Financial Markets and Trading: An Introduction to Market Microstructure and Trading Strategies

CHAPTER 1

Financial Markets:Traders, Orders, and Systems

This chapter describes a big picture of financial markets: who the traders are, what types of orders can be submitted, how these orders are processed, how prices are formed, and how markets are organized.

TRADERS

Let us start with the people who trade. They are called (well, you guessed it) traders. Those who trade for their own money (or their employer's money) are proprietary traders. Their ultimate goal is to make profits by buying low and selling high, whether it is long-term investment or day trading. Other traders execute orders for their clients. They are called brokers or agency traders. To denote the institutional character of a broker, the term brokerage (firm) is also used. For brokers, profits from trading may not be important since they receive commissions for trading and other services from their clients. Typical brokerage services include matching the clients’ buy and sell orders, connecting to markets, clearing and settlement, providing market data and research, and offering credit. Most of the listed services are self-explanatory, but clearing and settlement may need some elucidation. Settlement is delivery of traded assets to the trading counterparts (buyers and sellers). The trading process (sometimes called the transaction) does not occur instantly. For example, settlement in the spot foreign exchange for most currencies takes two business days. Clearing denotes all brokerage actions that ensure settlement ...