell large size amounts when they want at low transaction costs

Question 15

Kyle (1985) - Liquidity dimensions:
Width:
Depth:
Relativity:

Answer 15

Width: the cost per unit.
Depth: the size available at a given cost.
Resiliency: time that passes before traders recognize uninformed traders have caused prices to change.

Question 16

Who are institutional traders?

Answer 16

Mutual funds, pension funds, life insurance companies, trust departments of banks and investment companies.

Question 17

Institutional transactions are executed by

Answer 17

professional traders 1. in the institution

2. or acting as their agents

Question 18

Is the execution of these orders by institutional traders likely to affect price?

Answer 18

YES;

Questions – What will be the reactions? What factors affect these reactions?

Question 19

3 main investment company types?

Answer 19

1. Closed-end investment company – corporation that issues a specified number of shares that can be traded on the exchange
   •Open-end investment company – accept additional funds and repurchase shares directly from investments
   •Exchange Traded Funds (ETF) – shares are traded on exchange but differ from closed-end investment companies (the closed end value is determined by the market value ETF valued by Net Asset Value)

Question 20

How do institutions trade?

Answer 20

Common for institutions to break their order into smaller tranches spread over extended period of time.

Question 21

What is better than tranches for institutional trading?

Answer 21

Iceberg orders – only a small part of an order is shown in the limit order book, while the larger part is hidden.
•As executions are realized, successive part of the order are entered in the limit order book.

Question 22

Do Institutions want and expect both ex ante and ex post transparency?

Answer 22

Ex ante- want this at the same time for there own trade they want to hide but want to see orders of everyone else

Question 23

Many institutional traders use Algorithmic trading?

Answer 23

to reduce execution risk, preserve anonymity, and to minimize trade slippage.

Question 24

What is Algorithmic trading?

Answer 24

Algorithmic trading refers to automated trading with the use of live market data and rule-driven computer programs
•For automatically submitting and allocating trade orders among markets and brokers.
•As well as over time so as to minimise price impact of large trades