5 - secondary markets

what is the usual trading venue on the secondary market for developed markets

traditional exchange trading

give the names of the 5 biggest stock exchanges in the world

LSE —> london, uk

NYSE —> nyc, usa

Nasdaq —> usa

FWB —> frankfurt, germany

TSE —> tokyo, japan

4 other trading systems to know about

MTFs —> multilateral trading facillities

SIs —> systematic internalisers

OTFs —> organised trading facilities

OTC —> over the counter

what does an MTF do

an alternative trading system that brings together multiple smaller buyers and sellers

give two systems that could operate as an mtf

dark pools

ECNs

what is a dark pool

trading venue where order details are not publicly displayed before a trade

what is an ECN

electronic communication network:

electronic systems that match buy and sell orders

what is an SI

an investment firm that regularly trade with their own customers using their own money, rather than bringing their customer’s order to an exchange

what is an OTF

an organised trading system used for bonds and other non-equity products like certain derivatives

what is OTC trading

transaction happens directly between two parties, not through a formal exchange

what are the two types of systems in trading markets

quote driven

order driven

quote driven system

market makers agree to buy and sell at least a set minimum number of shares at quoted prices

give an example of a quote driven system

nasdaq

compared to order driven systems, quote driven systems tend to…

…provide greater liquidity, due to the presence of market makers

what is NMS

normal market size

in a quote driven system, your order must be at least….

….x1 NMS

what is pre trade transparency

info like last nights close, how it settles, the high low and middle of the day’s price, the currency its traded in etc

what system doesn’t have pre trade transparency

dark pools

what is post trade transparency

when the transaction reports go through so the screen can be updated with relevant info

order driven system

the investors indicate how many securities they want to buy or sell, and at what price, and the system brings together buyers and sellers

(like the one u did on the trading simulation)

which types of markets usually use order driven

equity markets

which exchanges usually use order driven

NYSE, TSE and LSE equities

NMS on order driven compared to quote driven

larger on order driven —> shows that there is more liquidity

do order driven systems need market makers

not necessarily because it is more liquid, but they can do

the buyers and sellers on an order driven system are….

….anonymous

you are only obligated to the CCP (central counterparty)

what is the name of the CCP process

novation

market makers have to quote at….

…x1 NMS

but other members who aren’t market makers don’t necessarily have to

4 participants in a trading system

market makers

IDBs —> inter-dealer brokers

LSE member firms

SBLIs —> stock borrowing and lending intermediaries

if you are not a market maker, you are probably an…

IDB

what is an IDB

an exchange member firm that has registered with the exchange to act as an agent between dealers, like market makers

(those ppl with a phone on each ear)

difference between a dealer and a broker

dealer = principal

broker = agent

give two examples of IDBs

ICAP

BGC

what is algorithmic trading

computer systems trading shares automatically

4 other terms for algorithmic trading

algo

automated

black-box

quant

benefits of algo trading

removes emotion

preserves discipline

speed

accuracy

reduced costs

criticism of algo trading

flash crash effect (eg if u accidentally place way too big an order)

what is prime brokerage

a collection of services offered to hedge funds by investment banks

7 typical services offered in prime brokerage

securities lending + borrowing

leveraged trade execution

cash management

core settlement

custody

rehypothecation

access to OTC markets

why do hedge funds lend and borrow securities

to cover short positions

who, if anyone, has the benefit of any dividends when securities are lent to a market maker

the lender

what is leveraged trade execution

undertaking trades on the fund’s behalf that use borrowed funds

what is cash management

maximising the return that is generated from cash held by the fund

what is core settlement

makings sure any securities purchased become the fund’s property and any cash from selling securities is received

what is custody

keeping the securities held by the fund safe

what is rehypothecation

the reuse of collateral

3 features of electronic order driven trading

automatic execution

price/time priority

anonymous trading

how is the order book arranged

best price at the top, then by the time that the order was entered

6 types of orders you can get

limit order

iceberg order

execute + eliminate order

market order

fill or kill order

all or none order

what is a limit order

a no worse than price, and time limit (see picture)

typically only for the day on which they are ordered tho

3 things that a limit order must specify

what to buy or sell

price (limit price)

volume

if limit orders are unexecuted, what happens to them

they remain on the order book

two types of limit order

iceberg

all or none

all or none order

must be filled entirely or not at all

iceberg order

done in bits, to hide the size of a large order

what is an execute and eliminate order

execute as much as u can then cancel any remainder

what three things must an e+e order specify

what to buy/sell

price

volume

market order

execute as much as possible at the best available prices

what must a market order specify

what to buy/sell

volume

NO PRICE

what is a fill or kill order

entire order filled or it’s cancelled immediately

what three things must a fill or kill specify

what to buy/sell

price (but not always actually)

volume

how is fill or kill different to all or none

all or none remains on order book if not executed

fill or kill disappears and u have to reorder it

what is an opening auction

at the start of the trading day the opening price is established via an auction process

what is this auction process called (the algorithm name)

uncrossing

what is the purpose of the algorithm used in connection with closing auctions

it is used to calculate the price for overlapping orders

when might automatic execution be suspended

when the price of the trade is more than the price tolerance level away from the previous price traded

what is a typical price tolerance level

5-25%

what is a trading halt

no trading for any reason either on or off book

who reserves the right to prohibit trading in a security

the exchange

what happens to the settlement of trades that have occurred prior to a trading halt

they are settled as normal

when the LSE declares a trading halt, what is the minimum period that trading will be suspended for

no specific minimum

most exchanges use a ….

…CCP

3 benefits of using a CCP

reduced counterparty risk

anonymity/improved liquidity

reduced administration/netting

3 typical costs of trading

broker’s commission

exchange, clearing + regulatory fees

transaction tax (stamp duty)

who pays stamp duty

only the buyer

how much usually is stamp duty

0.5% of the value of securities traded

what is DJIA

dow jones industrial average

how many companies in dow jones

30

what base number did dow jones start with

100

how do the dow jones decide which 30 companies to pick

selected by a committee, based on:

• reputation

• growth

• interest to investors

what are the only two industries not covered by dow jones

transportation

utilities

the FTSE 100 represents how much of the UK market

80-85%

FTSE100 includes….

….100 largest UK companies traded on the LSE

how is ‘largest’ defined

by market cap

how often is the ftse 100 updated

quarterly

how often is the ftse 100 published

every 15 seconds while the london market is open

what base number did the ftse 100 start with

1000

when was this base number set

1984

what is the nikkei stock 225

225 large japanese companies regularly traded on the TSE

what is the hang seng

more than 75 companies listed on the hong kong stock exchange

how do they decide which companies are in the hang seng

market value

turnover

financial performance

what is the stoxx

a family of indices based around the stoxx global 1800 that consists of 600 of the largest capitalisation companies from europe, the americas + asia/pacific (global developed markets)

what is msci world

includes around 1700 companies from 23 countries, based on market cap

what is the ftse eurofirst 300

around 300 of the largest listed companies by market cap from across europe

what is the CAC 40 and what does it stand for

cotation assistee en continu quarante:

market cap weighted measure of the 40 most significant values among the 100 highest market caps on euronext paris

how many shares owned by foreign investors in the cac 40

45% —> more than any other main european index

what is the dax

dutscher akitien index:

40 major german companies trading on frankfurt stock exchange

dax base value and date

1000, 30 dec 1987

s+p 500

500 largest cap stocks traded in the US

FTSE all share

600 of more than 2000 companies traded on the LSE

market cap weighted

FTSE all share was previously known as

the FTSE actuaries all share index