Trading Systems in Stock Exchanges or Trading Arrangement. Investors give orders to the broker or dealer to execute their transactions in the securities markets with a view to managing their portfolios. When an investor places an order with a broker/dealer, there are a number of arrangements from which he can choose. These arrangements include the type of orders placed, the cost of executing the trade, and the method of paying for the transaction. It is important to understand the different types of orders placed and executed in the securities markets. Trading Systems in Stock Exchanges
Trading Systems in Stock Exchanges or Trading Arrangement
Trading system in the organized stock exchange is the floor trading under which trading took place through an open outcry system on the trading floor. In-floor trading buyers and sellers transact business face to face using a variety of signals. Nowadays this trading system is abolished by a new one called screen-based trading system introducing a fully automated computerized mode of trading.
Types of Trading System
Trading Systems in Stock Exchanges. The screen-based trading systems are of two types:
Quote driven system:
Being the market maker, a dealer in a particular security input two-way quotes. One is for buying (bid price) and the other is for selling (offer/ask price). Investors then place their orders on the basis of the bid-ask quotes.
Order driven system:
Under this system, investors can place their buy orders or sell orders which are then fed into the system.
Several orders are discussed below:
The market order being the most frequent types of order is an order to buy or sell a stock at the best current market price. It indicates that the investor is willing to buy or sell at the best price currently prevails in the stock exchanges. Hence, a market buy order is what the investor wills to pay the lowest price available, a market sell order, on the other hand, indicates that the investor is willing to sell the security at the highest bid price currently available. A market order provides immediate liquidity for an investor willing to accept the prevailing market price. Market orders are used if the investors want to trade a small quantity of stock quickly in the hope that the price of whose will not change the current market price substantially.
A limit order indicates that the investor specifies the price at which he will buy or sell securities. So, a limit buy order specifies the maximum price the investor wants to pay for some expected securities. A limit sell order, on the other hand, stipulates the minimum price at which an investor wants to sell some quantity of securities. The order shall be executed only if the broker obtains the desired price. A limit order may either be day order or open order. A limit day order exists until the end of the current trading day. A limit open order is good until cancelled.
Stop order is an order that specifies a certain price at which a market order takes effect. Sometimes called stop-loss order is executed to protect an investor’s existing profit or to limit losses. More specifically, a stop-loss-order is an order by which an investor instructs his broker to sell a certain number of securities if the price goes down to whatever level the former specifies.
Stop Limit Order:
It is an order specifying both the stop price and the limit price at which the investor wants to buy or sell securities. The investor will take the risk of no trade if the security price will not reach the limit price. A stop-limit order to buy is the reverse of a stop-limit order to sell. As soon as the stock price reaches the stop level, the order to buy will be executed at the limit level or better indicating that below the limit price the order will not be executed.
It is an order that remains effective only for a day it is brought to the floor. The majority of orders are day orders. If not executed it is cancelled.
It is an order that remains effective indefinitely. It is known as open order since the investors are willing to wait until the price reaches some limit the set.
Fill or kill Order:
It is an order that must be executed immediately. Being unexecuted such an order is cancelled.
An order is a round lot that indicates 100 shares or multiple of 100 shares. On the other hand, an odd lot is any number of shares between 1 and 99. Trading Systems in Stock Exchanges or Trading Arrangement.
Securities are traded on a daily basis. But the settlement dare includes three business or working days after the trading day. Purchaser becomes the legal owner of the securities he bought on the settlement date on which the seller gives them up. At that day both the buyer and seller settle with the brokerage firm. Most of the customers allow their brokerage firm to keep their securities in the name of the brokerage firm. The client receives a monthly statement showing his cash position, securities held, any funds borrowed from the brokerage and so on.
Cash flows between the firm and financial markets
• To raise capital a firm sells debt and equity to investors in the financial markets through financing decisions.
• The funds raised by the firm is invested in the investment activities of the firm called investment decision or capital budgeting.
• The invested funds generate cash for the firm through its operation.
• Cash is paid to the debtors for using external funds as the cost of debt like interest if any.
• Cash is paid to the government as taxes.
• Cash is paid to the equity holders as dividends.
• Retained cash flows are invested in the firm sometimes by distributing stock dividend or bonus shares to the existing equity holders that also increases capital.
Trading Systems in Stock Exchanges or Trading Arrangement.