Financial Markets And Trading: Chap 1 Traders, Orders, Systems - ayaohsu/Personal-Resources GitHub Wiki

IOI

An indication of interest, is an expression in financethat demonstrates a buyer's non-binding interest in buying a security in the stock market, often before it is available for purchase. IOIs are not required, but when a firm decides to issue one, they are primarily used on two occasions: before an IPO, and before an institution places a block trade. The IOI remains open-ended and is not a commitment to buy. When an institution sees an IOI that they would like to trade against, they phone the broker to execute the trade. A current day IOI expresses the current desire to trade, and is only sent to the buy side.

Broker-dealer

Definition: natural person, company or other organization that engages in the business of trading securities for its own account or on behalf of its customers.

When executing trade orders on behalf of a customer, the institution is said to be acting as a broker. When executing trades for its own account, the institution is said to be acting as a dealer.

FIX Protocol (Financial Information eXchange Protocol)

The FIX Protocol language is comprised of a series of messaging specifications used in trade communications. Ex: IOI, Execution Report, order, etc.

Traders

Well, people who trade.. proprietary traders_: trade for their won money (or their employer's money); want to: buy low and sell high brokers (or agency traders): execute orders for their clients; want to: receives commissions brokerage service includes: matching the clients' buy and sell orders, connecting to markets, clearning and settlement, providing market data and research settlement: delivery of the traded assets dealer: the person in the brokerage firm, but instead of matching trades, they trade with their own account, so they want to buy low, sell high too. They are called market makers.

Two major groups by goal:

1. profit-oriented traders

	1. informed traders - fundamental analysis, value
	2. technical traders
	3. dealers: lower market access fee, but required to provide at least a minimum number of securities

2. Liquidity traders (utilitarian traders)

	* trade equity for cash, to buy a house (might not be most optimal regarding profit-oriented)
	* hedger (buying option to hedge)

Orders

Specifies the security, quantity, market side, price, conditions... When orders find their counterparts in the markets, a transaction occurs and it is said that orders are "matched" Two types:

1. market orders (price "taker")

	* no price specified, best available price

2. limit orders (price "maker")

	* quoted in the market with their bid or ask price

Limit orders that are not immediately filled are stored in the limit order book (LOB) until they are matched or canceled. A large market order may wipe out the entire LOB inventory at best price and get filled within some price range.

Limit orders can be pegged in some markets. Peg to the best price on the same(opposite) side of the market. Also, orders can be pegged to the bid/ask mid-price.

Bid-Ask Spread

Adverse selection component for dealer since dealers confront one-sided selection of their order flow

Market Structures

Market type: Exchange:

* Highly organized and regulated by government agencies

 Over-The-Counter Market:

* Are primarily used to trade bonds, currencies, derivatives and structured products
* Lack of transparency (ex: 2007 credit crisis, CDO)

Market structure by execution system: Order-driven markets

* displays the all the orders from buyers and sellers
* Order execution is not guaranteed

 Quote-driven market

* displays only the bid and ask offers 
* Order execution is guaranteed because the market makers are required to meet the bid and ask prices they quote
* Quote-driven is more liquid but lacks transparency
* Dealers submit maker orders while other traders can submit only market orders

Two Types of order-driven markets:

Continuous markets:

* Traders can submit their orders at any time (when market is open)
* Traders trade among themselves without intermediary market makers
* Every trader can become a market maker by placing a limit order
* Limit orders match according to price-time priorities 

Call markets:

* Oral Auctions: 

	* Traders gather in the same place and communicate their trading intentions (using shouting and hand signals)

* Call Auctions:

	* Prior to auction, traders submit orders
	* Orders are executed simultaneously at the same price
	* Price discovery process: if not a unique price, the auction price is chosen to yield maximum trading volume

Reference: "Financial Markets and Trading: An Introduction to Market Microstructure and Trading Strategies" by Anatoly B. Schmidt