MARKET MICROSTRUCTURE (I). The Trading Industry Trading Instruments ► Real Assets ► Financial Assets ► Derivative Contracts ► Insurance Contracts ► Hybrid.

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Presentation transcript:

MARKET MICROSTRUCTURE (I)

The Trading Industry

Trading Instruments ► Real Assets ► Financial Assets ► Derivative Contracts ► Insurance Contracts ► Hybrid Contracts

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

Orders and Order Properties

Market Orders ► Market Orders Pay the Spread ► Price Improvement ► Market Impact ► Execution Price Uncertainty

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

Stop VS. MIT Orders 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

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

Market Structures

Trading Sessions ► Continuous Markets ► Call Markets ► Call Versus Continuous Trading Sessions ► Trading Hours ► Tick Size

Execution Systems ► Quote-driven Dealer Markets ► Order-driven Markets ► Brokered Markets ► Hybrid Markets

Market Information Systems ► Information Collection Systems ► Information Distribution Systems ► Ticker Symbols ► Transparency ► Order Routing Systems ► Order Presentation Systems ► Order Books

Why People Trade

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

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

Futile Traders ► Expect To Profit, but Do Not Profit ► Inefficient Traders ► Pseudo-informed Traders ► Victimized Traders ► Rogue Traders