LOS 39.j Flashcards
(14 cards)
What are call markets?
Securities are traded at specific times, offering high liquidity during sessions but illiquidity between them.
What are continuous markets?
Trades occur anytime the market is open, with prices set by auction or dealer bid-ask quotes.
What are quote-driven markets?
Investors trade with dealers (market makers) who post bid and ask prices. Also called dealer, price-driven, or over-the-counter markets.
What are order-driven markets?
Orders are executed using trading rules, often anonymously. Examples include exchanges and automated trading systems.
Explain order matching rules.
The first rule is price priority: The highest priced buy orders and the lowest priced sell orders go first. They are the most aggressively priced orders. Secondary precedence rules determine how to rank orders at the same price. Most trading systems use time precedence to rank orders at the same price. The first order to arrive has precedence over other orders. In trading systems that permit hidden and partially hidden orders, displayed quantities at a given price generally have precedence over the undisplayed quantities. So the complete precedence hierarchy is given by price priority, display precedence at a given price, and finally time precedence among all orders with the same display status at a given price. These rules give traders incentives to improve price, display their orders, and arrive early if they want to trade quickly. These incentives increase market liquidity.
Explain trade pricing rules.
Determine the trade price.
Call markets = Uniform pricing: all orders at the same price (highest volume).
Continuous trading markets = Discriminatory pricing: uses the limit price of the first-arriving order.
What are brokered markets?
Brokers find counterparties for unique or illiquid securities (e.g., large stock blocks, real estate, art).
Define pre-trade and post-trade transparency.
Pre-trade: Access to quotes and orders before trading. Post-trade: Access to completed trade prices and sizes.
What are the characteristics of a complete market?
operational efficiency (low trading costs), informational efficiency (prices reflect information), and allocational efficiency (capital goes to productive uses).
What does it mean to be operational efficient and informationally efficent
Operationally efficient = If the market can function well at low trading costs
Informationall efficient = If security prices reflect all the information associates with fundamental value
What are the characteristics of a well-functioning financial system?
Investors can save for the future at fair rates of return.
Creditworthy borrowers can obtain funds.
Hedgers can manage their risks.
Traders can obtain the currencies, commodities, and other assets they need.
What do finanical intermediaries do in a well functioning finncial system?
Organize trading venues, including exchanges, brokerages, and alternative trading systems.
Supply liquidity.
Securitize assets so that borrowers can obtain funds inexpensively.
Manage banks that use depositor capital to fund borrowers.
Manage insurance firms that pool unrelated risks.
Manage investment advisory services that assist investors with asset management inexpensively.
Provide clearinghouses that settle trades.
Manage depositories that provide for asset safety.
The benefits of a well-functioning financial system are treme
What issues does a lack of market regulation bring?
- Fraud and theft
- Insider trading
- Costly information
How should market regulation solve this problem?
- Protect unsophisticated investors.
- Require minimum standards of competency and make it easier for investors to evaluate performance.t.
- Prevent insiders from exploiting other investors.
- Require common financial reporting requirements (e.g., those of the International Accounting Standards Board) so that information gathering is less expensive.
- Require minimum levels of capital so that market participants will be able to honor their long-term commitments. (Important for insurance firms and pension funds)
