Professional Documents
Culture Documents
Product ETF REIT SPDRS &iSHARES Block bids etc Indices Repo Bonds Trading & venues Trading Flow Order Flow Order types Diff betwn OTC & exchange txn Best Execution Clearing and settlement Presettlement Cross border settlement ICSD, CSD Custodian Etrading ECN ATS Dark Pools ALGO Program Trading Definitions Advantage Popular strategies High frequency strategies Diff betwn common & quant algo strategies VWAP , TWAP General Main markets Diff betwn Order driven & quote driven mkts IB - Overview IB Functions Front running Market open Price determination SWIFT PPP
Products
What is an ETF?
An ETF (or Exchange-Traded Fund) is a tradable open-ended fund or unit investment trust. The ETF issues shares or trust receipts giving the owner of the shares an economic interest in the fund assets. An index-based ETF seeks to track the performance of an index by holding in its portfolio either the contents of the index or a representative sample of the securities in the index. ETFs offer flexible, low-cost exposure to the performance of whole markets or market segments in just one easy transaction. ETFs can be bought and sold on NYSE Euronext at any time during trading hours. ETFs may be attractive as investments because of their low costs, tax efficiency, and stock-like features Designed to track specific market indexes, exchange-traded funds (ETFs) combine the broad diversification of a mutual fund with the trading flexibility of a stock
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What is a REIT?
Real Estate Investment Trust, is an investment vehicle created by an act of Congress in 1960. REITs were designed to provide investors with the opportunity to participate directly in the ownership or financing of real estate projects by providing them with a tradable interest in a pool of real estate-related assets. REITs own, and often operate, income-producing real estate such as office buildings, apartments, shopping centers, warehouses and hotels. Pays dividends of at least 90% of the REITs taxable income At least 75% of the company's total investment assets must be in real estate. Must derive at least 75% of its gross income from rents or mortgage interest.
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Block Trading
Block Bids A potentially more cost-efficient way to sell out a large position would be to work with J.P. Morgan Equity Capital Markets (ECM) to sell the stock to another institution in a block sale. ECM can target a broad group of potential buyers in strict confidence without indicating the seller's identity. Leveraging our banking relationships, J.P. Morgan can communicate quickly and provide rapid execution if the issuer is a willing seller. Once a match is made, the seller is identified and the trade is executed at a negotiated spread. Reverse Inquiry Reverse Inquiry provides a means by which institutional accounts can seek additional liquidity through the facilitation of direct shelf takedowns or block sales. By tapping J.P. Morgan Equity Capital Markets (ECM), institutional clients can place inquiries into issuers who have shelf registrations or can strategize about the purchase or sale of stock in the form of a block sale.
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Flow Derivatives
ETFs, or exchange traded funds, are tracking stocks that attempt to replicate the performance of an equity or fixed income sector or index Equity Futures Equity Swaps Listed and OTC Options Volatility Products
Including variance swaps on indices and single stocks
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Program trading is a generic term used to describe a type of trading in securities, usually consisting of baskets of fifteen stocks or more
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Indices
A capitalization-weighted index is an index whose components are weighted according to the total market value of their outstanding shares. Also called a market-value-weighted index In a price-weighted index such as the Dow Jones Industrial Average, the price of each component stock is the only consideration when determining the value of the index. The S&P 500 is a free-float capitalization-weighted index published since 1957 of the prices of 500 large-cap common stocks actively traded in the United States. The stocks included in the S&P 500 are those of large publicly held companies that trade on either of the two largest American stock market companies; the NYSE Euronext and the NASDAQ OMX. The NASDAQ-100 is a stock market index of 100 of the largest domestic and international non-financial companies listed on the NASDAQ. It is a modified market value-weighted index. The companies' weights in the index are based on their market capitalizations, with certain rules capping the influence of the largest components The Russell 2000 Index is a small-cap stock market index of the bottom 2,000 stocks in the Russell 3000 Index. DJIA is the average is price-weighted, and to compensate for the effects of stock splits and other adjustments, it is currently a scaled average
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Key Terms
Dow Jones Industrial Average (DJIA): An index of 30 blue chip U.S. stocks used to measure the performance of the U.S. financial markets. Introduced on May 26, 1896 by Charles H. Dow, it is the oldest stock price measure in continuous use and has become the most widely recognized market indicator in the world. NYSE Composite Index: This index closely reflects the broader market, as it represents 77% of the total market capitalization of all publicly traded companies in the United States. Furthermore, it encompasses 61% of the total market capitalization of all publicly traded companies around the world. Standard & Poor s 500 (S&P 500): An index of 500 stocks that represents the price trend movements of the major common stock of U.S. public companies. Stock Index: A basket of stocks used to track the market. Typically, this is used for long-term evaluation. The performance of a group of stocks is averaged, and over time, that average serves as an indicator of the market s general movement.
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REPO
A Repurchase agreement (also known as a repo or Sale and Repurchase Agreement) allows a borrower to use a financial security as collateral for a cash loan at a fixed rate of interest. In a repo, the borrower agrees to sell immediately a security to a lender and also agrees to buy the same security from the lender at a fixed price at some later date. A repo is equivalent to a cash transaction combined with a forward contract. The cash transaction results in transfer of money to the borrower in exchange for legal transfer of the security to the lender, while the forward contract ensures repayment of the loan to the lender and return of the collateral of the borrower. The difference between the forward price and the spot price is the interest on the loan while the settlement date of the forward contract is the maturity date of the loan. Repo Participant Near leg Far leg Borrower Seller Cash receiver Sells securities Buys securities Reverse repo Lender Buyer Cash provider Buys securities Sells securities Back
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ELECTRONIC TRADING
Electronic trading,
sometimes called etrading, is a method of trading securities (such as stocks, and bonds), foreign currency, and exchange traded derivatives electronically. It uses information technology to bring together buyers and sellers through electronic media to create a virtual market place. NASDAQ, NYSE Arca and Globex are examples of electronic market places. Exchanges that facilitate electronic trading in the United States are regulated by either the SEC or the Commodity Futures Trading Commission, and are generally called electronic communications networks or ECNs
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Fund managers
Order entry Order capture
Traders
Order placement
Sales Traders
Manual entry
Exchanges
OMS
FIX
connection
Block Crossing
EMS
Brokers
Algo trading
Using computer programs to trade automatically;
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Order types
A market order instructs your broker to buy or sell the stock immediately at the prevailing price, whatever that may be Limit orders instruct your broker to buy or sell a stock at a particular price. The purchase or sale will not happen unless you get your price You enter a stop loss order at a point below the current market price. If the stock falls to this price point, the stop loss order becomes a market order and your broker sells the stock. If the stock stays level or rises, the stop loss order does nothing A Good till canceled order instructs your broker to keep the order active until you cancel it The all or none order states you want the entire order filled or none of the order filled An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will be executed at a specified price (or better) after a given stop price has been reached. Once the stop price is reached, the stop-limit order becomes a limit order to buy (or sell) at the limit price or better. A conditional order that becomes a market order when a security reaches a specified price. When using a buy market-if-touched order, a broker will wait until the security falls to a certain level before purchasing the asset. A sell market-if-touched order will activate when the price of a security rises to the specified level
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Best execution
In deciding how to execute orders, your broker has a duty to seek the best execution that is reasonably available for its customers' orders. That means your broker must evaluate the orders it receives from all customers in the aggregate and periodically assess which competing markets, market makers, or electronic communications networks (ECNs) offer the most favorable terms of execution. Some of the factors a broker needs to consider when executing its customers' orders for best execution include: the opportunity to get a better price than what is currently quoted,
the speed of execution, the likelihood trade will be executed
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ATS Alternative Trading System Catch all term for Trading venues other than Stock exchanges 3 types Real time matching systems, Block crossing systems Broker dark pools
Benefits faster and low cost executions Real time matching systems Displayed markets , bid-ask quotes are displayed Block crossing systems Non displayed markets , execution prices are determined based on exchange traded prices or negotiations Broker dark pools Non displayed markets, execution prices Back are determined based on exchange traded prices
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Dark pool
Dark pools of liquidity (also dark pools or dark liquidity) are crossing networks that provide liquidity that is not displayed on order books. Matches buy and sell orders without displaying the orders This is useful for traders who wish to move large numbers of shares without revealing themselves to the open market Dark pools are best executing large orders for illiquid stocks; focus is on price and not time A crossing network is an ATS (Alternative Trading Systems) that matches buy and sell orders electronically for execution without first routing the order to an exchange or other displayed market, like an ECN (Electronic Communication Network), which displays a public quote. Instead the order is either anonymously placed into a black box or flagged to other participants of the crossing network. The advantage of the crossing network is the ability to execute a large block order without impacting the public quote. Back
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Custodian
When an institutional investor invests in securities it will commonly employ the services of a custodian to administer these securities by:
providing safe keeping of the investor's assets in the local market; making appropriate arrangements for delivery and receipt of cash and securities to support settlement of the investors' trading activities in that market; providing market information to the investor on developments and reforms within that market; collecting dividend income, interest paid on debt securities and other income payments in the local market; more broadly, managing the client's cash flows; monitoring and managing entitlements through corporate actions and voting rights held by the investor in the local market; managing tax reclaims and other tax services in the local market; ensuring that securities are registered and that transfer of legal title on securities transactions proceeds effectively; ensuring that reporting obligations to the regulatory authorities, and to other relevant bodies, is discharged effectively.
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SWIFT
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Trade execution
Confirmation/affirmation
Settlement instructions
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Strategies
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Program Trading
Program trading is a generic term used to describe a type of trading in securities, usually consisting of baskets of 15 stocks or more and $1M min in value Involves trading in securities, usually consisting of stocks traded on the New York Stock Exchange, and their corresponding options traded on the Chicago Board Options Exchange and/or the American Stock Exchange; and the Standard & Poor's 500 Index futures contract traded on the Chicago Mercantile Exchange. The trading of these items is based purely on their price in relation to each other on a predetermined basis; and not on any fundamental analysis reason such as an individual company's earnings, dividends, or growth prospects; or, on any overall economic reasons such as interest rate movements, currency fluctuations, or governmental or political actions In stock index arbitrage a trader buys (or sells) a stock index futures contract such as the S&P 500 futures and sells (or buys) a portfolio of up to 500 stocks (can be a much smaller representative subset) at the NYSE matched against the futures trade. The program trade at the NYSE would be pre-programmed into a computer to enter the order automatically into the NYSE s electronic order routing system at a time when the futures price and the stock index were far enough apart to make a profit.
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Algorithmic Trading
In electronic financial markets, algorithmic trading or automated trading, also known as algo trading, black-box trading or robo trading, is the use of computer programs for entering trading orders with the computer algorithm deciding on aspects of the order such as the timing, price, or quantity of the order, or in many cases initiating the order without human intervention. In this "high frequency trading" (HFT) computers make the decision to initiate orders based on information that is received electronically, before human traders are even aware of the information It is widely used by pension funds, mutual funds, and other buy side (investor driven) institutional traders, To divide large trades into several smaller trades in order to manage market impact, and risk. Sell side traders, such as market makers and some hedge funds, provide liquidity to the market, generating and executing orders automatically. Algorithms are a more efficient way to trade in an environment where cost, speed, consistency and the prevention of information leakage are crucial in attaining alpha These algorithms or techniques are commonly given names such as "Stealth", "Iceberg", "Dagger", "Guerrilla", "Sniper" and "Sniffer . (used for extremely illiquid stocks)
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Advantages ( To institutional investors ) achieve consistent good executions because execution expertise has been distilled into
rules High degree of anonymity because the data do not pass through human hands Absence of any ambiguity in execution instructions Cheaper commission than on trades done manually
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Description
Average execution price should be close to ( or better than) the VWAP price Average execution price should be close to ( or better than) the TWAP price Minimsie cost as calculated from IS , taking into a/c market impact and timing risk Minimise disparity between avg execution price and the price when the order was placed Execute trade without exceeding a given % of market volume Minimise disparity between avg execution price and closing price, taking into a/c market impact and timing risk Break off one piece of a larger order and disclosing only that piece to the market, automatically revealing the next piece after that piece is absorbed Do not disclose bid to the market, executing order only when requisite bid or offer emerge Peg order price to best quoted price Created in response to restrictions on short selling Place orders to buy when prices rise above specified stop loss and sell when prices fall below stop loss
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Market Making
Given a list of securities, stocks, options, etc. and a source of order flow, adhere to the order handling rules and trade at the spread Automate the expertise of a Series 55 licensed trader under all market conditions Most NASDAQ and ISE market makers are fully automated The NYSE is offering ability to interface algo capabilities to floor specialists
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Implementation shortfall
In financial markets, Implementation Shortfall is the difference between the decision price and the final execution price (including commissions, taxes, etc.) for a trade. This is also known as the "slippage". Agency trading is largely concerned with minimizing implementation shortfall and finding liquidity The decision price is the price of the stock that prompted the decision to buy or sell. The most common decision prices is the close price or the arrival price From the fund manager's point of view, his decision to trade is often based on the closing price of the day's trading (along with the entire history of the stock and other signals/indicators). When he decides to buy a particular stock the next day, it is because he believes that the price will go up from that closing price. Thus his decision price is the close price. However the broker, unless she is explicitly told what levels to buy at or what prompted the desire to buy, does not know when or why the decision was made. Her best guess is that the current price at the time the order is received is what prompted the decision and thus her decision price is the arrival price. In financial markets, market impact is the effect that a market participant has when it buys or sells an asset. It is the extent to which the buying or selling moves the price against the buyer or seller, i.e. upward when buying and downward when selling. market liquidity is an asset's ability to be sold without causing a significant movement in the price and with minimum loss of value
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General
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Auction Market: Floor brokers and specialists interacting with quotes and orders on the floor of the NYSE
Specialist: A member of the NYSE who is responsible for maintaining a fair and orderly market in the stocks they are allocated. At all times, specialists must put their customers interests above their own.
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Exchange highlights
NASDAQ (National Association of Securities Dealers Automated Quotation). Offers a hybrid model where market-makers compete with the order driven system The NYSE Hybrid Market is an order-driven market model that attempts to integrate the best aspects of the auction market with automated trading The American Stock Exchange (AMEX). Is an order driven market where investors can route orders to the exchange electronically, or manually via a floor broker. Amex s NETS equity trading system can trade any equity-based product in the US, regardless of the exchange on which a company or product is listed Euronext, the integrated exchange for trading equities on the French, Belgian, Dutch and Portugese markets, has confirmed its merger with NYSE to form NYSE-Euronext
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Offer specialized products and services that satisfy the needs of corporate and government clients
Private equity (e.g., Merchant Banking, Real Estate, Venture Capital, Other) Fixed income principal transactions Privatization Monetization Asset-backed securities
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Investment Banking
Provides strategic, financial and valuation advisory services Raises capital through the issuance of securities Advises companies in merger & acquisition and restructuring transactions Offers specialized products and services to meet the needs of corporate and government clients
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Reference Data
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