FTS Market Microstructure Treatments

Including

Quote and Order Driven Markets

FTS supports the following market microstructures:

· The continuous double auction (default setting for most cases)

o All traders can make market (submit bids and asks) and take market (hit bids or asks submitted by others)

o Every trader sees all the bids and asks posted

§ Though the moderator can hide this or make this visible for everyone from the Microstructure menu item; if it is hidden, then only the best bid-ask is shown

· A call market

o This is initiated from the Microstructure menu item

o In this market, everyone can submit bids and asks. At the end of the period, if there are crossing bids and asks, these are crossed at a single price that maximizes the volume of trade. If there is an interval of prices that maximize the trading volume, the average of that interval is chosen (so the surplus is split between the buyers and sellers)

· A pre-opening call market

o This is the same as the call market, except that at the end of the call market trading, the uncrossed bids and asks remain in the system for the start of the trading in a double auction

· A pure order driven market

o In this market, every trader can submit an offer or buy and/or a an offer to sell. These are shown in a limit order book visible to everyone; the highest buy offer and the lowest sell offer are also shown to everyone.

§ The moderator can hide these, as above, though the best offers are still shown.

o Trade takes place when a bid comes in that exceeds an existing ask (at the existing ask) or when an ask comes in that is less than an existing bid (at the existing bid).

o The has to be set in the case spreadsheet

o

· A pure quote driven market

o In this market, there is a distinction between market makers and markets takers.

§ Only market makers can submit quotes (bids/asks)

§ Market takers can submit buy and sell orders

§ The buy and sell orders are visible to the market makers only

§ The best quotes are visible to everyone

§ Market makers can fill orders by double clicking on the order in the book

· But these have to satisfy price and time priority

§ The market makers/takers have to be specified in the case spreadsheet

· Other microstructure variations

o Privately negotiated trades

§ In any of the treatments above, you can also allow privately negotiated trades. In this setting, trader 1 privately sends a message to trader 2 suggesting a trade. If trader 2 accepts, the trade is executed and reported to all traders.

§ This has to be set in the case spreadsheet

o Block trades

§ A trader can be given a short or long position in a security, and be required to trade out of that position before they can trade it for their own account.

§ If they do not trade out of that position, they do not earn any payoff in that security

§ This has to be set in the case spreadsheet