Lecture Six Flashcards
Limit Order Book Trading
- choose a venue i.e. tock exchange vs dark pool/crossing system
- choose an order: limit order vs market order
Best execution does not equal best price
Best execution: traders receiving the most favourable terms available for their trades
Execution Cost: order processing costs and market impact
Consolidation of Order Flow
- increases order interaction, concentrates liquidity
- improves accuracy of price discovery and execution of institutional trades
- affects quantity discovery and price discovery
- increases intraday price volatility
Algorithmic Trading
automated trading with the use of live market data and rule driven computer programs
- used for automatically submitting and allocating trade orders among market and brokers
- minimises price impact of large trades over time
- reduces execution risk
Dark execution
- trades that involve non-displayed orders in lit venue
- dark pool trading
- internalisation
Non-Displayed Order
limit orders that allows traders to partially or fully hide the intended volume at the time of order submission
Peak Size
how many shares you wish to display to the market
Iceberg Orders
only a small part of an order is shown in the limit order book while the larger part is hidden
- interact with other orders in a limit order market that also handles visible orders
- follows price-visibility-time priority rule
Non displayed shares have a lower execution priority over displayed shares
Dark Pool Trading
buyers and seller trade securities without displaying orders to market participants
- market is not pre-trade transparent
- via derivative pricing
One-Sided Market
Mid-quote execution
- mostly owned by agency brokers and exchanges
- typically execute orders at midpoint or VWAP
Two-Sided Market
most broker-dealer dark pools
may contain some price discovery and contain proprietary order flow
Mid-Quote Execution
via derivative pricing rule
price in centre point is derived from price in lit venue
Benefits of Mid-Quote Execution
- reduced cost of determining and updating advertised prices
- advertiser has a reduced incentive to aggressively price
- when advertiser lowers the posted price, the additional customers will be split with the price matcher
Impact of Mid-Quote Execution on Lit Venue
dark pool price is pegged to price in lit venue
aggressive visible bid or offers encourages counterparties to bid.
if these counterparties can obtain the same price in the dark pool, their orders will migrate from the lit venue.
Fewer trades will be posted in the lit market
beta spread becomes wider
dark pool price will be affected by less trades in the lit market
Issues with Dark Pool
Price manipulation
before selling shares in the dark venue, can lift the bid price in the lit venue to lift the best bid in the dark market
Principle Agent Problem
venue operator maximises their profit instead of acting in the best interest of their clients
Rule Violation
some dark pools allow sub penny trading
