Electronic Crossing Network and Auctions

CFA Level III Portfolio Management
#1

Electronic Crosing Networks match buyers and sellers at the midquote of prevailing bids/asks.

If the prices are fixed at the moment of trading, how is this classed as an order-driven market? Sounds more like a quote-driven market…?

Where do the bids/asks come from?

As a separate question, I’m struggling to see exactly how auction markets function. Someone commits to selling x shares, and they go to the highest bidders? Or someone commits to buying x shares and they get them from the lowest sellers? Who chooses their price?

#2

orders are only sized. if the sizes match then the orders can be crossed. the price taken off a price feed e.g reuters.

there is an order book. the market order will work it’s way through the orderbook, so the price gets worse the larger the order size.

If you’re looking for a book, try http://www.amazon.co.uk/Trading-Exchanges-Microstructure-Practitioners-Association-x/dp/0195144708/

#3

Thanks.

The curriculum emphasises that elec crossing networks don’t provide “price discovery” but am I right in thinking that this isn’t a big problem if it’s based on prices from a market that provides “price discovery” (as long as the crossing network is small in comparison) ?

So in an auction, it’s the holders of securities who offer them for sale, and the buyers who control the price they offer…?

How about this as a way to help remember the price/execution certainties of each:

electronic crossing networks ≈ limit orders

auctions ≈ market orders

#4

You’re exectly right.

Sometimes I find it’s worth pushing a bit harder to get that ‘click’ when things effortlessly make sense. It will makes pre-exam review much much easier.

I find stuff that doesn’t ‘click’ (e.g. lists to memorize, ethics etc.) needs a lot of dedicated time just before exam day.

Thanks for the help both.

#5

price discovery is related to information not available in the market.the crossing network only shows the information from current makert.

#6

Can someone give real life examples of an order driven vs. a quote driven market?

#7

The classic example we always seem to use in the UK is the SEAQ vs SETS exchanges. SEAQ is an quote driven market while SETS is an order driven market. SEAQ is an exchange for smaller cap, much less liquid stocks and SETS is for highly liquid, large cap stocks.

Check out this link - scroll down to slide page number 23 for a detailed explanation:

https://secure.cfauk.org/assets/1217/Chapter_2___April_2013_v10_1_update.pdf

#8

This is super helpful, thanks!