Futures and Options - Types of Orders

Document Sample
Futures and Options - Types of Orders Powered By Docstoc
					    Part - IV
 Types of Orders
       &
Market Structures

     Prof. Rushen Chahal   1
Introduction to Orders
   What is an order?
       It is a trade instruction given to a broker or
        to an exchange.
            Whenever a trader wishes to buy or sell a
             security he needs to place an order
            It should indicate:
                 What he wishes to accomplish
                 The terms and conditions subject to which he wants
                  his instructions to be carried out.


                              Prof. Rushen Chahal                      2
Introduction (Cont…)
   In order to convey meaningful information
    to the person who is executing the trade,
    an order must contain certain basic
    information.




                    Prof. Rushen Chahal         3
Required Information
   Firstly the trader needs to indicate as to
    whether he wishes to place a long or a
    short position.
       For a long position a buy order needs to be
        placed.
       For a short position a sell order needs to
        be placed.


                      Prof. Rushen Chahal         4
Required Information (Cont…)
   The security that is sought to be bought
    or sold must be clearly identified.
       For instance if we assume that the investor
        wishes to go long in IBM stock, he should:
            Place a buy order for IBM shares




                          Prof. Rushen Chahal     5
Required Information (Cont…)
   The number of shares that are sought
    to be bought or sold must be specified.
       This is called the Order Size.
   To continue with our example let us
    assume that the investor places a buy
    order for 200 shares of IBM.


                       Prof. Rushen Chahal    6
Required Information (Cont…)
   The next critical issue is the price.
       Is the trader prepared to accept the best
        price that is currently available in the
        market?
       If not, if he wishes to buy
            What is the maximum price that he is willing to
             pay
       Else if he is seeking to sell
            What is the minimum price that he is prepared
             to accept    Prof. Rushen Chahal             7
Required Information (Cont…)
   Traders who are prepared to accept the best
    terms available in the market
       Place Market Orders
   Others who wish to place a ceiling or a floor
       Place Limit Orders
   The corresponding price ceiling or floor is
    called the Limit Price.
       Let us assume that the investor places a limit buy
        order with a limit price of $ 595.

                         Prof. Rushen Chahal                 8
Required Information (Cont…)
   Finally the trader needs to specify how
    long he would like the order to remain
    valid for in the event of a delay in
    execution due to the unavailability of a
    suitable matching order on the other
    side of the market.
       For instance a trader may specify that his
        order should be either executed on
        submission or canceled.
                      Prof. Rushen Chahal            9
Required Information (Cont…)
       Or he may be prepared to specify a period
        of time for which he is prepared to wait if a
        suitable match is not available.
   Exchanges will not obviously permit
    orders to stay alive forever.
       They will specify a maximum validity
        period.
       Orders which fail to get executed within
        this period will automatically stand
        canceled.       Prof. Rushen Chahal        10
Required Information (Cont…)
   Continuing with our example assume
    that our investor places a Day Order.
       It means that if a suitable match is not
        found by the end of the day on which the
        order is entered, it should be canceled.
   The next issue is
       Is it acceptable to partially fill the order


                        Prof. Rushen Chahal            11
Required Information (Cont…)
   Take the case of the buy order for 200
    shares
       What if a counterparty is found for only
        100 shares?
            Should the order be partially executed and the
             remaining order for 100 shares be kept in
             abeyance until another suitable match is found.
            If the investor does not wish this to happen he
             will place an All or None (AON) order.

                          Prof. Rushen Chahal             12
Introduction (Cont…)
   Orders are the fundamental building
    blocks of trading strategies.
   A proper order issued at the right time
    can:
       Make the difference between a profitable
        trade and a costly trade.
       It can at times even make a difference
        between a trade and no trade.
                      Prof. Rushen Chahal          13
Why Orders?
   Orders become essential because most
    investors do not personally arrange
    their trades.
       Thus, in order to ensure that others
        execute their trades as per their intent,
        they must specify all relevant information.
            Thus it is desirable that they envisage all
             possible contingencies and prescribe suitable
             courses of action.

                           Prof. Rushen Chahal               14
Revocation
   In the event that an investor wishes to
    modify the terms on which he wishes to
    trade, he has no option but to cancel
    his existing order and resubmit a fresh
    order.
       The problem in practice is that by the time
        a fresh order is issued, market conditions
        may have changed adversely.

                      Prof. Rushen Chahal         15
Revocation (Cont…)
       At times, to make matters worse, an
        existing order may get executed before the
        trader is able to have it canceled.
   Thus correct specification is critical.
       Speed is the essence in order placement,
        execution, and cancellation.
       Obviously computer based trading systems
        are superior to manual systems.

                      Prof. Rushen Chahal        16
Terminology
   When a trader wants to indicate that he
    wishes to buy a security, he will make a
    bid.
   When he wishes to convey that he is
    seeking to sell he will make an offer.
   When a dealer wishes to trade on his
    own account he will quote either a bid
    or an offer.
                   Prof. Rushen Chahal     17
Terminology (Cont…)
   Whereas if the dealer is trading on
    behalf of a client, he will convey the
    buy or sell order placed by the client to
    a broker or to an automated trading
    system.
   Bids and offers include information not
    just about the price, but also about the
    quantity sought to be transacted.
   This is known as the order size.
                   Prof. Rushen Chahal      18
Terminology (Cont…)
   The price specified in a buy order is
    called: the bid or the bidding price.
   The price specified in a sell order is
    called: the offer, offering, ask, or asking
    price.
   The highest bid price in the market is
    called the best bid.
   The lowest offer price in the market is
    called the best offer.
                    Prof. Rushen Chahal      19
Terminology (Cont…)
   The best bid and offer are also known as the
    Market Bid and Market Offer respectively.
   A Market Quotation, often called a Best Bid
    and Offer (BBO) reports the best bid and
    offer in the market at a point in time.
   The best bid and offer available anywhere in
    the U.S. at a point in time is known as the
    National Best Bid and Offer (NBBO).


                    Prof. Rushen Chahal        20
Terminology (Cont…)
   The difference between the best ask and the
    best bid is the bid-ask spread.
   It is also known as the inside spread, since it
    is observed within the market.
   In England the spread is often referred to as
    the touch.
   Once an order is accepted the price at which
    the trade is executed is known as the Trade
    Price.
                     Prof. Rushen Chahal          21
Terminology (Cont…)
   An order may not be released for
    trading as soon as it is submitted.
       In practice a broker may need to check
        whether a particular account is authorized
        to trade.
            Once an order is accepted, but before it is
             executed, it is known as a Working Order.



                           Prof. Rushen Chahal             22
Order Driven Markets
   Markets may be classified based on the
    execution system
       An execution system is a set of procedures
        for matching buyers and sellers.
   We will first focus on what are called
    order driven markets.



                      Prof. Rushen Chahal        23
Order Driven Markets (Cont…)
   What is an order driven market?
       It is a market in which buyers and sellers
        can trade with each other without the
        intermediation of a dealer.
       These markets have specified trading rules
        which stipulate as to how trades should be
        executed.


                      Prof. Rushen Chahal        24
Order Driven Markets (Cont…)
   There are two sets of rules.
       The Order Precedence Rules state as to
        how buy and sell orders should be
        arranged and matched.
       The Trade Pricing Rules are used to
        determine the price at which a trade is to
        be executed.


                      Prof. Rushen Chahal            25
Order Driven Markets (Cont…)
   Most of these markets are Auction
    Markets.
       In these markets the trading rules define
        the process by which buyers seek the
        lowest available prices and sellers seek the
        highest available prices.
            This is called the Price Discovery Process.



                           Prof. Rushen Chahal             26
Order Driven Markets (Cont…)
   Public traders are not the only traders
    on such markets.
       Dealers can also trade.
       There are in fact markets where they
        provide most of the liquidity.
       In a pure order driven market however, a
        dealer is on par with any other public
        trader.

                      Prof. Rushen Chahal          27
Order Driven Markets (Cont…)
   Many order driven markets conduct
    continuous two-sided auctions in which
    buyers and sellers can continuously
    attempt to arrange their trades at prices
    that vary through time.
   Such auction markets can be of two
    types
       Open outcry systems
       Electronic rule based systems
                      Prof. Rushen Chahal   28
Order Driven Markets (Cont…)
   In an open outcry system also known
    as an Oral Auction traders negotiate
    face to face on the floor of an
    exchange.
   The trading rules determine as to who
    can negotiate and when.


                  Prof. Rushen Chahal       29
Order Driven Markets (Cont…)
   In an electronic rule based system the
    trading rules are coded into the order-
    processing software.
       There are still some outdated systems
        where incoming orders are matched
        manually by clerks.




                      Prof. Rushen Chahal       30
Order Driven Markets (Cont…)
   Since these markets employ clearly
    specified trading rules traders cannot
    choose with whom they will trade.
       In practice, a trader may end up trading
        with someone with whom he does not
        have a credit relationship.
       To prevent settlement failure, such
        exchanges employ elaborate procedures to
        ensure that all traders are creditworthy
        and trustworthy.
                     Prof. Rushen Chahal       31
Market Orders
   In the case of a market order there is
    no specified price limit.
   The execution price for such orders is
    determined as follows.




                   Prof. Rushen Chahal       32
Market Orders (Cont…)
   A market buy order will be executed at
    the best available price from the
    standpoint of the trader.
       What is the best available price for him?
       It is obviously the lowest of the limit prices
        specified by all those traders who have
        placed unexecuted limit sell orders prior to
        the placement of the market order.

                       Prof. Rushen Chahal           33
Market Orders (Cont…)
   Market sell orders too will get executed
    at the best available price from the
    standpoint of the trader.
       This will obviously be the highest of the
        limit prices specified by the traders who
        have placed unexecuted limit buy orders
        prior to the incoming market sell order.


                      Prof. Rushen Chahal           34
Priority Rules
   In order to ensure that market orders
    get executed at the best available
    prices, the unexecuted but valid limit
    orders at any point in time must be
    sorted according to Priority Rules.
   There are two major rules
       The price priority rule and
       The time priority rule

                       Prof. Rushen Chahal   35
Priority Rules (Cont…)
   The primary priority rule is the Price
    Priority Rule.
   According to this:
       A limit buy order with a higher limit price
        ranks higher than all other limit buy orders
        with lower limit prices.
       A limit sell order with a lower limit price
        ranks higher than all other limit sell orders
        with higher limit prices.

                       Prof. Rushen Chahal          36
Priority Rules (Cont…)
   Thus an incoming market buy order is
    guaranteed to get executed at the
    lowest available price on the sell side of
    the market.
   An incoming market sell orders is
    assured of getting executed at the
    highest available price on the buy side
    of the market.
                   Prof. Rushen Chahal       37
Priority Rules (Cont…)
   The secondary priority rule is the Time
    Priority Rule.
   How should two or more limit buy
    orders or limit sell orders with the same
    limit price be prioritized?
       Obviously the order which comes in first is
        automatically accorded priority.


                      Prof. Rushen Chahal         38
Limit Order Books
   A Limit Order Book (LOB) at any point in time
    contains the details of those limit orders
    which are currently valid, but which have not
    been executed thus far due to the
    unavailability of a suitable match.
   In the earlier days this record was physically
    maintained in the form of a book of orders.
   These days everything is in electronic form.

                     Prof. Rushen Chahal         39
Illustration
   We will now give a detailed example to
    illustrate:
       How orders are arranged on the basis of
        the priority rules
       How matching between orders on the
        opposite sides of the market takes place




                      Prof. Rushen Chahal          40
Illustration (Cont…)
   Assume that today is 2 January and
    that shares of a company have just
    been listed for trading.
   Also assume that in the first 30 minutes
    the following orders are placed.




                   Prof. Rushen Chahal     41
 Table-1
 Chronological Sequence of Orders
Time    Trader    Order            Order    Limit
                  Side               Size   Price
10:01   Arvind     Buy                100   600.00
10:03   Beena      Buy                200   600.20
10:07   Charu      Sell               200   600.10
10:10   Dhiraj     Sell               500   600.25
10:15    Ejaz      Buy                200   600.00
10:18   Francis    Buy                400   Market
10:20    Gauri     Sell               500   600.00
10:25   Harish     Sell               200   599.90
                   Prof. Rushen Chahal               42
10:30   Leena      Buy                500   599.75
Illustration (Cont…)
   At 10:01 Arvind’s order will enter the
    system.
   It is the very first order so it cannot be
    matched with an order on the other
    side.
   Since it is a buy order it will go to the
    top of the buy side of the LOB.

                    Prof. Rushen Chahal          43
Table-2
Snapshot of the LOB at 10:01
  Buyers                        Sellers
 Trader Order   Limit        Limit     Order Trader
         Size   Price        Price      Size


 Arvind   100   600.00




                 Prof. Rushen Chahal              44
Illustration (Cont…)
   At 10:03 Beena’s order will enter the
    system.
   It too cannot be matched because there
    are no sell orders in the book at that
    point in time.
       So the order will queue up on the buy side.
       The limit price specified by her which is
        600.20 is higher than the price of 600.00
        specified by Arvind. So she will get priority.
                       Prof. Rushen Chahal          45
Table-3
Snapshot of the LOB at 10:03
            Buyers                          Sellers
  Trader Order       Limit          Limit    Order Trader
          Size       Price          Price     Size

   Beena      200    600.20


   Arvind     100    600.00



                     Prof. Rushen Chahal               46
Illustration (Cont…)
   At 10:07 Charu’s sell order will enter the
    system.
   It has a limit price of 600.10
       It indicates that she is prepared to sell at this
        price or more.
   The system will try and match it with the best
    buy order in the LOB
       This is Beena’s order with a limit price of 600.20.


                          Prof. Rushen Chahal                 47
Illustration (Cont…)
   Obviously a trade is feasible.
   Charu has sought to sell 200 shares
   Beena has sought to buy 200 shares
   So in the process of execution, both the
    orders will be completely filled.
   One question remains
       At what price will the trade be executed?

                      Prof. Rushen Chahal           48
Illustration (Cont…)
   On the National Stock Exchange (NSE)
    an incoming or Active order will get
    executed at the price of the existing or
    Passive order with which it is matched.
   So in this case the trade will get
    executed at 600.20.


                   Prof. Rushen Chahal         49
   Table-4
   Snapshot of the LOB following the
   trade
                 Buyers                             Sellers
Trader   Order     Limit      Limit              Order   Trader
         Size      Price      Price              Size


Arvind 100         600.00



                           Prof. Rushen Chahal                    50
Illustration (Cont…)
   At 10:10 Dhiraj’s sell order will enter
    the system with a limit price of 600.25.
   The system will try and match it with
    the best order on the buy side which
    has a limit price of 600.00.
   Obviously a trade is infeasible.
   So Dhiraj’s order will take its place at
    the top of the sell side of the LOB.

                   Prof. Rushen Chahal         51
   Table-5
   Snapshot of the LOB at 10:10
         Buyers                       Sellers
Trader    Order    Limit      Limit          Order   Trader
           Size    Price      Price           Size


Arvind   100      600.00 600.25 500                  Dhiraj



                       Prof. Rushen Chahal                    52
Illustration (Cont…)
   At 10:15 Ejaz’s buy order for 200 shares with
    a limit price of 600.00 will come in.
   It cannot be matched with the best sell order.
   In terms of the limit price it will have equal
    priority with Arvind’s order.
   However since it came in later it will be
    accorded lower priority based on the time
    priority rule.
       Hence it will be placed below Arvind’s order.
                         Prof. Rushen Chahal            53
   Table-6
   Snapshot of the LOB at 10:15
         Buyers                       Sellers
Trader Order      Limit      Limit           Order Trader
        Size      Price      Price            Size
Arvind    100     600.00 600.25               500   Dhiraj


 Ejaz     200     600.00


                       Prof. Rushen Chahal                   54
Illustration (Cont…)
   At 10:18 Francis’ market buy order for
    400 shares will come in.
   This order is assured of execution if
    there happen to be one or more orders
    on the opposite side with a cumulative
    order size greater than or equal to the
    size of the incoming order.
       In this case there is a sell order for 500
        shares.
                       Prof. Rushen Chahal           55
Illustration (Cont…)
   Thus the incoming order will be fully
    filled.
   The trade price will be the price of the
    passive order which 600.25.




                   Prof. Rushen Chahal         56
  Table-7
  Snapshot of the LOB following the
  trade
         Buyers                      Sellers
Trader    Order   Limit       Limit         Order   Trader
           Size   Price       Price          Size

Arvind    100     600.00 600.25             100     Dhiraj


 Ejaz     200     600.00


                      Prof. Rushen Chahal                    57
Illustration (Cont…)
   At 10:20 Gauri’s sell order for 500
    shares with a limit price of 600.00 will
    enter.
   The system will try and match it with
    Arvind’s order.
        A trade will result for 100 shares.
       However 400 shares will remain to be filled
        on Gauri’s order.
                      Prof. Rushen Chahal         58
Illustration (Cont…)
   The system will try and match the remainder
    of the order with Ejaz’s order
       A trade will result for 200 shares.
       However Gauri’s order will still not be fully filled.
            For the balance 200 shares there is no possibility of a
             match.
            So the unfilled portion will stay in the LOB.
            It will go to the top of the sell side since Gauri’s limit
             price of 600.00 is less than the price of 600.25 specified
             by Dhiraj.


                              Prof. Rushen Chahal                     59
   Table-8
   Snapshot of the LOB following the
   trade
         Buyers                          Sellers
Trader   Order    Limit         Limit           Order   Trader
          Size    Price         Price            Size

                              600.00            200     Gauri


                              600.25            100     Dhiraj


                          Prof. Rushen Chahal                    60
Illustration (Cont…)
   At 10:25 Harish’s sell order with a limit
    price of 599.90 will enter.
   Based on the price priority rule it will go
    to the top of the sell side of the LOB.




                    Prof. Rushen Chahal       61
   Table-9
   Snapshot of the LOB at 10:25
         Buyers                      Sellers
Trader    Order   Limit      Limit          Order   Trader
           Size   Price      Price           Size
                           599.90           200     Harish

                           600.00           200     Gauri

                           600.25           100     Dhiraj

                      Prof. Rushen Chahal                    62
Illustration (Cont…)
   At 10:30 Leena’s buy order with a limit
    price of 599.75 will enter.
   The system will try and match it with
    the best sell order which has a limit
    price of 599.90.
       Obviously a trade is infeasible.
       The incoming order will therefore go to the
        top of the buy side of the LOB.
                      Prof. Rushen Chahal         63
   Table-10
   Snapshot of the LOB at 10:30
         Buyers                          Sellers

Trader   Order    Limit          Limit          Order   Trader
          Size    Price          Price           Size
Leena     500     599.75 599.90                 200     Harish

                               600.00           200     Gauri

                               600.25           100     Dhiraj

                          Prof. Rushen Chahal                    64
Question
   What would happen if a market order
    were to enter the system and there
    were to be no limit orders on the
    opposite side.
       Every exchange will specify a solution for
        this eventuality.
       On the NSE if this kind of a situation were
        to occur during the course of a business
        day then
            The incoming order will become a limit order with a limit
             price equal to the last recorded trade price.
                              Prof. Rushen Chahal                    65
    Table-11
    The LOB at a Particular Instant
         Buyers                          Sellers
Trader   Order    Limit        Limit            Order   Trader
          Size    Price        Price             Size
                             599.90             200     Harish

                             600.00             200     Gauri

                             600.25             100     Dhiraj

                          Prof. Rushen Chahal                    66
Question (Cont…)
   Assume that the last recorded trade
    took place at a price of 599.80.
   Assume that a market sell order for 500
    shares placed by Raghu enters the
    system.
       Obviously a suitable match cannot be
        found.
       The incoming order will therefore be
        converted to a limit sell order with a limit
                       Prof. Rushen Chahal             67
        price of 599.80.
    Table-12
    Post Submission Snapshot of the LOB
         Buyers                          Sellers
Trader   Order    Limit         Limit           Order   Trader
          Size    Price         Price            Size
                               599.80           500     Raghu
                               599.90           200     Harish
                               600.00           200     Gauri
                               600.25           100     Dhiraj
                          Prof. Rushen Chahal                    68
Question (Cont…)
   A related question would be
       What if a market order were to enter the
        system at the start of a trading day and
        there were to be no limit orders on the
        other side.
            The incoming order in such cases will be
             converted to a limit order with a limit price
             equal to the previous day’s closing price.


                           Prof. Rushen Chahal               69
Market Orders versus Limit
Orders
   Isn’t a limit order a more sensible
    alternative to placing a market order?
       After all it gives the investor more control
        over the trade.
   The answer is that while it is true that
    traders can control the execution price
    using limit orders, there is no guarantee
    that a suitable match for such orders
    can be found within a reasonable period
    of time.        Prof. Rushen Chahal      70
Market…(Cont…)
   For instance assume that the last trade
    price was 600.20 and the order book at a
    point in time looks as follows.




                    Prof. Rushen Chahal        71
    Table-13
         Buyers                          Sellers
Trader   Order    Limit          Limit          Order   Trader
          Size    Price          Price           Size
Arvind    100     600.00        600.25           500     Dhiraj
                                600.30           300    Solomon
                                600.30          1,700    Suniti
                                600.40          1,500    Sunil
                                600.50          1,000   Kumar
                                600.50
                          Prof. Rushen Chahal   1,000   Swamy 72
Market…(Cont…)
   Assume that Ejaz places a buy order for
    200 contracts with a limit price of
    600.00.
       It cannot be matched with an existing
        order.
       So it will take its place in the queue behind
        Arvind’s order.


                       Prof. Rushen Chahal          73
Table-14
Snapshot of the LOB after Ejaz’s
Order
        Buyers                       Sellers
Trader    Order   Limit      Limit          Order Trader
           Size   Price      Price           Size
Arvind     100    600.00    600.25           500     Dhiraj

 Ejaz      200    600.00    600.30           300    Solomon

                            600.30          1,700    Suniti

                            600.40          1,500    Sunil

                            600.50          1,000   Kumar

                            600.50          1,000   Swamy
                      Prof. Rushen Chahal                     74
Market…(Cont…)
   Now assume that Simeran places a
    market buy order for 1,500 shares.
   It will obviously get executed
    immediately.
       500 shares will be bought at 600.25
       1000 shares will be bought at 600.30
   So the last reported trade price will be
    600.30.
                      Prof. Rushen Chahal      75
    Table-15
    Snapshot of the LOB following the
    trade
         Buyers                          Sellers
Trader   Order    Limit         Limit           Order   Trader
          Size    Price         Price            Size
Arvind   100      600.00      600.30            1,000   Suniti

 Ejaz    200      600.00      600.40            1,500   Sunil

                              600.50            1,000   Kumar

                              600.50            1,000   Swamy
                          Prof. Rushen Chahal                    76
Market…(Cont…)
   Now assume that another market order
    is placed for 1500 shares by Rahul.
   It too will get executed.
       1000 shares will get traded at 600.30
       And 100 shares at 600.40.




                      Prof. Rushen Chahal       77
   Table-16
   Snapshot of the LOB following the
   second trade
         Buyers                          Sellers
Trader   Order    Limit          Limit          Order   Trader
          Size    Price          Price           Size
Arvind    100     600.00 600.40                 1,000   Sunil

 Ejaz     200     600.00 600.50                 1,000   Kumar

                               600.50           1,000   Swamy

                          Prof. Rushen Chahal                    78
Market…(Cont…)
   Seeing the market price jump from
    600.20 to 600.40 in a short span, other
    traders wishing to place buy orders may
    be induced to place limit orders with
    prices higher than that of the best order
    on the buy side.
       Assume that Pooja places a buy order for
        500 shares at 600.10
       Followed by Ajay who places a buy order
        for 1,500 shares at 600.15.
                      Prof. Rushen Chahal          79
   Table-17
   The LOB at the End
         Buyers                      Sellers
Trader    Order   Limit       Limit         Order   Trader
           Size   Price       Price          Size
 Ajay     1,500   600.15 600.40             1,000   Sunil
Pooja     500     600.10 600.50             1,000   Kumar
Arvind    100     600.00 600.50             1,000   Swamy
 Ejaz     200     600.00
                      Prof. Rushen Chahal                    80
Market…(Cont…)
   As can be seen Ejaz’s order has been
    pushed back in the queue.
       There is no way of telling when it will get
        executed
       There is no guarantee that it will get
        executed at all.
   Had Ejaz placed a market order instead
    at the outset it would have been
    immediately executed at 600.25.
                       Prof. Rushen Chahal            81
Market…(Cont…)
   Thus market orders are guaranteed to
    be executed if there are sufficient limit
    orders on the other side
       But the trader has no control over the
        execution price.
       This is because the trade price will depend
        on the limit price of the matching limit
        order.

                      Prof. Rushen Chahal         82
Marketable Limit Orders
   The odds of a limit order being
    executed on submission would depend
    on its limit price.
       For buy orders, the higher the limit price
        the greater is the chance of early
        execution.
       For sell orders, the lower the limit price the
        greater is the chance of early execution.
   Limit buy orders with high prices and
    sell orders with low prices are said to be
    Aggressively Priced. Chahal
                    Prof. Rushen             83
Marketable…(Cont…)
   In most cases:
       Limit buy orders will be placed at a price
        lower than the best available price in the
        market
            Which is the price of the best sell order in the
             LOB
       Limit sell orders will be placed at a price
        higher than the best available price in the
        market
            Which is the price of the best buy order in the
                           Prof. Rushen Chahal               84
             LOB
Marketable…(Cont…)
   Sometimes however a trader could
    price his limit order very aggressively.
   A limit order is said to be marketable if
    it can be executed on submission.
   We will illustrate it using an example.
   Consider the following LOB.


                   Prof. Rushen Chahal          85
    Table-18
    Snapshot of an LOB
         Buyers                          Sellers
Trader   Order    Limit         Limit           Order   Trader
          Size    Price         Price            Size
 Anil     500     600.00 600.25                 1300    Prasad

Ashraf   1000     599.90 600.40                 1200    Ahmed

Mohan    1500     599.75 600.50                 1500    Kumar

                          Prof. Rushen Chahal                    86
Marketable…(Cont…)
   A limit buy order with a limit price of
    600.25 or more will get executed as
    soon as it enters the system.
   A limit sell order with a limit price of
    600.00 or less will be executed as soon
    as its enters the system.


                   Prof. Rushen Chahal     87
Marketable…(Cont…)
   So the limit price for a marketable buy
    order:
       Must be greater than or equal to the best
        available offer
   The limit price for a marketable sell
    order must be less than or equal to the
    best bid.

                      Prof. Rushen Chahal           88
Marketable…(Cont…)
   A marketable limit order seems fairly
    similar to a market order
       The question is:
       Why would anyone wish to place a
        marketable limit order instead of a market
        order?




                      Prof. Rushen Chahal            89
Rationale
   Both market orders as well as
    marketable limit orders embody a desire
    for quick execution on the part of the
    trader.
   But in the case of a market order he
    has no control over the execution price
   In the case of a marketable limit order
    he can specify a floor or a ceiling.
                  Prof. Rushen Chahal    90
Rationale (Cont…)
   When is this freedom to specify a floor
    or a ceiling likely to prove valuable?
       It will be significant if circumstances were
        to preclude a marketable limit order from
        getting executed as planned.
       Let us go back to Table-18.




                       Prof. Rushen Chahal             91
    Table-18
    Snapshot of an LOB
         Buyers                          Sellers
Trader   Order    Limit         Limit           Order   Trader
          Size    Price         Price            Size
 Anil     500     600.00 600.25                 1300    Prasad

Ashraf   1000     599.90 600.40                 1200    Ahmed

Mohan    1500     599.75 600.50                 1500    Kumar

                          Prof. Rushen Chahal                    92
Rationale (Cont…)
   Assume that a trader named Ravi issues
    a limit buy order with a limit price of
    600.30 for 300 shares.
   His expectation at the time of placing
    the order is that:
       It will get matched with the best offer
        which is at 600.25


                       Prof. Rushen Chahal        93
Rationale (Cont…)
   But it may so happen that another
    market order may enter the system
    before Ravi’s order.
       Traders throughout the country (world) are
        monitoring the situation
            A split second’s delay in order entry can lead to
             another order (s) acquiring time priority.



                           Prof. Rushen Chahal              94
Rationale (Cont…)
   Let us assume that a large market buy
    order for 3000 shares enters prior to
    Ravi’s order.
   It will push the trade price up to
    600.50.
   Since Ravi has specified a limit of
    600.30
       His order will not be executed
                          to Rushen Chahal
        Instead it will go Prof. the top of the LOB on the buy
                                                             95
        side
Rationale (Cont…)
   If Ravi believes that the execution price
    is important although the speed of
    execution is a major factor
       He may prefer a marketable limit order to
        a market order
   In this case had he placed a market
    order it would have got executed at
    600.50, an outcome that may not be
    satisfactory. Prof. Rushen Chahal               96
Rationale (Cont…)
   Thus marketable limit orders give the trader
    control over the execution price
   But there is execution uncertainty.




                     Prof. Rushen Chahal           97
Limit Orders as Options
   A standing limit order is an offer of
    liquidity to other traders.
       It gives them an option to trade at the limit
        price.
            A limit sell order is a call option that gives other
             traders the right to buy.
            A limit buy order is a put option that gives
             other traders the right to sell.


                            Prof. Rushen Chahal                98
Options (Cont…)
   The specified limit prices are the
    exercise prices of the corresponding
    options.
   However although a limit order
    represents an option, it is not an
    options contract in the conventional
    sense.
       An options contract is an option to trade that is
        sold by a writer to a buyer in return for a price or
        premium.          Prof. Rushen Chahal                99
Options (Cont…)
   Limit orders however are options given
    away for free.
       In the sense that the traders who place
        such orders do not receive a premium.
   Besides there is no exclusive owner of
    the option on the other side.
       For any trader can exercise the option by
        placing a market order or a marketable
        limit order.
                      Prof. Rushen Chahal           100
Compensation for Traders Placing
Limit Orders
   A trader who places a limit order does
    not get an option premium even though
    the order represents an option.
       So why should the trader offer an option
        for free?
   The answer is that the trader hopes to
    trade at a better price.

                      Prof. Rushen Chahal          101
Compensation…(Cont…)
   A buyer who has submitted a standing
    limit order
       Expects to buy at the bid price represented
        by his order
   Had he submitted a market order
    instead
       He would have to buy at the ask price
   Consider the following LOB
                      Prof. Rushen Chahal        102
   Table-19
   Snapshot of the Petronet LOB
         Buyers                          Sellers

Trader   Order    Limit         Limit           Order   Trader
          Size    Price         Price            Size
Vivek    500      20.85         20.95           1300    Usha
Vikas    1000     20.80         21.05           1200     Uma
Vinod    1500     20.75         21.15           1500    Urmila
Vijay    1000     20.70         21.20           2000     Urvi
Vinay    1500     20.65         21.15           1000    Uttara
                          Prof. Rushen Chahal                103
Compensation…(Cont…)
   The trader who has placed the best bid
    expects to trade at 20.85.
       Had he placed a market order instead
            He would have ended up buying at 20.95




                            Prof. Rushen Chahal       104
Problems with Limit Orders
   A trader placing a limit order will not
    always get what he is seeking.
   Sometimes the market could move
    away from him
       The consequence will be that his order
        never gets traded



                      Prof. Rushen Chahal        105
Problems…(Cont…)
   If he still wants to trade he will have to
    chase the market
       Bidders will have too increase their bids
       Sellers will have to lower their offers
   Thus the price at which he ultimately
    trades may be worse than the price that
    he would have traded at had he used a
    market order at the outset.

                       Prof. Rushen Chahal          106
Illustration
   Take the case of the trader who has
    placed the best bid for Petronet at
    20.85.
   Assume that a market order for 3000
    shares comes in and get executed.
   The best ask will become 21.15.
   Also assume that new limit buy orders
    come in at 20.90 and 21.00.

                  Prof. Rushen Chahal       107
Illustration…(Cont…)
   If after observing this our trader were
    to cancel his limit order and either place
    a fresh limit order at 21.00 or else place
    a market order which will then get
    executed at 21.15
       The eventual price will be worse than
        20.95
            Which is the price he would have got had he
             used a market order at the outset.

                          Prof. Rushen Chahal              108
Risks
   Traders who use limit orders face two kinds
    of risks.
       The first pertains to execution uncertainty.
            When prices move away from their orders limit order
             traders will fail to trade
            For instance in the case of Petronet, if market buy orders
             keep entering
                  The best offer will move up from 20.85
            From the point of view of a trader who has placed a buy
             order at 20.65
                  The odds of execution will be reduced.

                                 Prof. Rushen Chahal                109
Risks (Cont…)
   The second risk is that a trader may
    end up trading and may subsequently
    regret it.
       This will be the case if the price moves
        towards and through his limit price.
            His order will obviously get executed.
            But if the market continues to move sharply
             against him he could make significant losses.


                           Prof. Rushen Chahal               110
Risks (Cont…)
   For instance, in the case of Petronet,
    assume that a market sell order for
    4000 shares comes in
       It will cause a buy order for 1000 shares at
        20.70 to get executed.
       If the price were to keep declining
            The buyer may have to offload the shares
             subsequently at an even lower price

                          Prof. Rushen Chahal           111
Risks (Cont…)
   This is called ex-post regret.
   This kind of regret is an occupational
    hazard for all traders and not just those
    who place limit orders.




                     Prof. Rushen Chahal        112
Stop-Loss Orders
   What is a Stop-Loss order?
       A stop or a stop loss order is an order
        placed by a trader who has a position in
        the market and would like to cut his losses
        and quit immediately if the conditions were
        to turn adverse.
   Such a person may have no desire to
    close out his position at the time of
    placing his order.
                      Prof. Rushen Chahal        113
Stop-Loss Orders (Cont…)
   Take the case of an investor who is
    long in a stock and expects the price to
    rise.
   However if there were to be a sudden
    unanticipated decline in the market he
    may like to ensure that his loss does
    not exceed an acceptable level.
       Let us assume that his threshold loss
        corresponds to a price of P*.
                      Prof. Rushen Chahal       114
Stop-Loss Orders (Cont…)
   In this case he can place a stop order
    with a trigger price of P*
       The stop instruction will prevent the order
        from getting activated until and unless the
        trigger is hit or breached.
       Once the trigger is hit or breached the
        order will get triggered off and will become
        a market order.

                      Prof. Rushen Chahal         115
     Table-20
     LOB prior to the placement of a stop-
     sell order
            Buyers                           Seller
 Trader      Order   Limit           Limit          Order   Trader
              Size   Price           Price           Size
  Aarti      1200    600.00         600.20           500    Arvind
  Anita      1000    599.85         600.30          1000    Anurag
Aakanksha     500    599.75         600.35           500    Amitabh
Anamika       800    599.55         600.40           700     Arjun
Anushua       500    599.25         600.50           300     Ajay
  Anjali     1000    598.00         602.00          1000    Avinash
                              Prof. Rushen Chahal                     116
Illustration (Cont…)
   Assume that Vijay is currently long in
    800 shares.
       He has no intention of selling.
       However if the market were to trade at
        599.60 or below then he would like to exit
        the market immediately.
            He can therefore place a stop sell order with a
             trigger price of 599.60.


                           Prof. Rushen Chahal             117
Illustration (Cont…)
   Assume that a market sell order for
    4000 shares comes in.
       It will ensure that Aarti’s, Anita’s,
        Aakanksha’s, Anamika’s, and Anushua’s
        orders are fully filled.
       The last trade price will be 599.25
            This is less than Vijay’s trigger.
            So his order will get activated and will get
             executed at 598.00.

                           Prof. Rushen Chahal              118
Illustration (Cont…)
   The trigger price in the case of a stop
    sell order will always be less than the
    best price that is available at the time
    of placing the order
       Which in Vijay’s case is 600.00




                      Prof. Rushen Chahal      119
Stop Orders (Cont…)
   Such orders can also be used by those
    who wish to buy in the event of adverse
    market conditions.
   Assume that Rajiv has a short position
    in 800 shares.
       He expects the market to fall.
       However if the price were to rise and hit or
        cross 600.50, then he would like to offset
        his short position and exit the market.
                      Prof. Rushen Chahal         120
Stop Orders (Cont…)
   Assume that Rajiv places a stop buy
    order with a trigger of 600.50.
   Assume that a market order for 3000
    shares enters.
       Arvind’s. Anurag’s, Amitabh’s, Arjun’s, and
        Ajay’s orders will be completely filled.
       The last trade price will be 600.50 which
        corresponds to Rajiv’s trigger.
                      Prof. Rushen Chahal         121
Stop Orders (Cont…)
   The stop buy order will get activated
    and will get executed at 602.00.
   In the case of stop buy orders the
    trigger price will always be greater than
    the best price available in the market
    which is 600.20.


                   Prof. Rushen Chahal     122
Stop-Limit Orders
   Such an order also is an instruction to hold
    the order in abeyance until a specified trigger
    is hit or breached.
       The difference is that in this case if the order is
        triggered off it will become a limit order.
       Thus two threshold prices have to specified.
            The first corresponds to the activation level for the limit
             order
            The second is the limit price for the limit order.



                              Prof. Rushen Chahal                      123
Stop-Limit Orders (Cont…)
   Why do we need such orders?
   Take Vijay’s case first.
       His sell order got executed at 598.00 even
        though he had specified a trigger of
        599.60.
       He obviously had no control over the
        execution price
            Because the order became a market order on
             activation.

                          Prof. Rushen Chahal             124
Stop-Limit Orders (Cont…)
   If Vijay wanted to protect himself
    against such an eventuality he could
    have placed a stop limit order with a
    trigger price of 599.60 and a limit price
    of say 599.25.
       In this case if the stop order is activated it
        will become a limit order at 599.25.
       So Vijay is assured of a price of 599.25.

                       Prof. Rushen Chahal           125
Stop-Limit Orders (Cont…)
   Similarly when Rajiv placed a stop buy order
    it eventually got executed at 602.00 even
    though the specified trigger was 600.50.
   To protect himself he could have specified a
    stop-limit order with a trigger of 600.50 and a
    limit price of say 601.
       In this case he will have to pay a maximum price
        of 601.


                        Prof. Rushen Chahal            126
Market Impact
   Large market orders are more difficult
    to fill than small ones and often result
    in large price moves.
       If there is a large buy order prices may
        move up substantially.
       If there is a large sell order prices may
        move down substantially.


                       Prof. Rushen Chahal          127
Market Impact (Cont…)
   The movement in price due to a large
    order is called the Market Impact or the
    Price Impact of the order.
   Take the case of the following LOB.




                   Prof. Rushen Chahal    128
     Table-20

            Buyers                               Seller
 Trader     Order Size   Limit           Limit          Order   Trader
                         Price           Price           Size
  Aarti       1200       600.00          600.20          500    Arvind
  Anita       1000       599.85          600.30         1000    Anurag
Aakanksha      500       599.75          600.35          500    Amitabh
Anamika        800       599.55          600.40          700     Arjun
Anushua        500       599.25          600.50          300     Ajay
 Anjali       1000       598.00          602.00         1000    Avinash
                                  Prof. Rushen Chahal                     129
Illustration (Cont…)
   A large market buy order for 4000
    shares would get executed at prices
    ranging from 600.20 to 602.00.
   A large market sell order for 5000
    shares would get executed at prices
    ranging from 600.00 to 598.00


                  Prof. Rushen Chahal     130
Lot Size
   The usual unit of trading is referred to
    as a Round Lot.
   Normally traders trade in multiples of a
    round lot.
   Anything less than a round lot is an odd
    lot.
   The definition of a round lot depends
    on the instrument being traded and the
    market on which it trades.
                   Prof. Rushen Chahal    131
Lot Size (Cont…)
   On the American Stock Exchange, there
    is no no standard lot size, and a trade
    can be for any number of shares.
   Most stock exchanges in the U.S.
    specify a round lot as constituting 100
    shares.
   In Japan a round lot is equivalent to
    1000 shares.
                  Prof. Rushen Chahal    132
Time Conditions
   Traders specify validity instructions to
    indicate the period of validity of their
    orders.
   They also specify expiration instructions
    to indicate as to when and how their
    orders become void.
   In principle such instructions can be
    specified for any kind of an order.

                   Prof. Rushen Chahal     133
Time Conditions (Cont…)
   But these conditions are particularly
    important for standing limit orders and
    stop orders.
   This is because such orders rarely trade
    on submission, and some may never
    trade.
   Consequently there is a need to specify
    what is to be done with unfilled orders.
                   Prof. Rushen Chahal    134
Open & Good Orders
   An order that that has not yet been
    executed or canceled is an open order.
   An order that is eligible for execution is
    a good order.
   All good orders by definition are open
    orders.
   But every open order need not be a
    good order.

                    Prof. Rushen Chahal      135
Open & Good Orders (Cont…)
   Consider an order placed on 1 July to
    buy a stock on or after 3 July.
   On 1 July the order is an open order.
   But is not a good order.




                  Prof. Rushen Chahal       136
Day Orders
   A day order is valid only for the
    duration of the day on which it is
    entered.
   If it is not executed during the course
    of the day, then the system will
    automatically cancel it at the end of the
    day.
   As of 1999 the Stock Exchange of
    Singapore has been permitting only
    `good today’ limit orders.
                     Prof. Rushen Chahal    137
Day Orders (Cont…)
   Every morning the Exchange opens with
    no outstanding orders carried over from
    the previous day.




                    Prof. Rushen Chahal       138
Good Till Canceled Orders
   Such orders will remain in the system
    until they are executed or canceled,
    whichever happens first.
   So if they are not executed on the day
    on which they are entered, they will be
    carried over to the next day and so
    forth.
   But obviously they cannot remain in the
    system indefinitely.
                  Prof. Rushen Chahal    139
GTC Orders (Cont…)
   The exchange will notify a maximum
    time period after which such orders will
    be automatically canceled.
   In order to ensure that traders do not
    forget such orders, many brokers
    provide their clients with a list of
    unfilled GTC orders at the end of every
    month.
                   Prof. Rushen Chahal     140
GTC Orders (Cont…)
   Some brokers cancel GTC orders after
    pre-specified time periods to avoid the
    cost of keeping track of stale orders.
   In the U.S GTC orders expire semi-
    annually unless canceled earlier.
   That is, they have a maximum validity
    of six months.

                   Prof. Rushen Chahal        141
Good Till Days Order
   In the case of such orders, the investor
    has to specify the number of days for
    which the order can stay in the system
    unless it is executed.
   The number of days that can be
    specified obviously cannot exceed the
    time limit set for Good Till Canceled
    orders.
                   Prof. Rushen Chahal     142
GTD Orders (Cont…)
   Special cases of such orders are Good-
    this-week (GTW) orders and Good-this-
    month (GTM) orders.
   Not all brokers will accept such orders
    because it requires then to keep track
    of expiration dates.


                  Prof. Rushen Chahal     143
Immediate or Cancel Orders
   Such orders have to be executed as soon as
    they are released into the system or else they
    have to be canceled.
   Sometimes only a partial match may be
    found.
   If so, a part of the order will be executed and
    the unmatched portion will be immediately
    canceled.
   They are also known as Fill or Kill (FOK)
    orders or as Good-on-sight orders.
                       Prof. Rushen Chahal        144
Other Types of Orders
   Good-after-orders are activated or
    become valid only after a pre-specified
    date.
   Market-on-open orders can be filled
    only at the beginning of the trading
    session.
   Market-on-close orders can be filled
    only at the close of the trading session.
                   Prof. Rushen Chahal      145
Quantity Instructions
   All-or-nothing or all-or-none (AON)
    orders must be either filled all at once
    or else remain unexecuted.
   There are also trades with a minimum
    or none instruction.
   In such cases multiple trades can be
    used to fill an order.

                   Prof. Rushen Chahal         146
Quantity (Cont…)
   But each trade must be for a quantity
    that is greater than or equal to a
    specified minimum size.
   Such orders are also known as
    Minimum Acceptable Quantity (MAQ)
    orders.


                  Prof. Rushen Chahal       147
Tick Size
   What is a tick?
   It is the minimum price increment or
    variation observable in the market.
   In other words, it is the smallest
    amount by which two prices can differ.
   It is usually set by exchange
    regulations.

                  Prof. Rushen Chahal    148
Tick Size (Cont…)
   In the U.S. until 2000 the tick size was
    one-sixteenth of a dollar or 6.25 cents.
   Subsequently the system has been
    decimalized and tick size is now 0.01
    dollars or one cent.
   The tick size on the Tokyo Stock
    Exchange is a function of the price.

                   Prof. Rushen Chahal     149
Tick Size (Cont…)
        Price                         Tick Size
    P  2000 Yen                        1 Yen
   2000 < P  3000                      5 Yen
  3000 < P  30000                      10 Yen
  30000 < P  50000                     50 Yen
 50000 < P  100000                    100 Yen
100000 < P  1000000                   1000 Yen
     P  1000000                      10000 Yen
                Prof. Rushen Chahal               150
Tick Size (Cont…)
   Traders classify prices by their relation
    to previous prices.
   A price is said to be on an uptick if it is
    higher than the last observed price.
   A price is said to be on a downtick if it
    is lower than the last observed price.
   If a price is equal to the last observed
    price it is said to be on a zero tick.

                    Prof. Rushen Chahal       151
Tick Size (Cont…)
   Zero tick prices are further classified
    depending on the last different price
    observed.
   A price is said to be on a zero downtick
    if the last different price observed was
    higher.
   A price is said to be on a zero uptick if
    the last different price observed was
    lower.            Prof. Rushen Chahal     152
 Illustration
Previous Last Price       Current          Term
 to Last                   Price
  Price
  72.00    72.00             72.10         Uptick

 72.00      72.00            71.90        Downtick

 72.10      72.00            72.00          Zero
                                          Downtick
 71.90      72.00            72.00          Zero
                    Prof. Rushen Chahal
                                           Uptick    153
Oral Auctions
   Many futures, options, and stock
    exchanges use continuous bilateral oral
    auctions to trade their contracts and
    securities.
   The largest such market is the market
    for T-bond futures on the CBOT which
    attracts 500 floor traders.
   In an oral auction traders meet face to
    face on the floor of the exchange.
                  Prof. Rushen Chahal     154
Oral Auctions (Cont…)
   Some will cry out their bids while others
    will call out offers.
   Still others will listen for bids and offers
    that meet their requirements.
   Most traders will do both – shout as
    well as listen.


                    Prof. Rushen Chahal       155
Oral Auctions (Cont…)
   Trades occur when a buyer accepts a
    seller’s offer or when a seller accepts a
    buyer’s bid.
   In the first case the buyer will shout
    `take it’ to accept the offer.
   In the second case the seller will call
    out `sold’ to accept the bid.

                   Prof. Rushen Chahal      156
Oral Auctions (Cont…)
   Buyers and sellers often take turns
    bidding and offering until they agree on
    a price and quantity to trade.
   A trader who makes a bid or an offer to
    trade is a supplier of liquidity.
   A trader who accepts a bid or an offer is
    an acceptor of liquidity.

                   Prof. Rushen Chahal     157
Oral Auctions (Cont…)
   The first rule of an oral auction is the
    open-outcry rule.
   That is, a trader must publicly express
    his bid or offer to enable others to
    react.
   Any trader can accept a bid or ask
    called out by another trader, even
    though they may not be actively
    negotiating at that point of time.
                     Prof. Rushen Chahal     158
Oral Auctions (Cont…)
   The first person to accept a bid or an
    offer generally gets to trade.
   The order precedence rules determine
    who can bid or offer, as well as whose
    bids or offers other traders can accept.
   The primary order precedence rule is
    always price priority.

                   Prof. Rushen Chahal     159
Oral Auctions (Cont…)
   The secondary order precedence rule
    would depend on the market
    concerned.
   Futures markets go by time preference.
   Stock markets use public order
    preference followed by time preference.


                  Prof. Rushen Chahal    160
Price Priority
   The rule gives precedence to traders
    who offer the best prices.
   Buyers can only accept the lowest
    offers and sellers can only accept the
    highest bid.
   This rule is self-enforcing.
   Because an honest trader will search for
    the best prices.
                  Prof. Rushen Chahal     161
Price Priority (Cont…)
   Most oral auctions will not allow a trader to
    bid below the best bid or offer above the best
    offer.
   Such bids and offers only add to the noise
    and create confusion.
   However a trader can improve the best bid by
    bidding higher.
   A trader can similarly improve the best offer
    by offering at a lower price.
                     Prof. Rushen Chahal        162
Time Priority
   The time precedence rule gives
    precedence to the trader whose bid or
    offer improves the current best bid or
    offer.
   When a trader is having time
    preference no trader can bid or offer at
    the best bid or offer that is currently
    available.
                   Prof. Rushen Chahal     163
Time Priority (Cont…)
   A trader will retain his time preference
    until another trader improves his quote
    or until another trader accepts his
    quote.
   Once a bid or offer is accepted, anyone
    may bid or offer at the new price and
    all orders at that price have equal
    standing.
                   Prof. Rushen Chahal     164
Priority
   In an oral auction bids or offers are
    valid only for an instant.
   In practice traders maintain their
    precedence by repeating their
    bids/offers as often as is necessary to
    show that they remain interested.
   In a large active market, a trader may
    continuously repeat his bid/offer.

                   Prof. Rushen Chahal        165
Time Priority (Cont…)
   The time precedence rule encourages
    competition among traders.
   Because if a trader is aggressive the
    only way that he can get ahead of
    someone who has time precedence is
    by improving the price.
   And if he improves the price he
    automatically gets the right to trade
    first.
                  Prof. Rushen Chahal       166
Time Priority (Cont…)
   Unlike price priority time priority is not
    self enforcing.
   Most traders do not care whose bid or
    ask they are accepting as long as they
    get the best price.
   Thus a person with time preference
    must defend it when someone
    improperly tries to quote at the same
    price.
                    Prof. Rushen Chahal          167
Time Priority (Cont…)
   In practice a trader whose priority is
    being challenged will yell out:
   `That’s my bid’ or
   `That’s my offer’ or
   `That’s my market’



                   Prof. Rushen Chahal       168
Public Traders
   Some equity exchanges prohibit members
    from trading ahead of a public trader who is
    willing to trade at the same price.
   Why is this rule required?
   An exchange member can easily acquire time
    preference at a new price before a public
    trader, because he sees price changes first
    and can quote faster than a public trader can
    submit orders.
                     Prof. Rushen Chahal       169
Public Traders (Cont…)
   Thus this priority rule permits a public
    trader to take precedence over a
    member even when the member has
    time preference.
   The objective is to give public traders
    greater access to the market and
    weaken the information advantage
    possessed by the floor trader.
                   Prof. Rushen Chahal         170
Trade Pricing Rule
   This is used to determine the price at
    which a trade is accepted.
   In an oral auction every trade takes
    place at the price proposed by the
    trader whose bid or offer is accepted.




                   Prof. Rushen Chahal       171

				
DOCUMENT INFO
Shared By:
Categories:
Stats:
views:2
posted:2/8/2012
language:
pages:171
Description: Prof. Rushen's notes for MBA and BBA