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57 Cards in this Set
- Front
- Back
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Two Roles in market |
Market maker/liquidity supplier- offers the price Security Trader/liquidity demander-accepts the price |
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Perfect Frictionless market |
conventional supply demand framework where each buyer/seller is atomistic which makes them honest about |
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Why are auctions attractive? |
Especially SPDA--> Maximizes buyers and sellers profits |
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How to run single price double auction |
1. order accumilation 2.Buyers are ranked by highest price 3. Sellers are ranked from lowest price to highest 4. market clears where the demand and supply cross matched volume are the number of lowest price shares sold at the demanded price. The imbalance is are the remaining shares left/missing to be sold. If after a certain price nothing can be matched-->minimize the net imbalance |
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The Facebook IPO |
Example of deadline effects NADAC's open was delayed 30 min --> left nasdac short 3 million shares |
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How to pick clearing price in Auctions ? |
Standard Rule: pick the price that maximizes the matched volume If multiple price match the same volume. If that doesn't work, Pick the one the minimizes the trade imbalance, in the middle, randomly, price that minimizes the change from a prior price. Clearing price determines the max profit a buyer or seller can make |
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What are deadline effects |
where everyone waits till the last moment to trade. Creates trade imbalances and opportunity for manipulation The question becomes shall we delay the deadline until outcome looks stable ? Solutions include randomization of deadline, limited disclosure of demand and supply function, special orders, freeze periods Opening Cross: occurs at the same time as continuous trading: NASDAQ 9:30 am > 4am --> orders may be marked "on open" to express that the trade will only be executed at opening cross Another situation is the open procedure between opening book and reguar continuous book. opening order must be received before 9:28 am. Between 9:28 and 9:30 Trades will only be accept imbalance trade and only accept them if they lower the imbalance. |
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Allocation Efficiency |
Profits of alternative allocation/profits in SPDA=% |
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competitive vs non competitive bids US treasury bonds |
specify price and quantity vs only quantity(like a market order) |
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Capitalization= |
market value= # of shares* Price |
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Turnover= |
volume / shares outstanding= normalized volume |
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important benchmark to value a stock |
(Bid+Ask)/2 |
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Latency? |
Time to process an order |
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4 components of an order |
MUST Order type Quantity Security Buy or sell MAY price duration etc... |
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round trip and one way |
two trade and only one trade |
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On-open, on-close, next auction: |
Have the order participate in open, close, or next auction |
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Immediate-or-cancel |
fill as much as possible immediately and cancel rest |
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Fill-or-kill |
fill 100% now or cancel it |
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All-or-nothing |
fill 100% in one trade by end of day |
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Minimum-volume |
fill min quantity or more by end of day |
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Must-be-filled |
effectively treated as market orders |
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Do-not-route |
do not re-route to another exchange |
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Directed routing |
automatically re-route order to another exchange |
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Flash |
Display an order for 25-30 milliseconds on this exchange before rerouting |
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One-cancels-other |
if one order executes, then a second order is cancelled |
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One-triggers-other |
if one order executes, then a second order is submitted |
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Identity |
Specifies an anonymous order when that is not the default |
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Short sales |
Flag that this order will be a short sale |
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Odd lots |
Flag that this is an odd lot |
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Settlement |
Nonstandard settlement conditions |
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Intermarket sweep |
When trade gets rerouted to another exchange to execute the trade (marketable) |
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HTF profit on you based on |
Order anticipation |
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Two routes for HFT strategy |
Passive liquidity supplying orders: non-marketable limit orders)--> defacto dealers--> earn the spread, but also control inventory risk Active /agressive liquidity demanding orders: (market orders and marketable limit orders) for four strategies: 1.Statistical arbitrage across multiple securities 2.Fast trading on news announcements 3.Order anticipation 4.Latency arbitrage |
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Criteria for identifying HFT |
1.Firm’s holdings frequently cross zero (i.e., positive negative positive, etc.) 2.Short order duration 3.High order to trade ratio (i.e. frequent submission & cancellation of limit orders) 4.NASDAQ’s knowledge of customers = subjective judgment |
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Market Structure that facilitates HFT |
Co location--> How? Lower percent quoted spreads & percent effective spread –Improved price efficiency –Raised volatility Strategic Runs:Sequence of order submissions/cancellations of same quantityon the same side--> How? Lower quoted spread– Lower effective spread– Higher depth–Lower volatility --> gives improved market quality Messages:Order submissions + cancellations + trades |
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Latency arbitrage |
Arbitrageurs compute unofficial NBBO before SIPs official NBBO to exchanges•Use info about the movement of the market to arbitrage: buy low & sell high |
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Positive HFT impact and Negative |
Improve liquidity (especially lower quoted and effective spreads) –Improve price efficiency Occasional trading glitches –Order anticipation –Latency arbitrage |
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Dealer vs Broker |
Dealer trades as a principle and has little regard for favourable terms Brokers as an agent wants to execute the order at the best price for the customer |
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exhanges may deal with a dealer to provide |
more liquidity to its exchange |
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specialist is powerful against |
NYSE who had near monopoly main role to maintain order and a fair market |
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Specialist vs DMMs |
1. access bid and asks simultaneo ulsly 2.can't llok at orders coming into the book before hand 3.Can trade at parity: not a market maker |
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To trade on NASDAQ (use NASDAQ markets and systems), you (or your firm) must become a NASDAQ To act as a broker (agent) for customer orders, you must also become an To trade against your customers (take the other side of their trades) you must also become a |
member order entry firm market maker |
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Implementation Shortfall= |
= Value of a “Paper” Portfolio –Value of a Real Portfolio = Value of a Frictionless Portfolio –Value of Real Portfolio Including Frictions= Loss due to Frictions |
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implementation short fall real time and historical data to determine |
an order's optimal execution horizon, balancing market impact and opportunity cost |
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Investment cycles |
Pre trade Trade Postanalysis trade feed back to selection steps |
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REquest trading horizon formula for Transaction costs |
number of stocks/(AVD*desired trading rate) |
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TWAP formula |
average benchmark of prices (bm) number of share you trade(price-bm)+... |
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Delay cost formula |
REquested shares(m0 -md) |
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force leading to fragmentation of trading is |
regulation that favors competition |
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Impact driven algos |
goal is to minimize price impact--> twap aor vwap |
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Cost driven algo |
balances cost and risk |
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opportunistic driven algo |
exploits favourable market condition |
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What is TWAP in algo |
Trade equal size each period |
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VWAP formula |
(v1*p+v2*p2+v3*p3)/(v1+v2+v3) |
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POV impact driven algo |
percent of realized volume always traded.-->participation rate |
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Implementation Shortfall algo |
Cost driven algo IS benchmark= decision price goal is to meet or beat the decision price |
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Agressive in the money vs passive in the money |
trade more with favourable prices trade more with unfavourable prices for the adaptive shortfall |
