FIN400_Study Guide

FIN400_Study Guide - Information asymmetric Traders who...

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Information asymmetric Traders who know more about values & traders who know more about what other traders intend to do have a greater advantage over those who do not Well informed traders profit from less informed traders Agency problems Arise when agents do what they want to do rather what their principals want them to do o Brokers & Clients because done have they don’t have to do what you want them to do or not work hard on your behalf Externalities (+) ex when something that benefits other people without compensation (-) ex when they do something that harms other people w/o penalty o Order Flow Ex Traders who offer to trade give other traders valuable options to trade for which the offers are not compensated ~*~*~*~* Retail Trade Usually trade for their own account, not a large block trade Institutional Trade/Large Block Trade Work for a firm who trades on behalf of principal, usually deals with large block trade Issues with an Institutional Trade/large Block Trade Useful to tell everybody in the market if pursuing a large block trade Example of founder who passed away and the daughter inherited the stocks o Since she wanted to diversify her portfolio and not just keep 95 percent of her stocks on her fathers company o Best interest for her to sell the large chunk into the market, however must tell everybody in the market if the selling is for no reason o She must tell them that there is no liquidity in what she is trying to do, she must be credible o If she is trading for reasons because of information then clients will not trade ever with her Has large price impact Dark pools - Clients would go to places to minimize info leakage (not exchange) - POSIT is an example POSIT 1
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First crossing systems off the exchange, owned by ITG o Their would be accounts that did not want to go to the exchange floor (due to information leak) o So POSIT does intraday matches to match the trades that did not want to make it to the floor to match orders o No pricing discovery (Vs. Matching system- there is price discovery) POSIT is a response natural counterparty- o Run cross at certain time during trading day that is pre-specified (9am, 10:30am etc) o If you want to buy/sell put it in this “black box” Jake wants to buy 200k shares of Microsoft Denise wants to sell 50K shares of Microsoft At 10:30AM, POSIT runs cross and all trades must be submitted by 10:29AM POSIT matches any trades in “black box” Since there is only 1 match, Jake gets 50K of Microsoft from Denise POSIT then determines the price based off a 7 minute time frame from 10:31AM-10: 38AM and chooses a random price (Random time important because prevents price manipulation -if investor knows how to pinpoint the price to the exact m/s then price will be exhausted and they would know when to trade large chunk) Price chosen was 28.03 so that will be the transaction o POSIT advantage: Investors get large order without disclosing – who and what they
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FIN400_Study Guide - Information asymmetric Traders who...

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