Transcript Chapter 18 Buy-Side ..

Chapter 18
Buy-side traders
Order submission strategy –
Market vs. limit orders
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The bid-ask spread
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Use market orders when the spread is narrow
Use limit orders when the spread is wide
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Limit order price depends on the tradeoff between execution
price and execution probability
What will happen when limit orders do not
execute? Can wait or not?
Must know how execution probability depends on
limit order prices – order book, volatility, trader
interest
Order exposure decision
Full exposure – submit limit orders
 No exposure – wait until an opportunity to
trade shows up
 Trade anonymously using brokers and
exchanges
 Weighs the benefits of display against the
costs of display
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Benefits of exposure
Easier for other traders to find them
 Attract latent traders (reactive traders)
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Reactive vs. proactive traders
• Traders find it cheaper to be reactive when
suitable trading opportunities are rare
• The reactive-proactive continuum is similar to
the aggressive-passive continuum. The former
represents the willingness to bear the costs of
searching and the latter represents the
eagerness to arrange trades
Costs of exposure
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Exposure may reveal trader motives
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Informed traders do not want to reveal their
information (perhaps only initially but not later)
• Want to avoid front runners and squeezers
• Bluffers do not want to reveal their trading
intentions (perhaps only initially but not later)
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Exposure may reveal future price impacts
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Front runners increase trading costs
Exposure may reveal valuable trading
options
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Quote matchers
Defensive strategies
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Evasive strategies – to hide
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Deceptive strategies – to confuse
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Use brokers, electronic trading systems,
break orders, undisplayed orders, order
indications, or simply wait
Make a small trade on the opposite side, etc
Offensive strategies – to attack
Market design
Markets can reduce front running by
adopting a time precedence rule and a
large tick size to make front running costly
 Allow to submit undisclosed orders
 A detailed and accurate audit trail to catch
penalize dishonest brokers
 Allow to report their trades late
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