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Originally established by individuals for the purpose of securities trading. Most popular model today, strong bias for self regulation. most bourses today were influenced by British private bourses
Developed in France, made and regulated by government. Most public have become private.
From Germany where banks had brokerage monopoly.
Order driven market
Auction market. Dax, Nikkei, Paris. No market makers. Markets match supply and demand directly. Central order book.
Price driven market
Dealer or quote driven market, market makers maintain inventory, and quote buy / sell prices. Multiple buy / sell prices, and best price prevails.Continuously quote prices. Nasdaq is an example
Tangible cost, Intangible cost
Commissions, fees, taxes, decided and known beforehand
Intangible cost, equal to the price adjustment needed to purchase liquidity. Size of impact depends on order size, market liquidity, and desired execution speed. Defined as difference between time order is submitted and when actual trade occurs
the value of the best alternative foregone; crucial in world of scarce resources
Tradeoff between market impact and opportunity cost
Large orders slowly tends to incur higher opportunity costs, especially in an information sensitive market. Rushing large trades incurs higher market impact costs.
computer-generated orders to buy or sell many stocks at the same time cause rapid adjustments of institutional portfolios
When PM executes buy for one client and sell for another client within the firm.
Utilizes electronic crossing network. Orders crossed externally, low cost, anonymous. Disadvantage - trade can grow stale of no counterparty found.
When principal acts as dealer and pledges to take opposite side. Opportunity cost minimised and liquidity assured by dealer.
buying and selling contracts on the market index while at the same time buying securities for the portfolio to gain fast access while minimising cost. Reduces opportunity cost because futures are v liquid. Basis r…
Indications of interest
Search for couterparties. Execution costs are lower, however leads to less anonymity.
Advantage - Reduce admin duty and cost of each transaction. Disadvantage is they do not get rid of inherent currency and economic risks of foreign shares.
ADR level 1
Basic ADR, dont qualify to be listed, OTC, no need to comply with SEC registration and reporting requirements. Cheap way to guage interest for a security in the US.
ADR level 2
Main diff from level 1 is that it is listed. Must register with SEC. Annual report reconciling own FS with US GAAP, as well as quarterly.
ADR level 3
Most prestigious, can float an IPO in US.