Exchange Operations
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The document provides an overview of exchange operations including trade flow, member registration, order matching mechanisms, and other exchange functions. Key points: - Trade flow involves clients, trading members, clearing members, and the exchange interacting to place, modify, and execute orders leading to settlement. - Exchange functions include member registration, a marketplace for order matching, trade capture, market data dissemination, regulation and oversight. - Order matching uses continuous or auction mechanisms depending on the instrument. Continuous matching fills orders immediately while auction uses an order entry and matching phase to determine a single price.
![EXECUTION MODELS/TRADING MECHANISM
Automatic Order Book [Both order-driven/quote-driven]
Continuous Execution
Auction Execution
Odd Lot Execution
Standard Strategy (Exchange Defined Basket)
Execution
Non – Standard Strategy (TM Defined Basket)
Execution
Trade Reports Execution
Bulletin Board (Pink Boards) Execution
Quote Requests & their Execution
Non- Tradable Instrument Execution](https://image.slidesharecdn.com/exchangeoperations-100726095505-phpapp01/85/Exchange-Operations-10-320.jpg)
Exchange Operations
- 1. EXCHANGE OPERATIONS Anurag Singh Jan 2008
- 2. AGENDA Overview of Trade Flow Exchange/Trading House Operations Member Registration Market Place Deal/Trade Capture Information/Market Dissemination Market Control/Regulation & Supervision Exchange Trading Terminal Other Functions of Exchange
- 3. OVERVIEW - Trade Flow & Entities Involved
- 4. 1 - Client request TM to place TRADE FLOW order 2 – TM places order at Exchange 1’ – Client can directly place order using DMA 3 – (a) TM can modify existing order (b) Exchange provides Order status/Executions/Market Data 4 – TM updates client on order rejection/executions 3’ – TM updates CM about Executions 4 – Exchange sends deal/trades info to Clearing House 4’ – Client informs CM about trades 5 – CM sends clearing instructions to CH 6 – CM-CH interaction for risk management/position management/settlement instruction 7 – CM updates Client about positions/settlement status/margins 8,8’ – Settlement Instructions sent to & tracked from Bank/Settlement House 9 – CM sends SI to SP 10 – SP sends SI to SH 11 – Physical settlement updates to SP 12 – Settlement Status updated back to CM
- 5. ENTITIES
- 6. EXCHANGE OPERATIONS - Trading point of view
- 7. EXCHANGE FUNCTIONS Member Registration Market Place Deal/Trade Capture Information/Market Dissemination Market Control/Regulation & Supervision Exchange Trading Terminal
- 8. MEMBER REGISTRATION - FUNCTIONS Deals with Registration of Member Membership Capacity/Role Set up Member Suspension/Revocation Market in which Member will act TM-CM relationship set up
- 9. MARKET PLACE - FUNCTIONS Order/Quote Handling • Orders & Quotes are received & • Validated based on Exchange rules & regulations • Processing of orders and quotes • Storable orders are placed in order books Order Matching • Ranking of orders in the order book • Matching of orders Order/Trade Information • Real Time order/trade information dissemination • Trade info provided to other departments of Exchange
- 10. EXECUTION MODELS/TRADING MECHANISM Automatic Order Book [Both order-driven/quote-driven] Continuous Execution Auction Execution Odd Lot Execution Standard Strategy (Exchange Defined Basket) Execution Non – Standard Strategy (TM Defined Basket) Execution Trade Reports Execution Bulletin Board (Pink Boards) Execution Quote Requests & their Execution Non- Tradable Instrument Execution
- 11. CONTINUOUS EXECUTION Orders successfully received are immediately eligible for matching Fill & Store orders with remaining quantity left after earlier matching attempt, are stored in order book Order Ranking used for matching is mostly price-time Execution price recognition logic if incoming order price matches with the highest rank counter order then the order price is the Execution Price if the incoming order price is better than the existing counter order in the order book then Execution Price can be determined as: Alternative 1: use the price of the existing order in the order book as the deal price Alternative 2: use the average price of the existing order in the order book and the incoming order as a deal price Execution price dissemination logic if the incoming order results in single trade then the price disseminated will be the trade/deal price If the incoming order results in multiple trade then the price dissemination will happens as: If incoming order is a buy order, the deal prices are sent out in increasing order If incoming order is a sell order, the deal prices are sent out in decreasing order
- 12. CONTINUOUS EXECUTION - EXAMPLE Bids Asks Price Quantity Time Price Quantity Time 100 6 10:04 100 5 10:02 99 15 10:01 100 7 10.03 101 10 10:01 Execution Price - 100
- 13. CONTINUOUS EXECUTION - EXAMPLE Bids Asks Price Quantity Time Price Quantity Time 101 6 10:04 100 5 10:02 99 15 10:01 100.50 7 10.03 101 10 10:01 The result is two trades – one of order quantity 5 (Trade 1) and another 1 (Trade 2) Alternative 1: Execution Price of Trade 1 – 100 & Trade 2 – 100.50. Disseminated in the same order Alternative 2: Execution Price of Trade 1 – 100.50 ( Avg of 101 and 100) & Trade 2 – 100.75 (Avg of 101 & 100.50). Disseminated in the same order
- 14. AUCTION EXECUTION Auction Execution consists of two phase Order Entry Phase In this the orders are placed and the same are stored in the order book after validation & processing No matching is performed during this phase Indicative Equilibrium/Auction price is calculated during this phase Auction Phase This is the phase in which actual auction happens The Equilibrium price becomes the auction price When disseminating price information in the order entry phase, orders that have a better price than the EP are masked with price equal to Equilibrium/Auction Price
- 15. EQUILIBRIUM/AUCTION PRICE (EP) LOGIC EP is the price at which the highest volume gets traded All orders considered in identification of EP If multiple EPs with same traded volume, then the one with lowest Normal Order Imbalance is selected If multiple EPS with same order imbalances, then the price closest to Instrument Reference Price is selected In case none of the above price exists, theoretical price is calculated and EP is compared with that Note: Normal Order Imbalance – this is the volume/quantity of the orders which didn’t get traded due to missing volume on the opposite side of the EP, even though their prices are better than EP Instrument Reference Price – It is first of these values - last traded price, last settlement price, closing price. If none exist then it is the theoretical price calculated by Exchange
- 16. AUCTION EXECUTION EXAMPLE Bids Asks Price Quantity Price Quantity 51 45 50 75 50 45 The EP in this scenario is 50 (match quantity is max = 75) Bid Ask Price Quantity Price Quantity 50 90 50 75
- 17. AUCTION EXECUTION EXAMPLE Bids Asks Price Quantity Price Quantity 52 45 49 75 51 45 50 25 If EP is 49, matched quantity is 75 & order imbalance is 40 If EP is 50 matched quantity is 75 & order imbalance is 0 Thus EP is 50 Bid Ask Price Quantity Price Quantity 50 115 50 75
- 18. STANDARD STRATEGY EXECUTION Standard Strategy (SS) is Compound instrument, defined by Exchange for trading strategy Also have their own order book Generally have two to four legs All legs traded to same decimal places and same currency SS Execution SS are executed only if all the legs are matched SS matching can happen either in the SS order book or leg books In order to perform SS matching at legs book, most exchange use Bait order SS Execution – Price dissemination If matched in leg books, then price disseminated is same as matched If SS matches with SS, then the leg price disseminated is generally as below: Bid Price – ‘Current Bid Price + 1 tick’ or closing price or settlement price Sell Price – ‘Current Ask Price + 1 tick’ or closing price or settlement price
- 19. STANDARD STRATEGY – BAIT ORDER EXAMPLE Series: GFARMNTH – Google Far Month Series GNERMNTH – Google Near Month Series GFRNRSPRD – Google Near Month (S) – Far Month (B) series Series Bids Asks Price Quantity Price Quantity GFARMNTH 5.00 7 Bait Order GNERMNTH 7.00 20 GFRNRSPRD 2.00 7
- 20. NON-STANDARD STRATEGY EXECUTION Non-Standard Strategy is Defined by trading members No order book exists for the same The matching happens only at leg books Partial execution can happen Execution happens as for each leg as normal instrument order
- 21. TRADE REPORTS Trade Reports is for Deals closed outside the Exchange Each trading participant reports the Trade independently Exchange validates each leg individually based on rules and regulations Exchange performs matching of these reported trade legs Dissemination happens in a independent and transparent method
- 22. BULLETIN BOARD Bulletin Board is used by TMs for announcing the interest to buy or sell an instrument The execution model of bulletin board orders doesn’t follow price-time ranking Amendment/Deletion is allowed on Bulletin orders It allows to trade on single instrument and strategy Instrument may or may not be traded on Automatic Market
- 23. QUOTE REQUESTS Generally used when markets are illiquid TM can request quote for an instrument Quote request received by Exchange is forwarded to Market Makers and other Trading Members (depends on rules & regulation) Actual quote comes in the generic Automatic Continuous Market Quote requests are not related to actual order matching
- 24. NOTES: ORDER ATTRIBUTES Instrument Order Type Limit Order (Order validity – F&S, F&K, FoK) Market Order (Order validity – F&S, F&K, FoK) Market to Limit Order Best Limit Order Iceberg Order Validity Rest of Day Good till Date (Number of Days) Good till Cancelled (Unlimited) Side – Bid/Ask Price Quantity Trade Quantity Hidden Quantity Lot Size/Block Size Open/Close Indicator Client Information Give Up Information
- 25. NOTES: SESSIONS Generally there are two main sessions : Trading Session – defined for each Market Instrument Session – defines activation/suspension of instruments/series Every session is defined by its state: Pre-Open Open Closed
- 26. DEAL/TRADE CAPTURE After the orders are matched trade is formed The trade information needs to be stored for following purpose: To disseminate the information to the trading members To disseminate the information to the clearing & settlement houses For regulatory purpose Cancel/Amendment of trades
- 27. INFORMATION/MARKET DISSEMINATION Exchange Disseminates Market, Trade & Order Information to the Trading Participants The Information is provided at two levels: Market Level – Price Statistics, Market Depth Market per Order Level The other information which are disseminated are: Product Information Historical Trade Information Corporate Actions Session Information
- 28. MARKET CONTROL/REGULATION & SUPERVISION Trading Surveillance Checks Price Limits/Circuit Filters Best Price Movements Trade Quantity Limit etc. Alarms are set for these checks Market Making Surveillance Checks Market Maker performance metrics MM Performance reports Alarms are set for these checks
- 29. EXCHANGE TRADING TERMINAL Acts as the direct interface for Trading Members to access Exchange. Main Functions supported on the Terminal: Market Match (use default & create own Market watches) Place Orders Market Making – placing quotes View/Modify orders View Historical Data View of news and alerts published by exchange View own Trades Rectify own Trades View Intra-day Open trade positions at account level View Market Watch/Depth and Symbol details Define/View Trading Limits Download Reports
- 30. OTHER IMPORTANT FUNCTIONS OF EXCHANGE Defining Market Structure Instrument Set up Series Generation Providing API interface for Members to connect using own Application Fees & Billing Regulatory Reporting