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MARKET MICROSTRUCTURE (I)

MARKET MICROSTRUCTURE (I). The Trading Industry. Trading Instruments. Real Assets Financial Assets Derivative Contracts Insurance Contracts Hybrid Contracts. The Buy Side Investors Borrowers Hedgers Asset Exchangers Gamblers. The Sell Side Dealers Brokers Broker-dealers.

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MARKET MICROSTRUCTURE (I)

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  1. MARKET MICROSTRUCTURE (I)

  2. The Trading Industry

  3. Trading Instruments • Real Assets • Financial Assets • Derivative Contracts • Insurance Contracts • Hybrid Contracts

  4. The Buy Side Investors Borrowers Hedgers Asset Exchangers Gamblers The Sell Side Dealers Brokers Broker-dealers Who Are The Players?

  5. Orders and Order Properties

  6. Market Orders • Market Orders Pay the Spread • Price Improvement • Market Impact • Execution Price Uncertainty

  7. Limit Orders • Limit Price Placement • Standing Limit Orders=Trading Options • How far behind the market • Price volatility • Expected Compensation of Offering Liquidity • Risks of Using Standing Limit Orders • Execution uncertainty • Ex post regret = adverse selection risk • Limit Orders Represent Absent Traders

  8. Stop Loss Order is Activated When Price Falls  Sell Stop Orders <> Options Stop Orders <> Limit Orders Stop Orders Add Momentum  Destabilizing Effect MIT is activated when prices are touched Becomes Market Order Price is up Sell Price is down  Buy Stabilizing Effect Stop VS. MIT Orders

  9. Validity and Expiration Instructions • GTC, GTW, GTM • Good-until-specified date • Market-on-open • Market-on-close

  10. Market Structures

  11. Trading Sessions • Continuous Markets • Call Markets • Call Versus Continuous Trading Sessions • Trading Hours • Tick Size

  12. Execution Systems • Quote-driven Dealer Markets • Order-driven Markets • Brokered Markets • Hybrid Markets

  13. Market Information Systems • Information Collection Systems • Information Distribution Systems • Ticker Symbols • Transparency • Order Routing Systems • Order Presentation Systems • Order Books

  14. Why People Trade

  15. Utilitarian Traders • Investors and BorrowersTo Move Money Through Time • Asset ExchangersTo Find Greater Value • HedgersTo Manage Risks • GamblersTo Entertain • FledglingsTo Learn • Cross-subsidizersTo Get Other Services • Tax AvoidersTo Minimize Tax

  16. Profit Motivated Traders • Speculators • Informed Traders • Value traders • News traders • Information-oriented technical traders • Arbitrageurs • Parasitic Traders • Order anticipators • Bluffers • Technical Traders • Dealers • Market Makers • Block Facilitators

  17. Futile Traders • Expect To Profit, but Do Not Profit • Inefficient Traders • Pseudo-informed Traders • Victimized Traders • Rogue Traders

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