Equities

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					Equities

Rob Graffeo
Dec 14, 2009
• What is a stock?
• A stock, also referred to as an equity or
  common equity, represents ownership in a
  company.
Capital Structure


          Loans


    Credit (Bond Issue)


     Preferred Equity


      Common Equity
What is a stock exchange?
      What is a stock exchange?
• It is simply a place for buyers and sellers of
  stocks to come together to trade stocks
   Where else can equities trade?
• Pink Sheets
• Bulletin Boards
             How it all works
• Customers
• Trading Desks
• Exchanges
  – Dark Pools
  – Crossing Networks
  – Internal Matching
• Market Making
       Two types of execution
• Principal
  – A trader executes from a firm position
• Agent
  – A trader matches or executes from an external
    position.
           Trading capabilities
• Electronic
  – DMA
  – Program
  – Algorithmic
• Shares
  – Block
  – Single Order Execution
       Direct Market Access Trading
• The foundation of DMA is based on direct exchange feeds
• Process large volumes of
   – market data
   – Orders
   – Executions
• Access provided via:
   – Highly optimized server processes
   – A graphical front end
• Some basic statistics
   –   180 GB of market data processed daily (and growing)
   –   6.5 billion “ticks” (4.5 billion options, 2 billion cash)
   –   190,000 order / day
   –   700,000 executions / day
              Program Trading
•   Basket management
•   Blind Risk
•   Index rebalance
•   Customer portfolio rebalance
            Algorithmic execution
• Algorithms provide anonymity and are intended to
  minimize market impacts
• Basically two types of algorithms
   – Market micro-structure (behavioral)
   – Statistical
• Standard Algorithms
   – TWAP, VWAP
   – TVOL
   – Arrival Price
• Specialized Algorithms
• Smart Order Routing (SOR)
  Algorithms 1st Generation Examples
• Volume Weighted Average Price (VWAP)
   – A sophisticated method of predicting volume for individual securities.
     Delivers an average execution price in line with the VWAP benchmark
     while minimizing impact to the VWAP itself
• Target Volume (TVOL)
   – Determines comletion time of the order and price based on market
     “ticks” or volume. Basically works order in line with market volume,
     freeing the trader to focus on other pressing matters.
• Time Weighted Average Price (TWAP)
   – Aims to evenly distribute an order over user-specified duration
     dynamically balancing adverse selection and market impact in real
     time.
                   Exchanges
• What are exchanges
     • Nasdaq, NYSE/EuroNext, Boursa
• What is the the fundamental difference
  between the NYSE and most other exchanges?
Important Technology Components
• One of the most important components in
  equities trading is the Fix protocol.
  – Details available at http://www.fixprotocol.org.
  – Fix provides a standard way of communicating
    between the buy side (asset managers, insurance
    companies, hedge funds) and the broker dealers.
     • A broker dealer is some either brokers a trade or deals
       directly from inventory.
             Communications Continued
• The fix protocol also provides the ability for
  the broker dealers to communicate between
  each other and the execution venues.
• Example schema for entering a new order
<FIXML xmlns="http://www.fixprotocol.org/FIXML-4-4" xmlns:xsi="http://www.w3.org/2001/XMLSchema-instance"
     xsi:schemaLocation="http://www.fixprotocol.org/FIXML-4-4 ../../schema/fixml-main-4-4.xsd" v="4.4" r="20030618"
     s="20040109"><Order ID="123456" Side="1" TxnTm="2003-12-18T12:00:00" Typ="2" Px="85.00"><Hdr TID="SSB"
     SID="FCM" SeqNum="1" Snt="2003-12-18T12:00:00"/><Instrmt Sym="IBM"/><OrdQty Qty="100"/></Order></FIXML>
               OMS continued
• Order Management systems handle a variety
  of tasks
  – Primary task is to manage state of an order (open
    or closed)
     • Executions, Fills, leaves
     • Interface with Fix engines
     • Interface with booking engines
                 Options
• What’s an option?
             What’s an option
• An option is right to buy or sell an instrument
  at an agreed upon price at a future date.
  – American options
  – European options
  – Leaps
       Options Risk measurement
• Delta – measures the sensitivity of an options price to
  changes in the underlying stocks price
• Gamma – measure the rate of change of delta, thus it
  is the first order derivative of delta
• Theta – is the amount of premium paid for time or
  time decay
• Vega – the only non-greek letter for risk, but that isn’t
  why it is unique. Vega measures the change in a an
  options price to a change in volatility.

• There are others but beyond the scope for today’s
  overview.
    Why are options important?
• Hedging (portfolio insurance
• Profit enhancement strategies
• Speculation

				
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