ASX Trading Process not Chi-X

2 Outline Stock Exchange? SIRCA’s Role in ASX Data Order Book Explained Examples of Order Book Transactions Order Types and Qualifier Codes Order Duration ASX Market Phases Typical order book stats and trends

3 Stock Exchange?

4 What is it? –Venue to exchange ownership in shares of a publicly listed companies –Alternative forms Street corner/coffee shop, organised club, listed company Mutual agreement/open outcry/electronic platformopen outcry Why do they exist? –Help fund large investments efficiently & spread risk by Secondary market activities – provides liquidity and reduces risk Creating trust through regulation of brokers, public companies and information they release Transfer share ownership efficiently (CHESS)

5 Sirca’s Role in ASX Data Collect and Store ASX trading data for use in financial research. Daily Trade Log Convert and Store (~35Gb/month) Make available in AusEquities - Order Book

6 What is an Order Book? A prioritized list of the currently outstanding offers to buy or sell securities. Order entry time and price matter. The ASX trading system (called SEATS (Stock Exchange Automated Trading System) – 10 Sep 2006, then ITS (Integrated Trading System) – 28 Nov 2010, now NASDAQ OMX Genium INET (TradeMatch, PureMatch from November 2011, VolumeMatch)) uses an order book to match orders and create trades.

7 Order and Transaction Types ENTER: Enters an order into the order book. AMEND: Modifies an existing order in the order book. TRADE: Trade between two orders in the order book. DELETE: Removes an order from the order book OFFTR: Off-market trade not conducted through order book.

8 Building Order Book #1 TypePriceVolumeBid/AskID ENTER B1 ENTER8.3150A2 ENTER8.2950B3 ENTER A4 ENTER8.3140A5 ENTER: Adds an order to the order book. An order is an offer to buy or sell a security up to certain price. A ‘Bid’ order is an offer to buy at or below a price. An ‘Ask’ order is an offer to sell at or above a price. In ITS/OMX, orders are uniquely identified by a 64-bit integer value, eg do not use MS Excel to view.

9 Building Order Book #2 TypePriceVolumeBid/AskID ENTER B1 ENTER8.3150A2 ENTER8.2950B3 ENTER A4 ENTER8.3140A5 BidAsk IDVolPrice VolID

10 Building Order Book #3 BidAsk IDVolPrice VolID Difference between the ‘best Bid’ and ‘best Ask’ is called the ‘Spread’ Spread should always by >= 0 in open trading. Large spread generally indicates a lack of liquidity. Orders are sorted by price. Orders of the same price are sorted in order they were entered.

11 Trade Example #1 BidAsk IDVolPrice VolID TypePriceVolumeBid/AskBid IDAsk ID ENTER8.3150B6 TRADE Order Book Before executing Order 6

12 Trade Example #1 BidAsk IDVolPrice VolID Order Book After executing Order 6 Order 6 added to order book New best bid price is >= best ask price. System generates trade between orders 6 and 2 for 50 shares at $8.31 Since both orders 6 and 2 have 0 volume remaining they are removed from the order book.

13 Trade Example #2 BidAsk IDVolPrice VolID TypePriceVolumeBid/AskBid IDAsk ID ENTER B6 TRADE TRADE TRADE Order Book Before

14 Trade Example #2 BidAsk IDVolPrice VolID Order Book After Multiple trades generated. $8.31 with order 2 $8.31 with order 5 $8.34 with order 4 Order 4 remaining volume stays in order book.

15 Amend Example #1 BidAsk IDVolPrice VolID TypePriceVolumeBid/AskBid IDAsk ID AMEND20A2 Order Book Before

16 Amend Example #1 BidAsk IDVolPrice VolID TypePriceVolumeBid/AskBid IDAsk ID AMEND20A2 Order Book After

17 Amend Example #2 BidAsk IDVolPrice VolID TypePriceVolumeBid/AskBid IDAsk ID AMEND100A2 Order Book Before

18 Amend Example #2 BidAsk IDVolPrice VolID Order Book After Increasing the volume of an order or changing its price causes it to be effectively cancelled and re-added, which causes it to lose its time priority.

19 Delete Example BidAsk IDVolPrice VolID TypePriceVolumeBid/AskBid IDAsk ID DELETEB1 Order Book Before

20 Delete Example BidAsk IDVolPrice VolID TypePriceVolumeBid/AskBid IDAsk ID DELETEB1 Order Book After

21 Order Types What conditions/choices can you make when placing orders (some of these can imply prices that are not otherwise given)? LIMIT –Order entered with a specified price. –For Bid order: Buy at this price or lower. –For Ask order: Sell at this price or higher. –Most orders are of this type. –No Qualifier. BEST –Automatically entered at current best price. –Entered at best bid if a bid order, best ask if an ask order. –Price is not specified by the broker. –No Qualifier (looks like a Limit order).

22 Order Types MARKET –Order entered at best prices on opposite side of market. –Bid order entered at current best Ask priceS, Ask order entered at current best Bid priceS. Price is not specified by the broker. –A Market order does not have a price limit and is traded at any price available in the market. –Several price levels can be traded in order to fill as much as possible of the order quantity – this can be dangerous so setting some limits can be desirable – see ML, FK and AK. –Qualifier: MK and J (SEATS)

23 Order Types MARKET TO LIMIT –Order entered at the current best price on opposite side of market. –Bid order entered at current best Ask price, Ask order entered at current best Bid price. –Price is not specified by the broker. –Any part of order not immediately traded converted to a Limit order. –Qualifier: ML (ITS)

24 Order Types CENTRE POINT (June 2010 onwards) –Order entered at the prevailing midpoint of the best bid and ask prices in the Central Limit Order Book (CLOB). –Only trade with other Centre Point orders, not CLOB orders. –Can be entered with other order attributes, eg limit, ML, MK, AK and FK orders. –Only exist for one day. –Qualifier: CP

25 Order Duration How long does a CLOB order last? GTC –Good Till Cancelled. Order stays in book until filled, cancelled by user, or the maximum allowed time is reached for that instrument. Time limited –End of current day (SEATS Qualifier: B). –Specific date. –Expiry of series (for derivatives).

26 Order Duration Fill and Kill –Trade as much of the order as can be traded immediately, cancel the rest. –Qualifier: FK (ITS) and E (SEATS) Fill or Kill (All or Nothing) –Trade the entire balance of the order immediately if possible, otherwise cancel the order before trading any. –Qualifier: AK (ITS) and A (SEATS) FaK and FoK typically used with Market Orders to avoid trading at unfavourable prices

27 ASX Market Phases What trading activity occurs during the day? 00:00 Order book Refill –Unfilled and unexpired orders from the previous day are re-entered into the order book. –No trades occur 07:00 – 10:00 Pre-open –Market participants can enter/cancel/amend orders –No trades occur. –Spread can be negative.

28 ASX Market Phases ~10:00 Opening Auction –Market open is staggered (10:00:00 + 2:15) in five blocks (A-B, C-F, G-M, N-R, S-Z) with a small random component (+/- 15 seconds). –ASX Calculates the ‘Opening Price’ based on orders in system using a known algorithm. –All overlapping orders (Bid >= Ask) are now traded at this single price. ~10:00 – 16:00 Open Trading –Market participants can enter/cancel/amend orders –Orders are matched and trades generated. –Spread shouldn’t be negative (ignoring trading halts).

29 ASX Market Phases 16:00-16:10 Pre Closing Auction –Orders can be entered, modified or deleted. –No trades occur 16:10 – 16:12 Closing Auction –Similar process to opening auction. –All eligible orders traded at calculated price. –+/-15 second random component to actual time

30 ASX Market Phases 16:12-18:50 Adjustment –Online orders can be modified or deleted, but not entered. –No online trades occur. –Brokers can trade off-market via phone, called overnight trading. 18:50 – 23:59 Maintenance –Deletion of expired orders and orders too far from market are purged. –Add/Remove security codes (new listings, expired options etc.) –Change basis of quotation.

31 Some Stats – a typical day’s ENTERs for BHP QualifierCountDescription 69180Limit orders SHL13825Short Sell order FK1674Fill and Kill CP1515Centre Point order CPX370Centre Point Priority Crossing ML297Market-to-Limit order FK SHL246 FK CP122 AK CP108All or Nothing Centre Point order AK ML21 MK CP9Market Price order BL8Best Limit order FK MK6 AK MK5

32 Some Stats - a typical day’s trading for BHP –56197 transactions ENTER 37% AMEND33% TRADE18% 5969 DELETE11% 527 OFFTR 1% –Order book depth during open trading up to 340. Changing Patterns through time: –TRADE activity has increased by 3x since 2006 –AMENDs and DELETEs have increased by > 30x –But the average amount sold in each trade is 1/6 what it was in 2006 Why? Trades are increasingly being done algorithmically by computers = good for you

33 Links ITS Reference Manual: – cgi/idcplg?IdcService=ASX_COLLECTION_DISPLAY&hasColle ctionID=true&dCollectionID=739 ASX Market Phases: – Auction Pricing Algorithm (from page 9 onwards) : – cgi/groups/participant_services/documents/manuals/asx_ pdf ASX Qualifiers: –