User:Alexkachanov/Finance/Trading venues

Каждая биржа имеет свою market model, которая описывает, как обрабатываются ордера и как определяется цена сделки. Документ, описывающий market model получает каждый член биржи, чтобы не оказалось, что участник торгов чего-то не понял, и также он присутсвует на сайте биржи для скачивания.

США

 * Публичная биржа - регулируется SEC
 * ATS - не регулируется SEC
 * ECN - выставляет свои котировки в ленте
 * dark pool - не выставляет

После вступления в силу Reg ATS каждая ECN должна была решить кем ей быть: стать биржей или зарегистрироваться как broker dealer. А потом либо либо подключаться к nasdaq либо быть dark pool.

Это решение могло быть не окончательным. Любая ECN могла потом стать биржей, если ей было нужно.

ECN
An ECN is an electronic communications network that matches buyers and sellers for electronic securities trading in securities in the marketplace. (Tr. June 1 at 228.) A broker-dealer achieves ECN status by filing a registration with the SEC Division of Market Regulation, which is responsible for Self-Regulatory Organizations’ Rule compliance. Noaction letters are then issued to the ECN.

ECN это альтернативная электронная торговая площадка (ATS) (т.е. не регулируемая SEC), которая зарегистрирована как брокер-диллер. Любой брокер-дилер может под своим крылом такую торговую площадку потом сделать ее ECN, чтобы например привлекать поток оредеров со стороны а не только своих собственных клиентов. Это дает право торговой площадке публиковать свои best bid/ask в ленте рыночных данных NASDAQ.

ATS/Dark Pool
Dark pool - это альтернативная электронная торговая площадка (ATS) (т.е. не регулируемая SEC), которая не публикует своих bid/ask ни в каких лентах. Dark pool это все та же торговая площадка созданная при брокере-диллере только она не регистрируется с nasdaq-ом и служит скорее для интернализации ордеров клиента

An Alternative Trading System (ATS) is an electronic system that can bring together potential buyers and sellers of securities, and which may disintermediate the traditional broker's role in trading. ATSs include call markets, matching systems, crossing networks, and Electronic Communications Networks (ECNs).

An ECN is an ATS that has registered with the SEC as either a broker or an exchange. ECNs are regulated by the NASD if they are brokers, and are SROs and regulated by the SEC if they are registered as an exchange.

Some ECNs are pure matching engines that mostly accept limit orders from the participants (this is the case with most exchanges). Some ECNs only accept price-taking orders because the ECN’s operator is the market-maker (as is the case with several FX trading venues that originate from banks).

ATSs can be used by the principals to a trade, but ECNs only act as agents

London
exchanges и mft

Japan
Биржи и pts коих не очень много

Actors: Exchanges and Brokers
Let’s examine who the actors are in this matching process. Two counterparties, at a minimum, are required with opposing views to trade with each other—after all, one must be willing to buy when another is willing to sell. And their orders must converge on a common platform, which is the exchange. Generally, exchanges support two forms of trading:


 * Oral auctions
 * Electronic trading

In an oral auction, traders meet each other face to face on the exchange’s trading floor. They shout their bids and offer prices for other traders to hear; the other traders constantly write down these quotes. When two traders agree on a price and an associated quantity, a transaction takes place. Some traders may provide a two-way quotation (a bid price and an asking price) and enter into a transaction only with another trader willing to take the offer or accept the bid.

Oral auctions are the conventional form of trading used in absence of automation, but with the advent of electronic trading, they are on verge of decline. Electronic trading offers the same function through a computer and a trading screen. Traders log their orders through the trading system, and their orders are recorded in the exchange’s order book. These orders are then considered for potential matches as designated per the order-matching rules and algorithm defined by exchange.

The most common matching logic uses the concept of priority based on price and time:


 * All buy orders received by the exchange are first sorted in descending order of bid price and in ascending order of time for the same prices. This means orders where traders are willing to pay the highest price are kept on the top, reflecting the highest priority. If two orders have the same bid price, the one entered earlier gains a higher priority over the one entered later.


 * All sell orders are sorted in ascending order by offer price and in ascending order of time for the same offer prices. This means orders where traders are willing to accept the lowest rate are kept on the top, giving them the highest priority. Two orders asking the same price would be prioritized such that the one entered earlier gets a higher priority.

For example, consider traders A, B, and C who want to buy shares of Microsoft and traders D, E, and F who want to sell shares of Microsoft. Assuming the last traded price of Microsoft (MSFT) shares was $40, consider the scenario shown in Table 2-1.

A separate bucket is assigned for each company’s stock, and all orders for the company are grouped into the specific bucket. In business lingua, this bucket is called the order book. Thus, the order book for the example in Table 2-1 will look like Table 2-2.

All transactions happen on the rate reflected in the topmost row of the order book. This price is popularly called the touchline price. The touchline price represents the best ask (lowest sell) price and best bid (highest buy) price of a stock.

In the previous example, because there is a consensus on the rates from both the buyer and the seller, at the touchline price the order will get matched to the extent of 250 shares at $40.10. Thus, the order book will look like Table 2-3.

Bid/Offer
if the exchange was not on the NBBO, it could not fill the order and was generally required to “send the order away” to an exchange with the better price. To violate this rule and fill such a customer order is known as “trading through” the NBBO.

Order Precedence Rules
The order precedence rules of an oral auction determine who can bid (or offer) and whose bids and offers traders can accept. To arrange trades, markets with order-matching systems use their order precedence rules to separately rank all buy and sell orders in the order of increasing precedence. In other words, they match orders with the highest precedence first.

The order precedence rules are hierarchical. Markets first rank orders using their primary order precedence rules. If two or more orders have the same primary precedence, markets then apply their secondary precedence rules to rank them. They apply these rules one at a time until they rank all orders by precedence.

All order-matching markets use price priority as their primary order precedence rule. Under price priority, buy orders that bid the highest prices and sell orders that offer the lowest prices rank the highest on their respective sides. Markets use various secondary precedence rules to rank orders that have the same price. The most commonly used secondary precedence rules rank orders based on their times of submission.

Most exchanges give an option to traders to hide the total quantity of shares they want to transact. This is to discourage other traders from changing their bids/offers in case a large order hits the market. In this case, displayed orders are given higher precedence over undisclosed orders at the same price. Markets give precedence to the displayed orders in order to encourage traders to expose their orders. Though disclosure is encouraged, traders also have the option of not displaying the price in order to protect their interests.

Size (quantity) precedence varies by market. In some markets, small orders have precedence over large ones, and in some markets the opposite is true. Most exchanges allow traders to issue orders with size restrictions. Traders can specify that their entire order must be filled at once, or they can specify a minimum size for partial execution. Orders with quantity restriction usually have lower precedence than unrestricted orders because they are harder to fill.

The Matching Procedure
The first step is to rank the orders. Ranking happens on a continuous basis when new orders arrive.

Then the market matches the highest-ranking buy and sell orders to each other. If the buyer is willing to pay as much as the seller demands, the order will be matched, resulting in a trade.

A trade essentially binds the two counterparties to a particular price and quantity of a specific security for which the trade is conducted.

If one order is smaller than the other, the smaller order will fill completely. The market will then match the remainder of the larger order with the next highest-ranking order on the opposite side of the market. If the first two orders are of the same size, both will fill completely. The market will then match the next highest-ranking buy and sell orders. This continues until the market arranges all possible trades.

Прочее
Stock exchanges are organized markets for buying and selling securities. These securities include bonds, stocks, and derivative instruments such as options and futures.

A stock exchange provides players with a platform where transactions can take place. The function of a stock exchange is to bring all the buyers and sellers together in order to minimize transaction costs, which are a reality of life and have to be incurred by traders and investors. Apart from obvious costs such as commissions, taxes, and statutory levies, other costs such as spreads, impact costs, and search costs are built into the transaction costs.

We have explained spread as a round-turn cost. It is the cost you will incur if you buy some shares and sell them immediately. Exchanges minimize spreads by taking steps to improve the overall liquidity in stocks. Since exchanges bring all the participants interested in a security together, liquidity improves dramatically. Traders now compete with each other to buy and sell securities, and rates become realistic. The better the rates become, the narrower the spread becomes.

Impact cost is the cost incurred when someone is trying to push a large trade or when an informed trader wants to deal with someone in particular. Counterparties become suspicious when a large order is pushed through, especially when someone known to be an informed trader pushes it. For such orders, they don’t want to transact at the prevailing price and want to include a risk premium. The counterparty is thus subjected to a different price immediately, which is inferior to the ongoing price. This difference becomes an impact cost.

Bringing buyers and sellers together reduces the search cost dramatically. Assume, for example, that you want to buy a secondhand car. Usually, people who want to sell their cars put an advertisement in the classifieds column of a newspaper. Potential buyers read this listing and contact the sellers. When the basic price details and requirements match, they travel to meet face to face, inspect the car, and sometimes get a mechanic to do an appraisal. They negotiate the rates and other terms, and then the sale takes place. This entire process takes a couple of days to a week’s time. Such secondhand car markets are relatively illiquid. To improve liquidity in such a market, some secondhand car dealers organize sales where they request all sellers to display their cars in a fair. They also organize such meetings online. Potential buyers then visit the area (or log on to the Internet) and negotiate terms there and then. They also feel comfortable because they can compare all offers simultaneously. Suddenly, liquidity increases. Such markets have a potential of doing a lot more transactions in the same time frame, which benefits the buyers and the sellers. Both incur fewer costs in doing the deal, and both get the best possible price. Thus, getting buyers and sellers together improves liquidity, reduces search costs, and increases the confidence of the participants. A stock exchange performs precisely this function.

Out-loud Trading
Stock exchanges worldwide are going through a lot of transformation. You probably remember seeing television footage of a typical stock exchange where thousands of traders shout in order to place orders. Since an exchange’s trading floor is a big area and the number of traders is large, how could it then be possible or at least easy for people to find interested counterparties in a particular security? What if one trader wanted to transact on a security that is not so popular? It wouldn’t be easy to find a counterparty.

In reality, an exchange floor has areas earmarked for each security. Traders desirous to trade a certain security have to go to the area demarcated for that security and find counterparties. What you usually see on television is traders shouting their bids or offer prices for a particular security. Others listen to their prices and commit to transactions when they hear favorable prices. Once a transaction is committed, it is immediately recorded manually so that it is honored later even when prices turn against one of the parties.

''Note: To cut down on shouting, traders devised methods of negotiating by using actions through their fingers and palms. This method of trading is, however, fraught with a lot of lacunae.''

Stock exchanges usually never accept orders directly from investors; instead, order requests are directed to exchanges via brokers. A broker is a member of an exchange who acts as an intermediate agent between an investor and the exchange. (We will discuss brokers in the “Members of the Exchange” section.) We will use the words broker and member interchangeably because they both refer to members of a stock exchange. To place an order, investors have to call/meet their brokers or brokers’ agents and dictate their orders. (A broker’s agent would forward the order to the broker.) The broker would then go or send a representative to the floor of the exchange to execute the order. Once the execution is done, the investor is informed about the execution. In the past, it was not unusual for the broker to club (aggregate) the order from various investors in a common security while going to get it executed. This execution could have then happened in multiple fills at different prices. Brokers then decided which price to pass on to which investor. Investors had no mechanism to know whether the purchase/sale price being passed to them by their brokers was correct and meant for them. This area was ambiguous and fraught with manipulation. In less-advanced financial markets, brokers would normally pass on purchase requests from customers at the highest price of the day and pass on sale transactions at the lowest price of the share on that day. Brokers would pocket the difference between the highest/lowest price and actual purchase/sale prices. This became a good form of earning for the brokers, and in many cases, income from this was even higher than the commissions they earned.

With the advancement of technology and expectation of markets came the desire to reduce dependency on such traders and bring about transparency in the entire trading process. When you have a huge nation with vibrant retail participation, the potential number of orders that hit the exchange is large. It becomes virtually impossible for brokers to do justice to individual investors, which in turn affects the quality and price of execution and raises a lot of ethics-related issues. This problem gave birth to screen-based trading.

Screen-based Trading
Most advanced nations have adopted screen-based trading. All the crowded and noisy exchanges are a thing of past now in most countries. All brokers are connected electronically to their exchanges through their trading terminals. Brokers can see every order that hits the exchange on their trading terminals and can bid or offer shares for an order by entering their corresponding buy/sell orders. These trading terminals are installed at the brokers’ offices, thereby dramatically increasing the reach of exchanges to the common trading public. This virtually brings the exchange to an investor’s doorstep. In some countries, investors connect to the exchange directly by trading software provided by their brokers. Their orders are first routed to the broker’s surveillance system, which conducts the necessary risk management checks and then routes the order to the exchange for execution.

The screen-based trading system has many advantages over the traditional system. First, the process of trading has a lot of transparency. Traders know the exact prices at which their transactions go through. They also can access the exchange’s order books (with, of course, certain restrictions) and know the touchline prices, which are the last transacted prices. Access to the order books also helps traders know the best bid and offer rates prevailing in the markets. This means they know at what prices their next orders are likely to be transacted.

Second, trading systems have broken geographical barriers and reduced communication costs drastically. In the earlier model, a lot of trading was centered in large cities that had a physical presence of a stock exchange. Investors from other cities were required to hook up with representatives of members of these exchanges, and the order flow used to happen on the phone. A large number of orders used to miss out or sometimes used to get transacted on a security different from what the investor had demanded. Many exchanges still prefer floor-based trading because dealers see their counterparties in person and decide immediately whether they are more informed or less informed than them and whether trading with them will prove profitable. In adverse cases, dealers get an opportunity to revise their quotes to suit themselves.

Exchanges provide fair access to all members, and members expect that their orders will be executed in a fair manner without bias. Automated trading provides them with comfort because computers behave the way they have been programmed without any bias. Exchanges are usually open between fixed times during the day, and they allow all members to log in and trade during this time. This time slot is called the trading session. Most exchanges allow order entry even before the trading session in a session called the pre-opening session. This session is a slot of about 15 to 20 minutes before the trading session commences. Members are allowed to enter orders in this session, but the orders don’t get transacted. Exchanges arrive at the fair opening prices of all scrips by getting a feel of prices contained in the orders for all securities. This is also useful because it prevents the exchange system from being burdened by a huge number of orders being entered when the trading starts. Trading stops at a designated time. Exchanges are particular about timing because even a few seconds’ deviation could benefit some members at the cost of others.

Ownership
Historically, most exchanges worldwide were nonprofit organizations owned by their members. This ownership structure has continued for more than a century now. This, however, raised a lot of governance issues in many countries because members made policies suiting them at the cost of their clients. Clients started shying away from such exchanges, and liquidity shifted to other exchanges that had better and more transparent ownership and management structures.

Many exchanges are now trying to de-link ownership and membership on the lines of professionally managed companies. They are now offering shares to institutions and listing those shares on the same/multiple exchanges. Once a share is listed on an exchange, the exchange and its functioning, fundamentals, and financials become the subject of public scrutiny. This form of change is called the demutualization of the exchange. Exchanges make money from charging listing fees, membership fees, and transaction charges and by selling market data. Market data is trading- and settlement-related data and is used by most market participants who base their trading decisions on this information. (We will cover market data and its importance in the trading business in Chapter 4.) Apart from exchanges, brokers get data from a variety of sources, including depositories, clearing corporations, and third-party agencies such as Reuters, Bloomberg, and internal data repositories. (We discuss the various kinds of data required for trading activities and related issues in Chapter 3.)

The New York Stock Exchange (NYSE) and the American Stock Exchange (AMEX) are the major stock exchanges in the United States; both are located in New York City. Some regional stock exchanges operate in Boston, Cincinnati, Chicago, Los Angeles, Miami, Philadelphia, Salt Lake City, San Francisco, and Spokane. In addition, most of the world’s developed nations have stock exchanges. The larger and more successful international exchanges are in London, Paris, Hong Kong, Singapore, Australia, Toronto, and Tokyo. Another major market in the United States is the NASDAQ stock market (formerly known as the National Association of Securities Dealers Automated Quotation system). The European Association of Securities Dealers Automated Quotation system (EASDAQ) is the major market for the European Union (EU). NASDAQ is a major shareholder in EASDAQ.

The Need for Efficient Order Matching
The two primary objectives in the financial marketplace are to keep transaction costs at a minimum and to avoid credit defaults. Although several market practices have been devised to fulfill these objectives, efficient order matching is an important factor for achieving these goals.

A market’s liquidity is measured by how easily a trader can acquire (or dispose of) a financial asset and by the cost associated with each transaction. For example, if you wanted to sell a house, you could place an advertisement or go through a real estate agent. Both of these options have costs associated with them. It may also take a month to locate a buyer who is willing to match the price you desire. In this case, the house is considered to be relatively illiquid. But imagine a marketplace where all sellers and buyers of houses in the city came together in one area and tried to find a match—the search would be easier, the chances for finding a buyer would be greater, and the convergence of all buyers and sellers would result in price discovery and hence better prices. In this case, the house is considered highly liquid. If you extend this example to a marketplace where company instruments (shares and debt instruments) are traded, you get a stock exchange, as introduced in Chapter 1. To avoid search costs (and of course to enforce other legal statutes), buyers and sellers come together in a stock exchange on a common platform to transact. Since many buyers and sellers are present at any point in time, searching for a counterpart for an order is relatively easy.

An order is an intention to enter into a transaction. Each order has certain characteristics such as type of security, quantity, price, and so on. Initiators of orders notionally announce their willingness to transact with the specified parameters. Each player in the market wants to get the best possible price. There is a huge scramble to get one’s order executed at the right time and at the best available market price. Efficient order matching is thus a highly desirable tenet of an advanced market. Also, anonymity is considered good for a financial market. This means traders do not know any information about the people with whom they are trading. This is desirable when the participants in the market do not have the same financial strength and when it becomes important for the market to protect the interests of the small players. Anonymity also prevents large players from exerting undue influence on the trade conditions. In such a situation, to protect the integrity of the market, precautions must be taken to ensure that no credit defaults take place. As mentioned in Chapter 1, this is the job of a clearing corporation, which takes away the credit risk concerns of large players through novation. This process also takes care of matching large orders with several potential small players.

Containment of Credit Risk and the Concept of Novation
Millions of orders get executed everyday, with each trader transacting hundreds and sometimes thousands of trades. In such a process, traders potentially commit to pay others (from whom they bought) and anticipate the receipt of money from others (to whom they sold). Imagine if one of the traders exhausted his payment capacity and defaulted. His default would actually give rise to a chain of defaults, and the integrity of the market as a whole would be in danger. In such a scenario, it would be difficult for large traders to transact with small traders. This, in turn, would raise transaction costs, because traders would start selectively trading with each other. To circumvent this credit risk and bring about confidence in the minds of traders, clearing corporations implement novation.

Note:	Novation is a Latin word that means splitting.

Novation essentially splits every transaction into two parts and replaces one party in the trade with the clearing corporation. So, each party in the transaction feels they have transacted with the clearing corporation.

For example, assume that the orders of buyer A and seller B match for 10,000 shares of Microsoft. In the absence of novation, the trade will look like Figure 2-1.

With novation in place, the trade gets split in two and looks like Figure 2-2.

Buyer A pays money and receives the shares from the clearing corporation. The clearing corporation, in turn, collects the shares and pays the money to seller B.

Indexes
Though an index is not a real entity, any discussion of the equities market cannot be complete without a discussion of indexes. The movement of indexes has now become synonymous with the movement of markets and stocks. An index’s price is undoubtedly the most sought after number or piece of information by traders, investors, researchers, and so on. Investors and researchers do a lot of analysis to predict where an index is headed and what its direction means to each market participant.

Basically, an index is a measure of relative values. When discussed in equities market parlance, changes in an index measure changes in market values and hence the market capitalization of underlying securities. If someone says, “stock prices rose” or “the market was up,” they’re generally referring to an index. A stock index is built on a specific group of stocks. Whether its value is up or down reflects the combined price movements of all the stocks in the index.

Indexes are created and maintained by exchanges normally through an index committee. However, several popular indexes are created and maintained by external companies, agencies, and newspaper houses.

Widely cited indexes include the following:


 * The Dow Jones Industrial Average (DJIA) tracks stock prices of 30 major companies.


 * Standard & Poor’s 500, commonly referred to as the S&P 500, combines the stock prices of 500 large companies.


 * The NYSE Composite Index includes all common stocks traded on the NYSE.

Apart from miming trends in the market, indexes provide investors with a cheaper method of creating interest in a market. Most popular indexes are heavily traded, and they enjoy extremely good liquidity. The impact cost of trading in these indexes is low, and they enjoy good spreads. Indexes are also not bound by the limitation of availability as compared to corporate stocks. (Corporate stocks are finite in number; indexes are not finite because they are just numbers.) All these factors make indexes a desirable product on which to trade. You can track indexes through an index fund or through index options and futures. Some investors prefer taking a position in an index itself rather than investing in individual securities. Mutual fund managers build a position in indexes to hedge their positions in stocks.

Suppose a fund manager holds $10 billion worth of securities in a portfolio. Also assume that the fund manager expects the market to fall in the medium term by 10 percent. Assuming that the securities in the portfolio are perfectly correlated with the market and the market actually falls by 10 percent, the portfolio should also see an erosion of about 10 percent. Now the fund manager faces a strange situation. Although she knows the market will fall, she cannot go ahead and sell individual securities because if she sells them individually, their prices would fall anyway because of impact. Since impact cost is much less in an index than in individual securities, the fund manager can go short (sell) on the index. Now if the market actually declines, the fund manager will lose money on the portfolio but will buy back the index she short sold and make money on her short position on the index. If the quantum of index that is sold short is calculated scientifically, the losses on the portfolio of stocks will be more or less covered by the profit on the index position. Indexes thus provide an inexpensive but potent way of eliminating portfolio risk.

We will now show how a basic index is computed and what it means when someone says that “the index has gone up by 100 points.” As discussed earlier, an index is a relative measure. But what does it measure, and what does it mean?

Market capitalization measures the total current replacement value of a company. In other words, it is the price you would have to pay if you wanted to buy out the company fully (with the assumption that the prices would not rise with the buying, an unlikely case). In other words, it also indicates the amount of money it would take if someone decided to create an exact replica of the company with the same products, manufacturing, and distribution capabilities and the same brand value (in an environment where the first company is absent so the two don’t compete with each other).

Market capitalization is measured by multiplying the total number of outstanding shares that the company has issued by its current market price:

Market capitalization = Total number of outstanding shares * Current market price

While constructing any index, some stocks from industries that best represent the economy are selected for inclusion in the index. These stocks are the best representatives of companies in the industry they represent. Selecting stocks that will participate in an index requires considering a number of criteria. Some of these are as follows:


 * The quality of representation of the company in the industry segment to which the company belongs


 * How much less the impact cost is when a transaction on this stock is executed


 * The liquidity of the stock on the exchanges on which it is listed and traded


 * The stock holding pattern—how widely the stock is held

Normally, the 80-20 rule applies here, meaning 20 percent of the stocks usually represent 80 percent of the market capitalization. So, a handful of about 30–50 stocks are selected. Which stocks are selected and what criteria was used is public domain information; you can get it for any index from the exchange/index owner. With about 30 stocks, their market capitalizations are added up to arrive at the market capitalization of the entire market. Thus, the market capitalization of an entire market (assuming 30 stocks have been selected) for the creation of an index is as follows (where market capitalization equals i):

Since an index is a relative measure of market capitalization, the current market capitalization is compared to the market capitalization of a selected base year. And usually 100 is taken as the starting point of the index. Using this concept, you can arrive at a number. Thus, the index is as follows:

So, when you read that some index is at 4,000, it means the market capitalization of that particular market has gone up 40 times compared to the market capitalization of the base year. Note that you divide 4,000 by 100 in this interpretation because you multiplied the index by 100 to start. It is not compulsory that all indexes are multiplied by 100, though; it depends upon the calculation used from index to index.

If the index adds 100 points in one day and moves from 4,000 to 4,100, it means that the relative market capitalization has gone up from 40 times to 41 times. In other words, it means the market has added the kind of worth in one day that is equal to its total worth during the base year. The base year that is chosen for computing the index whose market capitalization is used as a benchmark is one where the markets were relatively stable and were not characterized by a bull or bear run. The average market capitalization is public domain information and can be calculated/obtained from the exchange/index owner.

Since market capitalization uses the current market prices of stocks and these prices change every second, the index changes every second. With the previous formula of the index and all other factors being constant, you can now compute the effect of change in an index with a change of prices in any security dollar by dollar.

Members of the Exchange
Members of the exchange are also called brokers. On the NYSE today, two kinds of brokers exist:
 * floor brokers and
 * specialists.

Floor Brokers
Floor brokers act as agents of their customers and buy and sell on their customers’ behalf and for the organizations for which they work (see Figure 1-4). It is mandatory for clients to access the exchange only through designated brokers. Clients cannot do trades otherwise. Brokers solicit business from clients, get their orders to the exchange, and match them on the exchange’s matching system. They also settle their clients’ trades. Some even get the orders matched outside the system, but most countries have a regulation that trades resulting from such orders be reported immediately to the exchange system for the entire market to know.

Clients specify which security they want to trade and under what conditions. Some clients want to trade immediately regardless of the prevailing price. Some are willing to wait the entire day for a good price, and some are willing to wait for several days for a favorable price. These restrictions are explained to the brokers, and the brokers try to arrange trades accordingly. These conditions can be captured gracefully in order attributes, or order terms. (We cover various attributes associated with orders in Chapter 2.)

Though clients pay commissions to floor traders to get their transactions executed, they get a lot of benefits indirectly. Brokers have access to an exchange’s order-matching system where they execute orders at competitive prices. They undertake the responsibility of clearing and settling those trades in a hassle-free, standardized, transparent method. In addition, brokers are generally better informed than their customers. Sometimes their advice can be valuable. Professional brokers, however, concentrate only on brokering and refrain from giving advice. They normally execute what their clients instruct. Some brokers give advice as a value-added service but don’t accept any liability for that advice not materializing. Brokers also extend a credit facility to customers in need who have a good reputation with the broker. They execute the orders on behalf of the customer first and collect money from the customer later. In many markets, brokers extend a similar facility through banks. This is called margin trading.

Brokers also execute transactions on their own accounts through house accounts. Profits and losses from these trades accrue to the broker and not to any client. Such transactions are called principal transactions. Floor brokers thus perform the role of agents as well as principals. Acting as an agent as well as a principal becomes an ethical issue and is a cause of key concern in many markets, especially in those markets that are not very advanced. When brokers buy the same security for themselves that they also buy for their customers, how can the customers be sure brokers are passing on transacted prices to them?

For example, assume a stock has moved from $40 to $42 during a trading session. A client has placed an order to buy this stock at $41. Assume that the broker also has interest in this stock and wants to purchase at roughly the same rate. When the broker goes to the floor to trade, the broker executes two buy orders. One gets filled at $41, and the other gets filled at $40.75. Now it’s a tough decision for the broker. If the broker has not segregated the order initially before executing, he will not know which one to pass on to his customer and which one to keep for himself. If he passes on the lot executed at $40.75, he keeps the customer happy but loses money (it’s still debatable whether this money was his to begin with), and if he passes the execution of $41, then it’s an ethics issue. Automated trading systems have a neat method of solving this problem. At an order level, the broker has to specify whether the order is meant for the customer or for his own account. If it’s for the customer, the broker also has to specify the client code of the customer. The code is required so the broker does not pass on an execution meant for one customer to another.

Dishonest brokers also do front running. When they receive a large order from an informed investor, they first trade on their own accounts in the same security and build up a similar interest as the client wants to build up, and then they trade for the client. In this case, the client builds the position she desires, but she may be saddled with relatively inferior prices as compared to the broker who traded before the client and thereby put his own interest ahead of the client’s. Front running is a punishable offense.

Many brokers also solicit business through Internet trading sites where customers who want to trade log on and place their orders. These brokers are also floor traders.

Specialists
Specialists are a second category of brokers; they provide two-way quotes and execute orders for floor brokers (see Figure 1-5). They are also called market makers for their designated securities and maintain their own inventories of shares (for which they are specialists). They will buy from anyone who wants to sell and sell to anyone who wants to buy. They are key liquidity providers. Designated market makers exist in many securities in many markets. They provide liquidity to anyone who wants to buy/sell in the absence of other counterparties. Specialists wait for others to trade with them. Thus, they are brokers who will be always willing to act as counterparties to anyone who wants to buy or sell. Anyone who wants to transact with such specialists will ask for a quote. Since they don’t initiate transactions, they have to be extra careful about the rates at which they choose to transact.

Specialists normally provide a two-way quote. Depending upon the quote, traders decide whether to trade immediately or wait for a more favorable price to be quoted. Depending upon a quote, a trader may also decide whether to buy or sell at that particular price. While providing a two-way quote, specialists don’t really know whether the trader wants to buy from him or sell to him. Actually, it does not make much of a difference to them because they earn through spreads and through price changes on the inventories of shares they maintain (provided the quantity is small and the counterparty is less informed). When specialists want to trade aggressively, they narrow the spread by bringing the bid price and offer price closer to each other. When they want to be cautious and want to discourage others from trading, they widen the spread. This increases the cost of doing a round-turn transaction for other traders, and it discourages others from trading with specialists. Note that liquidity in most securities is high, and adjusting the bid/offer rates even by a couple of cents creates a large difference in the demand and supply. Millions of shares can be bought or sold in a matter of seconds.

The quotes provided by specialists are often referred to as firm or soft. A firm quote is a quote that, once provided, cannot be changed. When a specialist provides a quote to any trader, the specialist becomes liable to trade with the trader at that particular price should the trader so desire. On the other hand, the specialist can modify a soft quote once the trader wants to transact. After giving a soft quote, a specialist can also refuse to transact with the trader. Specialists are generally wary of transacting with traders who potentially know more than them. This apprehension is obvious—if an owner of a company is trying to sell a large block of her own company’s shares and it is known that the transaction is not liquidity driven, it is obvious that she thinks her company’s stock is fully valued and that chances of further appreciation are rare. People who are more informed than the specialists are normally those who have an insider view of the company. If specialists are wary that they will lose out financially to the trader if they enter into the trade, they are likely to back out before transacting or at least modify the quote to suit them. People who know about corporate developments and trade to profit from them before the news comes out in the public domain are called insiders. Insider trading is an offense and is punishable in all markets.

A specialist’s business is interesting as well as important for the overall market. They help in the price discovery process and help the market reach an equilibrium position. During times of market stress, they provide necessary liquidity, thereby giving opportunity to others to invest/exit. They are generally better informed about the security than other traders. Depending upon the urgency of other traders, the outlook of the company behind the security, and the overall market conditions, specialists determine the bid and offer prices. Needless to say, just like other traders, they like to keep a larger inventory of shares when the prices are looking up and want to cut their inventories when the prices seem to be going down. The size of the inventory that they maintain largely depends upon the bid and offer rates they are quoting.

Since all other traders looking for liquidity want to transact with specialists, a high offer price from a specialist will tempt traders to sell their holdings to the specialist. This in turn will increase the inventory size the specialist is holding. A price rise will then benefit the specialist. Conversely, when the outlook is grim and the specialist wants to offload inventory, the specialist will revise the prices and quote a lower offer price. This will tempt other traders to buy shares from the specialist at the lower price. The specialist will then manage to offload his position in favor of other traders. Thus, you have seen how specialists trade on both the buy side and the sell side and how they attract and regulate liquidity by adjusting the bid and offer prices. At a particular level of inventory, however, they would want to maintain a constant stock. In such cases, they quote bid and offer prices in such a way that the rate at which other traders sell to them matches the rate at which other traders buy from them, and at this point demand for that stock equals the supply available. This position is called an equilibrium position, and this price is called the equilibrium price.

Becoming a Member
Through this entire discussion, it would seem that brokers are individuals. Some of them are. However, brokering as a business requires tremendous power and operational and marketing strength. Most members (brokers) are thus institutions. Even individuals who hold membership rights maintain a corporate structure and employ people who run the entire business for them. So, are the members the same people who you see trading on the exchange floor? Maybe, but in most cases they are not. They are member representatives who are authorized by the members to trade for them.

Large institutions and traders prefer to become members themselves to protect their interests and have better control over the entire trading and settlement process. In case volumes of their proprietary transactions are very high, they save good money that would have otherwise been spent on commissions.

To become an exchange member, a trader or an institution must acquire a membership in the exchange. Each exchange has a different set of norms and requirements. Indeed, having a membership in any renowned exchange is a matter of prestige. In most exchanges, memberships can be bought and sold like any stock. The cost at which membership can be acquired fluctuates and is a function of the demand and supply of memberships. However, money alone cannot buy membership. Most exchanges have strict screening criteria, and the candidates have to demonstrate a good understanding of the securities business, a commitment to their customers, and financial integrity. Membership on the NYSE is called a seat because in the earlier years of its existence, members had to sit in assigned seats during roll calls. In December 2005, two seats sold on the NYSE for $3,500,000 each. The highest price paid for a membership in the history of the NYSE was $4,000,000 in December 2005. As of December 15, 2005, the NYSE had 1,366 members.

Although some exchanges do not issue fresh memberships easily (thereby forcing potential members to buy from existing members), some exchanges offer memberships on a tap basis. This means that anyone wanting a membership can approach the exchange anytime and complete the necessary formalities to become a member.

Биржи мира

 * см. Список всех фондовых бирж
 * см. Список всех фьючерсных бирж

Dark Pools

 * см. список всех dark pools

Taxonomy of Dark Pools:
 * Public Crossing Networks
 * Internalization Pools
 * Ping Destinations
 * Exchange-Based Pools
 * Consortium-Based Pools

Independent dark pools
• Chi-X Global

• Instinet

• Liquidnet

• NYFIX Millennium

• Posit/MatchNow from Investment Technology Group (ITG)

• State Street's BlockCross

• RiverCross Securities

• SmartPool

• TORA Crosspoint

• ETF One

• Codestreet Dealer Pool for Corporate Bonds

Broker-dealer-owned dark pools
• JP Morgan - JPMX

• Barclays Capital - LX Liquidity Cross

• BNP Paribas - BNP Paribas Internal eXchange (BIX)

• BNY ConvergEx Group (an affiliate of Bank of New York Mellon)

• Cantor Fitzgerald - Aqua Securities

• Citi - Citi Match, Citi Cross

• Credit Agricole Cheuvreux: BLINK

• Credit Suisse - CrossFinder

• Deutsche Bank Global Markets - DBA (Europe), SuperX ATS (U.S.)

• Fidelity Capital Markets

• GETCO - GETMatched

• Goldman Sachs SIGMA X

• Knight Capital Group - Knight Link, Knight Match

• Merrill Lynch - Instinct-X

• Morgan Stanley - MSPOOL

• Nomura - Nomura NX

• UBS Investment Bank - UBS ATS, UBS MTF, UBS PIN

• Societe Generale - ALPHA Y

• Daiwa - DRECT

• Wells Fargo Securities LLC - WELX - has since closed

Consortium-Based Pools
Unlike other dark pools started by one broker, consortium-based pools are operated by numerous partnering brokers.
 * BIDS Trading - BIDS ATS
 * LeveL ATS
 * Luminex (Buyside Only)
 * NYSE Euronext, BNP Paribas, HSBC: NYSE Smartpool

Exchange-owned dark pools
• Australian Securities Exchange: ASX Centre Point

• International Securities Exchange

• NYSE Euronext: NYSE Arca Europe

• BATS Trading

• London Stock Exchange: Turquoise, Baikal

Dark pool aggregators
• Fidessa - Spotlight

•  Bloomberg Tradebook

•  Liquidnet LN Dark

•  Credit Suisse Crossfinder Plus

•  Deutsche Bank SuperX+

•  Quod Financial ASOR

•  Software AG - Apama

•  ONEPIPE – Weeden & Co. & Pragma Financial

•  Xasax Corporation

•  Crossfire – Credit Agricole Cheuvreux

•  Instinet - Nighthawk

•  Bernstein - Shadow

•  Wells Fargo - Komodo Dark

Public Crossing Networks
• ITG's POSIT

• ITG's POSIT NowSM

• Instinet CBX

• Instinet Match

• Liquidnet, H2O

• NYFIX Millennium

• Pipeline

Advertisement-based:
 * BLOCKalertSM
 * Liquidnet
 * Pipeline

Internalization Pools
a.k.a. Internal Crossing Network • BNY: Convergex

• Credit Suisse: Crossfinder

• Citibank: Citi Match

• Fidelity: CrossStream

• Goldman Sachs: Sigma X

• Lehman Brothers: LCX

• Merrill Lynch: MLXN

• Morgan Stanley: MSPOOL

• UBS: PIN

Ping Destinations
Ping destinations are quite different from other dark pools in that they only accept IOC (Immediate or Cancel) orders and unlike other dark pools, their customers' flow solely interacts with the operator's own flow.
 * ATD
 * Citadel
 * GETCO

Registered Pools:
 * ISE Midpoint Match +
 * Nasdaq Cross
 * NYSE Matchpoint

ATS мира
(2009-09) Alternative Trading Systems Directory 2009

Europe
• Baikal - London Stock Exchange

• BATS Europe

• Barclays Capital

• BIX

• Blink

• Burgundy

• Chi-X Europe

• Citi Match

• Crossfinder

• Equiduct Trading

• Euro Millennium

• Instinet BlockMatch

• Liquidnet

• MLXN

• MS Pool 19

• NYSE Arca Europe 20

• NYSE Smartpool 20

• Pipeline 21

• Quote MTF 21

• Plus Pool 22

• POSIT 23

• Sungard Global Trading 24

• SWX Swiss Block 24

• Tradeweb 24

• Turquoise 24

• SIGMA X 25

• UBS PIN Cross

North America
• Alpha 28

• Aqua 28

• BATS 28

• Barclays Capital 31

• BIDS ATS 28

• BlockBook 29

• Block Cross 29

• CBX 32

• Chi-X Canada 32

• CitiMatch 33

• ConvergEX Cross 33

• CrossFinder 33

• CrossStream 33

• DirectEdge 34

• GETCO 34

• Knight Link 35

• Knight Match 35

• Lattice 36

• LeveL ATS 36

• LiquidNet 36

• Liquidnet H2O

• Match Now 37

• Midpoint Match 37

• Mismi ATS 38

• MLXN 38

• MS Pool 38

• Nasdaq Crossing 39

• NYBX 39

• NYFIX Millennium ATS 40

• NYSE Arca 40

• NYSE MatchPoint 41

• Omega ATS 41

• One Pipe 41

• POSIT 42

• Pipeline 43

• Pure Trading 43

• Rivercrossing 43

• Track ECN 43

• SIGMA X 44

• TSX Photon 45

• UBS PIN Cross 45

• VortEX

Asia Pacific
• Axe ECN 48

• BIX 48

• BlocSec 48

• CBX Asia 49

• Chi-X Asia 49

• Chi-X Australia 49

• Citi Match 49

• CrossFinder 49

• Japan Crossing 50

• Knight Match 50

• Korea Cross 50

• LiquidNet Asia 51

• LiquidNet Australia 51

• LiquidNet Japan 51

• MLXN 52

• MS Pool 52

• NYFIX Millennium ATS 52

• POSIT 53

• UBS PIN Cross 54

• SIGMA X