Chapter 18 Buy-side traders - Acsu Buffalo by xiaopangnv


									  Chapter 18
Buy-side traders
Order submission strategy –
Market vs. limit orders
   The bid-ask spread
    •   Use market orders when the spread is narrow
    •   Use limit orders when the spread is wide
            Limit order price depends on the tradeoff between execution
             price and execution probability
   What will happen when limit orders do not
    execute? Can wait or not?
   Must know how execution probability depends on
    limit order prices – order book, volatility, trader
Order exposure decision
 Full exposure – submit limit orders
 No exposure – wait until an opportunity to
  trade shows up
 Trade anonymously using brokers and
 Weighs the benefits of display against the
  costs of display
Benefits of exposure
 Easier for other traders to find them
 Attract latent traders (reactive traders)
    • Reactive vs. proactive traders
    • Traders find it cheaper to be reactive when
      suitable trading opportunities are rare
    • The reactive-proactive continuum is similar to
      the aggressive-passive continuum. The former
      represents the willingness to bear the costs of
      searching and the latter represents the
      eagerness to arrange trades
Costs of exposure
   Exposure may reveal trader motives
    • Informed traders do not want to reveal their
      information (perhaps only initially but not later)
    • Want to avoid front runners and squeezers
    • Bluffers do not want to reveal their trading
      intentions (perhaps only initially but not later)
   Exposure may reveal future price impacts
    •   Front runners increase trading costs
   Exposure may reveal valuable trading
    •   Quote matchers
Defensive strategies
   Evasive strategies – to hide
    •   Use brokers, electronic trading systems,
        break orders, undisplayed orders, order
        indications, or simply wait
   Deceptive strategies – to confuse
    •   Make a small trade on the opposite side, etc
   Offensive strategies – to attack
Market design
 Markets can reduce front running by
  adopting a time precedence rule and a
  large tick size to make front running costly
 Allow to submit undisclosed orders
 A detailed and accurate audit trail to catch
  penalize dishonest brokers
 Allow to report their trades late

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