Equity Market Structure and Margin Trading

A comprehensive set of 100 vocabulary flashcards covering key concepts related to equity market structure and margin trading.

Quote-Driven Markets

Markets where customers trade with dealers who quote prices.

Dealer Markets

Another name for quote-driven markets, also referred to as price-driven or over-the-counter (OTC) markets.

Bid-Ask Spread

The difference between the bid and ask prices, measuring liquidity and representing dealer profit.

Liquidity

The ease of buying or selling a security without affecting its price.

Continuous Trading Market

A market where trades can happen anytime during market hours.

Call Market

A market where trades occur only at specific times when the market is called.

Price Priority

A rule stipulating that orders offering better prices are executed first.

Time Priority

A rule ensuring that for orders at the same price, the earliest order gets filled first.

Uniform Pricing Rule

All trades execute at the same price to maximize the number of shares traded.

Discriminatory Pricing Rule

Trades execute at the price of the existing limit orders, leading to varying prices.

Bid Price

The highest price a buyer is willing to pay for a security.

Ask Price

The lowest price a seller is willing to accept for a security.

Market Order

An order to buy or sell immediately at the best available price.

Limit Order

An order to buy or sell at a specified price or better.

Stop Order

An order that becomes a market order once a certain price is reached.

Market-if-Touched Order

An order that executes a market order if a specified price is reached.

Good Till Cancelled (GTC)

An order that remains active until filled or canceled.

Fill or Kill (FOK)

An order that must be executed in full immediately or else canceled.

All-or-None (AON)

An order that must be filled entirely or not at all.

Electronic Trading

Trading conducted via computer systems and digital platforms.

High-Frequency Trading (HFT)

A trading strategy that uses fast computers and algorithms to execute trades quickly.

Internalization

When a broker fills a client’s order from its own inventory or another customer’s order.

National Market System (NMS)

Links major U.S. exchanges allowing trading of stocks across platforms.

Regulation NMS

SEC rules aimed at making U.S. markets more efficient and competitive.

Tick

The smallest allowed price movement in a security.

Tick Size

The dollar amount of a tick, such as $0.01 for most U.S. stocks.

Decimalization

The switch from fractional pricing to decimal pricing that occurred in 2001.

Maker-Taker Model

A trading model where takers remove liquidity while makers provide it.

Payment for Order Flow

Brokers receive compensation for routing orders to specific dealers.

2010 Flash Crash

A brief and drastic fall in U.S. stock markets that occurred on May 6, 2010.

Spoofing

Entering fake large orders to mislead other traders and canceling them before execution.

Layering

Placing multiple spoofed orders at different price levels to create false market depth.

Wash Trading

Buying and selling a security to oneself to fake volume or manipulate tax positions.

Buying on Margin

Borrowing part of the purchase price of a security from a broker.

Collateral

Securities purchased on margin that act as collateral for the loan from the broker.

Broker’s Call Loan

A loan made by the broker to the investor for purchasing securities on margin.

Initial Margin

The minimum percent of the purchase price that the investor must pay with their own funds.

Margin Account

A special account allowing investors to borrow money from the broker to buy securities.

Maintenance Margin

The minimum equity level that must be maintained in a margin account.

Margin Call

A request by the broker for the investor to deposit more funds in their margin account.

Short Sale

Selling securities that the investor does not own, expecting to buy them back at a lower price.

Covering / Buying to Cover

Buying back securities in the market to return them to the lender after a short sale.

Short-Interest Rebate

A rebate paid by the lender of shares to the borrower for borrowing shares.

Regulation SHO

An SEC rule that sets regulations for short selling.

Naked Short Sales

Selling short without actually borrowing the shares, often illegal.

Short Squeeze

A situation where short sellers must buy back shares at higher prices, driving the price up sharply.

Short Sale Profit

The profit made from selling short when buying back shares at a lower price.

Short Sale Restrictions

Rules that govern when and how short sales can be executed.

Alternative Uptick Rule

Allows short sales only at a price higher than the last trade.

MARGIN TRADING EXAMPLES

Examples illustrating scenarios involving margin calls and profits in margin trading.

Using Margin for Leverage

Using margin allows investors to control more shares than with just their own funds.

Stub Quotes

Extremely high or low limit orders with no intention of execution.

Trade Pricing Rules

Rules governing how trades are priced in different market structures.

Market Data Rules

Ensures broad access to quote and trade data across markets.

Order Protection Rule

Mandates that traders execute at the best available price across different trading venues.

Access Rule

Ensures fair access to quotes and limits access fees.

Sub-Penny Rule

Prohibits the pricing in increments smaller than $0.01 for most stocks.

Electronic Trading Impact

Influence of automation and technology in modern trading processes.

Algorithmic Trading

A trading approach that uses complex algorithms for executing trades.

Conflicts of Interest

Situations where brokers' incentives may not align with their clients' best interests.

Regulatory Compliance

Adhering to SEC regulations that govern trading practices.

Market Transparency

The degree to which information about trades, prices, and liquidity is readily available.

Tight Spreads

Small differences between bid and ask prices, indicating high liquidity.

Volume

The number of shares traded during a specified time period.

Market Capitalization

The total value of a company's outstanding shares of stock.

Retail Investors

Individuals who buy and sell securities for their personal accounts.

Institutional Investors

Organizations that invest large amounts of money, such as pension funds.

OTC Markets

Over-the-counter markets where securities are traded directly between parties.

Exchanges

Organized marketplaces for buying and selling securities.

Market Participants

Various entities involved in the buying and selling of financial assets.

Order Execution

The process of fulfilling buy or sell orders placed in the market.

Trading Strategies

Methods employed by traders to achieve specific financial goals.

Investment Risks

The potential financial losses associated with trading and investing.

Price Discovery

The process of determining the price of a security through supply and demand.

Investment Horizons

The period over which an investor expects to hold an asset.

Diversification

The practice of spreading investments across various assets to reduce risk.

Risk Management

Strategies to minimize potential losses in investment portfolios.