Orders and Market Execution

Order types
1. Limit orders
  1. Specifies a maximum/minimum price
2. Market orders
  1. Large orders may cause market impact
  2. Execution price uncertainty
3. Marketable limit orders
  1. Marketable
  2. At the market
  3. Behind the market
4. Standing limit orders
  1. "options" that offer liquidity
5. Stop loss orders
  1. Destabilise prices by demanding liquidity when least available
  2. Order activated when price rises/falls to stop price
6. Tick Sensitive Orders
  1. Conditional on last price change
7. Market-not-held orders
  1. Best possible execution decided by broker
Market Execution Structures
1. Quote-driven dealer markets
  1. Posts quotes to buy or sell where ask price>bid price
  2. Dealer profits from bid-ask spread
  3. Examples: NASDAQ, FX, Bonds, Derivatives
2. Order driven markets
  1. Use trading rules to arrange trades
  2. Oral auctions
    1. Open-outcry trading floors
    2. Physical location
    3. Easier to enforce rules
    4. Rules: best bid/offer price accepted, first in first served, public orders first
  3. Single price auctions
    1. Uniform price used (uncertainty about true value of stock)
      1. Fair to both informed and uninformed investors
    2. For very illiquid stocks
    3. For insufficient technology
    4. Rules: uniform pricing (clearing price where supply=demand)
  4. Continuous electronic auctions
    1. Limit order book with bid and ask schedules for certain price and quantity
    2. Investors submit orders with brokers who act as intermediary
      Attachments:
      - Brokers
    3. Rule: price and time precedence, discriminatory pricing, matching procedure
  5. Crossing networks
    1. Match buy and sell orders without knowing public quotes
    2. OR Place orders anonymously so no-one knows who's trading
    3. Rule: derivative pricing rule
      1. But, can lead to stale prices, adverse selection
      2. Tempts traders into price manipulation
3. Classification based on liquidity provision and frequency of trading
4. Brokered Markets
  1. Broker's role in finding liquidity
5. Hybrid/multiple markets
  1. Mix characteristics of quote driven, order driven and brokered markets
  2. NYSE
    1. Floor traders (order driven)
    2. Electronic limit order book (order driven)
    3. Designated dealer to provide liquidity (quote driven)

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Orders and Market Execution

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	Created by Vhia Rose over 10 years ago