Electronic Trading System Facilities

Electronic Trading System Facilities

Features of Electronic Trading Systems

The mushrooming of electronic trading systems has forced buy-side traders, proprietary traders, and brokers to adopt the usage of new electronic trading tools.

We discuss a few of the features of electronic trading in this section.

  1. Hidden orders: Hidden orders are trade orders that do not reveal trade intentions. They are only exposed to brokers or exchanges who receive them. These types of orders work better in electronic transactions than at floor-based exchanges because computers do not display orders unless instructed to do so.
  2. Flickering quotes: Flickering quotes are exposed to limit orders that electronic traders submit and cancel immediately. Automated trading systems enable dealers to submit, withdraw, and resubmit orders when they do not want them to stand in the market.
  3. Electronic arbitrage: Electronic arbitrageurs use automated trading systems when taking and offering liquidities. When they use fast trading systems, they may often cancel and resubmit their orders when market conditions change.
  4. Leapfrog: Leapfrog is a game that emerges when the bid-ask spread is big, and the dealer has to jump ahead of the trader. Dealers are willing to trade at better prices than they quote if there is a wide market spread. When a trader quotes a better price, dealers will quote a better price than that; thus, the game occurs repeatedly. This behavior affects buy-side traders since they must quote a better price to maintain order priority.
  5. Machine learning: Machine learning is a method of data analysis that automates analytical model building. It is also referred to as data mining. Improved statistical techniques are used to describe data structures. Machine learning methods are important when dealing with large data.

Uses of Electronic Trading Systems

Firms that purchase securities use electronic brokers and their systems to make advanced orders, trading tactics, and algorithms to seek liquidity.

  • Advanced orders: Advanced orders are limit orders with limit prices that change with dynamic market conditions. An electronic system with relatively low latency is used to adjust a pegged limit order quickly.
  • Trading tactics: A trading tactic is a strategy for running a function that involves the submission of multiple orders. If the order delays, the electronic system will cancel the order and resubmit it repeatedly until the order fills.
  • Algorithms: An algorithm is a set of programmed strategies that use a combination of simple, advanced, or multiple orders to achieve its objective. A VWAP algorithm obtains a volume-weighted average fill price that is close to the VWAP of all trades organized in a specified time range. Buy-side traders use VWAP algorithms when spreading the order over time and when obtaining the average market price within an interval.

Question

Exposed limit orders that electronic traders submit and cancel immediately are best known as:

  1. Leapfrogs.
  2. Flickering quotes.
  3. Hidden orders.

Solution

The correct answer is B.

Flickering quotes are exposed to limit orders that electronic traders submit and cancel immediately. Automated trading systems enable dealers to submit, withdraw, and resubmit orders when they do not want them to stand in the market.

A is incorrect. A leapfrog is a game that emerges when the bid-ask spread is big, and the dealer has to jump ahead of the trader.

C is incorrect. Hidden orders are trade orders that do not reveal trade intentions. They are only exposed to brokers or exchanges who receive them. These types of orders work better in electronic transactions than at floor-based exchanges because computers do not display orders unless instructed to do so.

Reading 46: Trading Cost and Electronic Markets

LOS 46 (g) Describe characteristics and uses of electronic trading systems.

Shop CFA® Exam Prep

Offered by AnalystPrep

Featured Shop FRM® Exam Prep Learn with Us

    Subscribe to our newsletter and keep up with the latest and greatest tips for success
    Shop Actuarial Exams Prep Shop GMAT® Exam Prep


    Daniel Glyn
    Daniel Glyn
    2021-03-24
    I have finished my FRM1 thanks to AnalystPrep. And now using AnalystPrep for my FRM2 preparation. Professor Forjan is brilliant. He gives such good explanations and analogies. And more than anything makes learning fun. A big thank you to Analystprep and Professor Forjan. 5 stars all the way!
    michael walshe
    michael walshe
    2021-03-18
    Professor James' videos are excellent for understanding the underlying theories behind financial engineering / financial analysis. The AnalystPrep videos were better than any of the others that I searched through on YouTube for providing a clear explanation of some concepts, such as Portfolio theory, CAPM, and Arbitrage Pricing theory. Watching these cleared up many of the unclarities I had in my head. Highly recommended.
    Nyka Smith
    Nyka Smith
    2021-02-18
    Every concept is very well explained by Nilay Arun. kudos to you man!
    Badr Moubile
    Badr Moubile
    2021-02-13
    Very helpfull!
    Agustin Olcese
    Agustin Olcese
    2021-01-27
    Excellent explantions, very clear!
    Jaak Jay
    Jaak Jay
    2021-01-14
    Awesome content, kudos to Prof.James Frojan
    sindhushree reddy
    sindhushree reddy
    2021-01-07
    Crisp and short ppt of Frm chapters and great explanation with examples.