Market microstructure and strategy
I. Stock market transactions
II. How stock transactions are executed
IV. Regulation of stock trading
V. Trading international stock
Floor broker
Market-makers
The Spread on Stock Transactions
Electronic Communication Network (ECNs)
Circuit Breakers
Trading halts
Securities and Exchange Commission (SEC)
Reduction in transaction cost
Placing an Order
Margin Trading:
Key Divisions of the SEC
SEC Oversight of Corporate Disclosure
Structure of the SEC
Restrictions on trading when stock index reaches a specified threshold level.
Temporary suspension of securities
To ensure that
market participants have complete information before trading on the news
Stock volatility is relatively high after a halt is lifted.
Taxes Imposed on Stock Transactions
Investors below the highest tax bracket
Investors in the highest tax bracket
Short-term capital gains are taxed at the investor’s marginal tax rate on ordinary income
III. High Frequency Trading
Short Selling
Program Trading
Impact of High Frequency Trading on Spreads
Bots and Algorithms
Impact of High Frequency Trading on Stock Volatility
High Frequency Front Running
Margin Trading
Spreads is the difference between ask price and bid price
Spread = f(Order costs, Inventory costs, Competition, Volume, Risk)
ECNs are automated systems for disclosing and sometimes executing stock trades
ECNs focus on market orders
ECNs receive limit orders
Interaction between Direct Access Brokers and ECNs
Direct Access Brokers: trading platform on a website allowing investors to trade stocks without brokers
Advantages:
Match sellers and buyers without floor brokers
Create global floor less exchange
Investors can easily monitor
Dividends and long-term capital gains are taxed
at a maximum of 15% for federal taxes
A tax rate of 20 percent on dividends and long-term capital gains
Five commissioners appointed
Commissioner serves
a five-year term
The terms are staggered
The president selects one to
chair the commission
Evaluate if current regulations are effectively stopping misconduct and update the regulations as necessary.
When the commission adopts new regulations, they are distributed to
the public for feedback before final approval
The Division of Corporation Finance
The Division of Trading and Markets
The Division of Enforcement
Oversees the registration process for firms going public
Oversees corporate filings and proxy statements.
Ocuses on ensuring transparent disclosure of securities trades by trading facilitators
Investigates potential SEC regulation violations
has the power to discipline individuals and firms.
Introduced in October 2000 by SEC
Mandates firms to share important information with all investors simultaneously
Prevents firms from selectively providing information to analysts before the broader market is aware
SEC Oversight of Insider Trading
Individuals within a publicly traded company
Use non-public information to trade stocks
Information to others is illegal due to its unfair advantage
To combat insider trading, the SEC, along with other government agencies, has taken action to prosecute and penalize individuals involved in such activities
R = (SP-INV-LOAN-D)/INV
They may consider purchasing the stock on margin, meaning that they make the purchase using funds borrowed from their broker along with their
own cash
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- Measuring the Short Position of a Stock
- Using a Stop-Buy Order to Offset Short Selling
Investors sell a stock that they do not own when they believe that the price will drop
Investor
Order to the broker by specifying
A market order
A limit order
Execute the transaction at the best
possible price
Limit is placed on the price at which a stock can be purchased or sold
Brokerage firm
Receive orders from customers and then pass those orders on to the exchange through a telecommunications network
Full-service brokers
Short ratio equal number of shares currently short divided by the total number of shares outstanding.
Offer advice to customers on which stocks to buy
or sell
Discount brokers
Just execute the transactions desired by customers
This measure is between 0.5 and 2 percent
The higher the ratio, the higher the level of short sales.
stop-buy order to limit their losses
Stop-Buy Order: pending order to buy securities at a price higher than the current market price.
Stop-Loss Order
A particular type of limit order. In this case, the investor specifies a selling price that is below the current market price of the stock. When the stock price drops to the specified level, the stop-loss order becomes a market order.
Stop-Buy Order
In this case, the investor specifies a purchase price that is above the current market price. When the stock price rises to the specified level, the stop-buy order becomes a market order.
- Concerns about Short Selling
Morgan Stanley
As the 2008 credit crisis, hedge funds and other investors took large short positions on many stocks
- Restrictions on Short Selling
Naked Short Selling Put option
Short-sellers have three days to borrow the shares and deliver them to the purchasers.
After massive short sales of Morgan Stanley, SEC protected more than 800 firms from short sales.
Now, clients can directly access the stock exchanges and trade
A floor broker provide information to their customer.
is an independent member of the exchange, behalf of their customers to buy or sell securities
Market makers also assist in facilitating transactions on the Nasdaq (dealer market)
They can profit on the spread that exists between the ask and bid prices or take positions.
Designated market makers (specialists) they are matching up buy and sell orders on the NYSE (auction market)
Placing an Order Online
Some online brokerage services offer zero commission trading to investors who maintain a certain amount of money in their brokerage account. Brokers can still make a profit from these commission-free trades because they can use the money in the account to make money profits are higher than the amount they pay to investors in the form of interest.
Imposes margin requirements, which
represent the minimum proportion of funds that must be covered with cash
With margin requirements, a major decline in stock prices is less likely to cause defaults on loans from brokers and, therefore, will be less damaging
to the financial system.
Over time, the market value of the stock will change. Investors are subject to a maintenance margin, which is the minimum proportion of equity that an investor must
maintain in the account as a proportion of the market value of the stock
Margin Calls
stock prices to decline, resulting in more sales of stocks, continued downward pressure on stock prices, and additional margin calls
Dark pools
Operate like private stock markets that can be used by institutional investors
Concern
Desired trades cannot be monitored by others
Offer price slightly more favourable
Reduce transparency
The NYSE defines a coordinated trading strategy as the purchase or sale of 15 or more stocks with a market value of $1 million or more.
Orders are placed directly on the market and executed according to a predetermined set of instructions.
Simultaneously placing orders can reduce risk and maximize profits by exploiting market inefficiencies, but placing a large number of securities may not be effective.
High frequency traders (HFT) utilize bots, computerized systems, to access and interpret stock market information.
The ability of each HFT firm to exploit stock pricing patterns depends on the algorithms created by its employees.
"Algo wars"
Algorithms in HFT trading may contain randomizers, causing competition to resemble card games, raising concerns about ignoring underlying company valuations.
High-frequency trading (HFT) is a trading strategy that uses powerful computers to execute trades at high speeds.
HFT has been shown to have a significant impact on stock market volatility.
When the market is under stress, participation of high-frequency traders leads to a statistically significant increase in volatility.
Under stable market conditions, greater HFT intensity is associated with decreased stock price volatility.
Flash Crash
Besides Flash Crash
Reduction in Information Costs
Information about foreign stocks is available on the Internet, facilitating investors to make more informed decisions without having to buy information about these share
Differences in accounting rules may still limit the degree to which financial data about
foreign companies
High Frequency Insider Trading
High Frequency Insider Trading means we will use a combination of non-public or non-public information combined with HFI to buy and sell a large number of stocks at high rates and speed to make money. profit
On the bad side
They cause injustice and unfairness to small investors as they have to receive information more slowly and cannot compete with companies, investment funds or large investors. They will lose confidence in market
On the good side
Currently, there are many private stock exchanges that have opened, allowing investors to simultaneously consider multiple markets to place their orders, leading to more competitive stock pricing. But it also leads to a situation called "front running".
To limit front-running led to the establishment of the investor exchange
High-frequency traders can act as intermediaries by filling orders that they believe are likely to benefit them.
They can respond to investors' sell orders if their algorithm feels the stock will rise
They can fulfill investors' buy orders if their algorithm feels the stock will fall
In recent years, countries have consolidated their exchanges,
increasing their efficiency and reducing the transaction costs
Most major international stock exchanges are now fully computerized
Furthermore, the Internet
allows investors to use their computers to place orders
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