Showing papers on "Electronic trading published in 2002"

Trading and Exchanges: Market Microstructure for Practitioners

Abstract: PART I: THE STRUCTURE OF TRADING PART II: THE BENEFITS OF TRADE PART III: SPECULATORS PART IV: LIQUIDITY SUPPLIERS PART V: ORIGINS OF LIQUIDITY AND VOLATILITY PART VI: EVALUATION AND PREDICTION PART VII: MARKET STRUCTURES

Formalizing a language for institutions and norms

Abstract: One source of trust for physical trading systems is their physical assets and simply their presence. A similar baseline does not exist for electronic trading systems, but one way in which it may be possible to create that initial trust is through the abstract notion of an institution, defined in terms of norms [19] and the scenes within which (software) agents may play roles in different trading activities, governed by those norms. We present here a case for institutions in electronic trading, a specification language for institutions (covering norms, performative structure, scenes, roles, etc.) and its semantics and how this may be mapped into formal languages such as process algebra and various forms of logic, so that there is a framework within which norms can be stated and proven.

Electronic trading system

Abstract: An anonymous trading system comprises one or more matching engines, one or more market distributors and one or more trader terminals for input of orders from institutions trading on the system. The trader terminals are connected to the system through bank nodes. A broker terminal is connected through a bank node and enables voice brokers to trade on the system on behalf of client traders. The voice brokers terminal can be configured for any client trader and will display the market view for that trader. Trades in which the broker terminal participates are not concluded until a manual credit check has been performed.

The Making of a Dealer Market: From Entry to Equilibrium in the Trading of Nasdaq Stocks

Abstract: This paper provides an analysis of the nature and evolution of a dealer market for Nasdaq stocks. Despite size differences in sample stocks, there is a surprising consistency to their trading. One dealer tends to dominate trading in a stock. Markets are concentrated and spreads are increasing in the volume and market share of the dominant dealer. Entry and exit are ubiquitous. Exiting dealers are those with very low profits and trading volume. Entering market makers fail to capture a meaningful share of trading or profits. Thus, free entry does little to improve the competitive nature of the market as entering dealers have little impact. We find, however, that for small stocks, the Nasdaq dealer market is being more competitive than the specialist market.

Method and apparatus for facilitating business processes

Abstract: One embodiment of the invention provides a framework for facilitating business processes between multiple trading participants (300-314). Each trading participant (300-314) connects to a centralized process management platform (318) and becomes a member of an electronic trading community. Members of the electronic trading community may utilize the process management platform (318) as a conduit for sending and receiving business process data. The process management platform (318) monitors and manages the flow of business process messages and data to facilitate successful completion of business processes. The process management platform (318) acts as an intermediary for the parties involved in a particular business process. Trading participants (300-314) may connect to the process management platform (318) through process gateways. Each process gateway provides an interface for connecting to the process management platform (318) and may be located at a facility associated with the trading participant (300-314) or the process management platform (318).

Using Experiments to Inform the Privatization/Deregulation Movement in Electricity

Abstract: At the University of Arizona, electronic trading (now commonly known as e-commerce) in the experimental laboratory began in 1976 when Arlington Williams conducted the initial experiments testing the first electronic "double-auction" trading system, which he had programmed on the Plato operating system. The term "double auction" refers to the oral bid-ask sequential trading system used since the 19th century in stock and commodity trading on the organized exchanges. This system of trading has been used in economics experiments since the 1950s, and is extremely robust in yielding convergence to competitive equilibrium outcomes (Smith 1962, 1982a). Since information on what buyers are willing to pay, and sellers are willing to accept, is dispersed and strictly private in these experiments, the convergence results have been interpreted (Smith 1982b) as supporting F.A. Hayek's thesis "that the most significant fact about this (price) system is the economy of knowledge with which it operates, or how little the individual participants need to know in order to be able to take the right action" (Hayek 1945: 526-27). As with all first efforts at automation, the software developed by Williams allowed double-auction trading experiments that previously had kept manual records of oral bids, asks and trades, to be computerized. (1) That is, it facilitated real-time public display of participant messages, recording of data, and greater experimental control of a process defined by preexisting technology. It did not modify that technology in fundamental ways. This event unleashed a discovery process commonplace in the history of institutional change: the joining of a new technology to an incumbent institution causes entirely new, heretofore unimaginable institutions to be created spontaneously, as individuals are motivated to initiate procedural changes in the light of the new technology. Electronic exchange made it possible to vastly reduce transactions cost--the time and search costs required to match buyers and sellers, to negotiate trades, including agreements to supply transportation and other support services. More subtly it enabled this matching to occur on vastly more complicated message spaces, and allowed optimization and other processing algorithms to be applied to messages, facilitating efficient trades among agents that had been too costly to be consummated with older technologies. Moreover, resource allocation problems thought to require hierarchical command and control forms of coordination, as in regulated pipeline and electric power networks, became easily susceptible to self-regulation by entirely new decentralized pricing and property right regimes. Coordination economies in complex networks could be achieved at low transactions cost by independent agents, with dispersed information, integrated by a computerized market mechanism. This realization then laid the basis for a new class of experiments in which the laboratory is used to test-bed proposed new market mechanisms to enable a better understanding of how such mechanisms might function in the field, and to create a demonstration and training tool for potential participants and practitioners who become part of the "proving" process. Of course, once adopted, this modification and proving process continues in light of field experience. We provide a short history of the application of the conception of smart computer assisted markets to the design of electricity markets here and abroad. The Privatization/Deregulation Movement in Electricity We use the term "privatization" to describe generically the process of reform of foreign government command forms of organization of the electric industry. In all cases major components of the industry have not had their ownership transferred from public to private entities. Reform has focused on the use of decentralized spot and futures markets to provide price signals to improve the short and longer term management of the industry. …

The exchange-traded funds manual

Abstract: Preface. Acknowledgments. CHAPTER 1 An Introduction to Exchange-Traded Funds. Exchange-Traded Funds Were Introduced as "Something to Trade". Shareholder Protection. Tax Efficiency. Cost Transparency Is Desirable, But Trading Transparency Is Costly. Intraday ETF Trading. Comparing ETF and Mutual Fund Economics. Conclusion. CHAPTER 2 The History and Structure of Exchange-Traded Funds and Some of Their Competitors. Some Major Financial Market Developments (1975 to 2000). Declining Trading Costs Increase Financial Engineering Opportunities, and Financial Engineering Reduces Trading Costs in the New Millennium. A Brief History of ETFs. Other Tradable Basket Products. CHAPTER 3 The Regulatory Framework and Mechanics of the Open-End ETF. U.S. Fund Regulation Has Played a Major Role in the Structure of ETFs Introduced around the World. The Investment Company Act of 1940. Exemptions from the Investment Company Act of 1940 Have Been Granted to Permit Issuance of Open-End ETFs. ETF Developments Outside North America. Proposed Rule 33-8901 and Limitations on ETF Trading Transparency. The Mechanics of ETF Creation and Redemption In-Kind. CHAPTER 4 Taxation of ETFs and Their Shareholders. Taxation of Investment Companies: Subchapter M and Regulated Investment Company (RIC) Requirements. The Mechanics of RIC Shareholder Capital Gains Taxation. The Wash Sale Rule. Other Pass-Through Collective Investment Vehicles. The Relative Tax-Efficiency of Mutual Funds, Exchange-Traded Funds, and Portfolio Baskets. Deferral of Long-Term Capital Gains. Outlook for Changes in Investment Company Taxation. CHAPTER 5 The Economics of Indexing, Trading Transparency, and Limited-Function Active Management of ETFs. Indexing Works Best When Approached with Common Sense. The Continuum: From Passive to Active. Benefits from a Decline in ETF Trading Transparency. How Trading Plans Become Transparent. Effect of Transparency Costs on Fund Performance. Silent (Nontransparent) Indexes. A Battle of Contrasting Index Fund Management Strategies. CHAPTER 6 Fund Ratings and Rankings The Evaluation and Selection of ETFs and Mutual Funds. An Introduction to Fund Ratings. Wanted: A Comprehensive But Eclectic Approach to Fund Evaluation and Analysis. Measuring and Comparing Fund Performance. A Perspective on the Limitations of Fund Analysis Today. Elementary Fund Economics. The Largest Cost for Most Funds Is Not Reported to the Fund s Investors. What Is Tracking Error? Net Tracking Error as a Framework for Fund Performance Evaluation. Positive (Value-Added) Elements. eXtensible Business Reporting Language (XBRL): The New Data Standard. There Is a Wide Range in the Quality of Fund Touts, Tools, and Techniques. Fund Governance. CHAPTER 7 How Will Full-Function Actively Managed ETFs Work? The SEC Concept Release and Limited-Function Actively Managed ETFs. CHAPTER 8 How to Minimize Your Cost of Trading ETFs. ETF Trading Is Different from Stock Trading. ETF Intraday Net Asset Value (NAV) Proxies. The Brave New World of High-Frequency Electronic Trading. ETF Trading Volume Is Huge, Growing, and Highly Concentrated. How to Trade ETFs Efficiently. Market-on-Close (MOC) Transactions in ETFs. Introducing NAV Based Trading in Exchange-Traded Funds. Conclusion. CHAPTER 9 Economics and Market Effects of ETF Short Selling. Understanding the Risks of Selling ETFs Short. The Implications of ETF Short Selling. ETF Short Selling for Traditional Investors. CHAPTER 10 Leveraged Long and Inverse Exchange-Traded Funds. Trading Sardines. How Leveraged Long and Leveraged Inverse ETFs Construct Their Portfolios. Is It Useful to Describe Leveraged Fund Returns as Path Dependent?. Leveraged Fund Return Patterns. Taxation and Distributions from Leveraged ETFs. Other Issues Affecting Leveraged ETFs. Another Way to Obtain Leverage Without Borrowing. The Bottom Line on Leveraged ETFs. CHAPTER 11 ETF Applications for Individual Investors and the Advisors Who Serve Them. Short-Term ETF Trading Sometimes Makes Sense. ETFs as Portfolios and as Components. Integrating Diverse Family Accounts. Tax Management. Other Tax Issues. Thinking Outside the Box. Measuring the Comparative Economics of Trading and Holding Different Components of an Index Arbitrage Complex. CHAPTER 12 ETFs for Investors Living Outside the United States. Some Features of the ETFs Described in This Book Are Not Universal. CHAPTER 13 A Few Things Everyone Should Know about Investment Returns and Retirement. CHAPTER 14 Where to Look for Help in Using ETFs. Sources of Professional Help. The Advisory Relationship. Sources of ETF Information. Bibliography. Glossary. About the Author. Index.

Method of processing, displaying and trading financial instruments and an electronic trading system therefor

Abstract: An electronic trading system is described, where a client site may access data through a communications network, such as the internet, from data bases, both internal and external. The trading system allows the user to access the data and display various graphical elements on a PC screen. Such graphical elements may include a graphical representation of a financial instrument, and a graphical representation of a financial information analysis tool for the given financial instrument. The system software also provides the user with the ability to apply at least one condition on the first graphical element, relative to the second graphical element, such that an action is automatically taken when the condition is satisfied.

Electronic trading confirmation system

Abstract: A system and method of confirming trades of financial instruments such as OTC derivatives is disclosed. The system includes a data interface which accepts data relating to a trade from both the trader and counter party. The data includes different data fields of differing importance. The system includes a matching engine which compares the submitted data and assigns the trade a status depending on which of the data fields match. The system allows a user to filter trades on their status and display the details relating to that trade. The system also allows a user to display the data fields and change the data fields in order to change the status of the trades. The system thus allows a user to electronically confirm a trade and also identify unmatched trades and the information necessary to reconcile such unmatched trades.

Virtual trading floor system

Abstract: A virtual trading floor system for simulating the selling and buying in a financial market, auction forum or any market where buying and selling occurs is disclosed. The virtual trading floor system comprises a coder/decoder that receives data from a trading source such as data received from a central market place, such as the well-known NASDAQ, CBOT, CME, NYSE, EUREX markets, an exchange database or a website; a graphical interface that receives the data from the coder/decoder and displays a plurality of buying and selling trader metaphors representative of actual buying and selling traders; a control interface coupled to the coder/decoder for initiating orders, and a data interface coupled to the coder/decoder for displaying, receiving and transmitting data sent to and from the trading source.

A Framework for the Selection of Electronic Marketplaces: A Content Analysis Approach

Abstract: Although there has recently been an increased practitioner and media focus on electronic marketplaces, there still remains confusion over the advantages of participation. As a consequence organisations are finding difficulty in developing strategies, policies and procedures in relation to the e‐marketplace selection process. In some cases due to the dynamic and evolving environment of electronic trading, there can be a reluctance on the part of buyers and suppliers to participate in e‐marketplaces. Several classification models offer assessments of which type of marketplace are most suitable for different procurement purposes, but they fail to remain relevant in this dynamically changing environment. In this paper a content analysis of research and practitioner articles is carried out to evaluate the issues that prospective participants, seeking to purchase goods and services online, need to address in their selection process. A framework to support electronic marketplace related decision making is proposed, which is based within the contexts of business drivers, internal company issues and e‐marketplace facilitators.

Liquidity, Transaction Costs, and Reintermediation in Electronic Markets

Abstract: Relationships between trading cost, technology, and the nature of intermediation in the trading services industry are discussed. Electronic markets are linked to reductions in trading costs. Lower explicit costs are related to system development and operating costs. Electronic order book information is identified as a means of realizing implicit cost savings. The concept of liquidity management in electronic environments is introduced, and its potential is empirically illustrated. The empirical results suggest new roles for brokerage and exchange operations, and competition between the two. Competitive advantage with respect to the provision of liquidity management services is compared across types of intermediaries.

Method and apparatus for trading assets, capital, and information

Abstract: A secure, open, independent, collaborative on-line platform is provided for trading assets, accessing capital, and managing information. The platform can support, for example, asset trading, provision of capital and risk management services, delivery of decision support tools, and applications for service subscribers in the oil and gas industry. The system can provide a secure infrastructure to facilitate sharing of information among oil and gas companies and financial institutions, resulting in a more efficient market for assets and asset-related financial products.

Systems and methods for providing an interactive graphical representation of a market for an electronic trading system

Abstract: Systems and methods for providing an interactive graphical representation of a market for an electronic trading system are provided. A graph may be displayed on a display of a workstation in an electronic trading system. In one example, the graph may include a curve corresponding to a range of values of a financial instrument. In another example, the graph may include symbols that represent bids and offers for one or more financial instruments. A user may be allowed to select a portion of the graph. In response to the user's selection, a trading dialog box may be provided, thereby allowing the user to place a trade directly from the graph.

GoldenBullet: Automated Classification of Product Data in E-commerce

Abstract: Internet and Web technology starts to penetrate many aspects of our daily life. Its importance as a medium for business transactions will grow exponentially during the next years. In terms of the involved market volume the B2B area will hereby be the most interesting area. Also it will be the place, where the new technology will lead to drastic changes in established customer relationships and business models. B2B market places provide new kinds of services to their clients. Simple 1-1 connections are getting replaced by n-m relationships between customers and vendors. However, this new flexibility in electronic trading also generates serious challenges for the parties that want to realize it. The main problem here is caused by the heterogeneity of information descriptions used by vendors and customers. Intelligent solutions that help to mechanize the process of structuring, classifying, aligning, and personalizing are a key requisite for successfully overcoming the current bottlenecks of B2B electronic commerce. In this paper, we describe a system called GoldenBullet that applies techniques from information retrieval and machine learning to the problem of product data classification. The system helps to mechanize an important and labor-intensive task of content management for B2B Ecommerce.

Method and system for insuring users of electronic trading systems or exchanges and traditional established commodity exchanges against weather-related risks and hazards

Abstract: Method and system for bundling a weather-related risk management product to the trading of commodities, such as agriculture, food, electricity, natural gas, oil and other products being traded through independent electronic commerce exchanges including business-to-consumer, business-to-business and traditional established commodity exchanges. A weather-related insurance product is created for a commodity which will specify the weather-related risk premium and compensation to be paid if certain defined events occur. The exchange offers the insurance product to its members, and for those that purchase the insurance product, a premium is added to the cost for each transaction in which the member is a party. By bundling a weather-related insurance product together with each trade or transaction, the weather-related risk premium is incorporated as an added transaction cost at the time the trade is confirmed. The amount of premium paid by each trading party may be accumulated and recorded as “weather credits”. Pursuant to the terms and conditions of the insurance product which vary depending upon the commodity and the risks being covered, different amounts of weather credits are required in order to obtain compensation for a weather-related incident. As such, insurance for weather-related risk is made easily and readily available to all buyers and sellers regardless of the platform used for trading.

Methods for electronic multiparty accounts receivable and accounts payable systems

Abstract: The invention concerns methods for use in a multiparty accounts receivable and accounts payable system that allow business trading partners to use a single, shared system for both accounts receivable and accounts payable management. A system implementing the methods of the invention forms an electronic “bridge” between a plurality of business trading partners for purposes of invoicing, dispute resolution, financing, and settlement of single and multiple currency debts. As the invoicing and settlement activities of the participants in the methods of the invention are funneled through a common system, the methods allows a participant to aggregate all debts owed to other participants, aggregate all debts owed by the other participants, and net debts owed to other participants with debts owed by these participants. After aggregation and netting steps, the methods of the present invention allow a participant to issue a single payment to settle numerous accounts payable items, and to receive a single payment that settles numerous accounts receivable items. The methods allow participants to use the substantial amount of financial and cash flow information captured by a system implementing the methods of the invention to borrow more efficiently by permitting lenders to view this information. Furthermore, the methods provide a confirmation process to convert existing debt obligations into a new, independent payment obligation due on a date certain and free of any defenses to the underlying contract. The confirmed debt obligations provide a better source of working capital for the participants, or can be converted into electronic promissory notes. The invention further provides methods for electronic exchange of electronic promissory notes, allowing participants to raise working capital in various ways, for example, by selling them.

Floor versus Screen Trading: Evidence from the German Stock Market *

Abstract: The last decade has witnessed a dramatic increase in both the number and the market share of screen-based trading systems. Electronic trading systems do offer lower operating costs and the possibility of remote access to the market. On the other hand, arguments based on the anonymity of electronic trading systems suggest that adverse selection may be a more severe problem and that, therefore, bid-ask spreads may be higher. The present paper addresses the issue of transaction costs in floor and computerized trading systems empirically. In Germany, floor and screen trading for the same stocks exist in parallel. Both markets are liquid and operate simultaneously for several hours each day. An analysis of the bid-ask spreads reveals that the electronic trading system is relatively less attractive for less liquid stocks. The market shares of the competing systems reveal a similar pattern. The market share of the electronic trading system is negatively related to the total trading volume of the stock, is positively related to the difference between spreads on the floor and in the screen trading system and is at least partially negatively related to return volatility. We further document that spreads in the electronic trading system respond more heavily to changes in return volatility and that the adverse selection component of the spread is larger. We discuss implications our results have for the design of electronic trading systems.

Financial derivative and derivative exchange with guaranteed settlement

Abstract: A financial derivative exchange with guaranteed settlement comprising: an electronic trading forum wherein derivatives are actively traded between market makers and investors; means for investors to open and close positions in the electronic trading forum; means for market makers to open and close positions in the electronic trading forum; means for guaranteed settlement of positions thereby reducing the risk of default of the investor or market maker; and, means for inputting market information into the electronic trading forum so that the values of underlying securities are accurate. Also provided is a method for trading financial derivatives over an exchange having guaranteed settlement comprising: providing an electronic trading forum wherein derivatives are actively traded between market makers and investors; providing means for investors to open and close positions in the electronic trading forum; providing means for market makers to open and close positions in the electronic trading forum; providing means for guaranteed settlement of positions thereby reducing the risk of default of the investor or market maker; and, providing means for inputting market information into the electronic trading forum so that the values of the underlying securities and commodities are accurately reflected in the value of the derivatives.

Defining Benchmark Status: An Application Using Euro-Area Bonds

Abstract: The introduction of the euro on 1 January 1999 created the conditions for an integrated government bond market in the euro area. Using a unique data set from the electronic trading platform Euro-MTS, we consider what is the "benchmark" in this market. We develop and apply two definitions of benchmark status that differ from the conventional view that the benchmark is the security with lowest yield at a given maturity. Using Granger-causality and cointegration methods, we find a complex pattern of benchmark status in euro-area government bonds.

Does an Electronic Stock Exchange Need an Upstairs Market

Abstract: We examine the Paris Bourse, whose electronic limit order market closely resembles the downstairs markets envisioned by theorists, to test several theoretical predictions regarding upstairs trading. We present direct evidence in support of the Grossman (1992) prediction that upstairs brokers lower execution costs by tapping into unexpressed liquidity, as actual execution costs upstairs are on average only 20% (35%) as large as they would be if block trades were executed against displayed (displayed and hidden) liquidity in the downstairs limit order book. Consistent with prior analyses, the Paris data also support the Seppi (1990) hypothesis that upstairs brokers certify trades as uninformed. We also find that participants in stocks with less restrictive crossing rules agree to outside-the-quote executions for more difficult trades and at times when downstairs liquidity is lacking. These likely represent trades that could not have been otherwise completed, suggesting that market quality can be enhanced by allowing participants more flexibility to execute blocks at prices outside the quotes.

Advanced trading rules

Abstract: Technical trading rules Mean variance analysis Expected returns Moving average trading rules Distribution of directional strategies Exchange Rate prediction Foreign exchange markets Informative spillovers in the currency markets Stop-loss rules Technical trading rules for S&P 500 futures Commodity trading advisors BAREP futures funds.

Systems and methods for electronic trading that permit principal / broker trading

Abstract: Electronic trading systems and methods which facilitate principal/broker trading are provided. In a first aspect of the invention, a database relating to trading participants in the trading system is designed to indicate which traders utilize a principal/broker relationship and what, if any, limitations are placed on the activity of the broker, trading commands submitted by the broker, and counterparties in a transaction with the broker. In another aspect of the invention, trading commands and executed trades involving principals/brokers may be presented to other traders using special designations. The ability to enter certain trading commands by, and in response to, brokers may be limited. In a further aspect of the invention, anonymous trading features may prevent traders from knowing whether another trader is a broker or principal, may restrict traders from being able to block trading with brokers, and may permit brokers to configure anonymous trading parameters.

The Stock Price-Volume Linkage on the Toronto Stock Exchange: Before and After Automation

Abstract: This paper investigates the information content of trading volume on the Toronto Stock Exchange before and after the move towards fully electronic trading. It is argued that if price discovery improves under electronic trading, the predictive power of volume should be less significant. The empirical analysis supports more accurate price discovery under electronic trading. Results from both the structural and vector autoregression models indicate that the predictive power of volume for price variability disappears after full automation.

Confidential electronic trading and matching system incorporating execution via an auction market

Abstract: A method for providing a trading system comprising the steps of accepting selling information request from users and storing those requests, accepting buying information request from users and storing those requests, matching individual stored selling and buying requests according to a similar subset of information contained in respective selling and buying information requests, passing matched information to a trading station where the match information is announced, accepting one of the selling and buying information from the trading station if the selling or buying information accepted is better than one of the buying and selling information matched and announced, reporting back to the users one of the results of the original match when no acceptance occurs and the results of the acceptance when any one of the selling or buying information is accepted from the trading station.