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MIS 4500 (31)

Execution of Portfolio Decisions.docx

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University of Manitoba
Management Info. Systems
MIS 4500
Pourang Irani

Reading 44: Execution of Portfolio Decisions Context of Trading: Market Microstructure:  Order Types: o market order: instruction to execute order promptly in public markets at best price available  emphasizes immediacy of execution; bears some degree of price uncertainty o limit order: trade at best price available but only if price is at least as good as specified limit price  emphasizes price; has execution uncertainty o market-not-held order: where handled by broker; not-held means not required to trade at specific price or specific time interval; allows for discretion to not trade based on judgment o Participate (do not initiate) order: variant of market-not-held: broker stays deliberately low-key and waits and responds to initiatives of more active traders (to capture better price) o Best efforts order: even more discretion to broker to judge market conditions o undisclosed limit order: doesn’t disclose total quantity of order o Market on open order: to be executed at opening of market o market on close order: to be executed at market close o (principal trade: broker buys/sells the position for self) o (portfolio trade (or program trade or basket trade): specified basket of securities; reduces risk to other side of asymmetric info)  Types of Markets: (markets provide liquidity, transparency and assurity of completion)  market fragmentation: many places to trade  straight through processing: automatic settlement of trade after execution  open outcry auction market: old style o Quote-Driven (Dealer) Market: dealers establish firm prices at which securities can be bought and sold  (closed-book markets: if limit order book is not visible in real time to public)  bond markets are overwhelmingly dealer markets (b/c of lack of liquidity)  effective spread: 2 x deviation of actual execution price from midpoint of market quote at time order is entered (may result in effective spread lower than quoted spread) o Order-Driven Markets: transaction prices established by public limit orders  Electronic Crossing Networks: buy and sell orders are batched (accumulated) and crossed at specific point in time, usually anonymous fashion (POSIT is an electronic crossing network)  avoids dealer costs and effects a large order can have on price and information leakage  volume may be low  doesn’t provide price discovery (where transactions prices adjust to equilibrate supply and demand)  Auction Markets (periodic/batch auction markets or continuous auction markets): orders of multiple buyers compete for execution (after reopening market for day may be auction market)  Automated Auction (Electronic Limit-Order Markets): computer-based auctions that operate continuousl
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