Lecture 21

Secondary equity market

Where most trades are for the general public

•Bonds

Primarily traded “over-the-counter”•No centralized exchange can be traded anywhere

Derivatives

Standard options and futures are traded on exchanges•In the US, CME is the largest futures exchange•Swaps, forwards, and more exotic instrumented are traded OTC

Equity

Mostly traded on exchanges•But, a lot of volumes may not go to exchanges

ATS

venues where institutional investors can trade a large number of shares. No bid/ask information

Wholesalers/SDPs

:•Wholesalers directly interact with retail traders’ order flow•SDPs serve as a counterparty to any trade on that platform when u trade u are more likely to be talking to whole seller.

Bid-Ask Spread Two (major) order types if you would like to trade stocks

Market order–you’d like to buy/sell at whatever prevailing price on markets

•Limit order–you have to specify your price limit $X

•You are willing to buy at or below $X per share•You are willing to sell at or above $X per shar

Bid-ask and liquidity

••Ask price > bid price•Bid-ask spread is the profit for market makers in providing the liquidity

Bid price

–•The highest price a buyer is willing to pay for an asset

Ask price

–•The lowest price that a seller is willing to accept

NBBO or National Best Bid and Offer

aggregates the best prices (highest bid, lowest ask