Securities Analysis 3FB3 February 25th, 2014
Issues can arise as these quotes actually represent commitment to trade up to a specified number
of shares. If the market order is for more, the order may be filled at multiple prices.
Another issue can arise from the possibility of trading inside the quoted spread, if a broker that’s
assigned to buy and one to sell meet and then meet in the middle.
Price Contingent Orders
Investors may also place orders specifying prices at which they are willing to buy or sell a
security. Limit buy order: buy when security can be bought at or below certain price. Limit sell:
sell when above certain price. Collection of limit orders waiting to be executed is a limit order
Canadian National Stock Exchange – online, limit orders are ordered with best orders first: the
orders to buy at the highest price and sell at the lowest price. Buy and sell orders of 1.03 and
1.07 are inside quotes. Inside spread in $0.04
Stop-loss orders are similar to limit orders in that the trade is not to be executed unless the stock
hits a price limit. But in this case, the stock is to be sold if its price falls below a stipulated level.
The order lets the stock be sold to stop further losses from accumulating. A stop-buy order is
when stock should be bought when its price rises above a given limit. These trades often
accompany short sales and are used to limit potential losses from the short position.
Open or good-till-cancelled orders remain in force for up to 6 months unless cancelled by the
customer. Fill or kill orders expire if the broker cannot fill them immediately.
There are three types of trading systems for securities: over the counter dealer markets,
electronic communication networks, and formal exchanges.
Dealer markets are commonly known as over the counter (OTC) markets. The OTC market is
not a formal exchange, there are neither membership requirements for trading nor listing
requirements for securities. Brokers registered with the provincial securities commission act as
dealers in OTC securities. Security dealers quote prices at which they are willing to buy or sell
securities. They do not require a centralized trading floor. Dealers can be located anywhere they
can communicate effectively with other buyers and sellers.
OTC quotes used to be recoded manually and published daily on pink sheets. Then Nasdaq was
developed, linking brokers and dealers in a computer network.
Nasdaq was originally organized as more of a price-quotation system than a trading system. It
now allows for electronic execution of trades at quoted prices without the need for direct
negotiation, bulk of trades is done electronically.
Electronic Communication Networks (ECNs)
Electronic communication networks are private computer networks that directly link byers
with sellers and allow participants to post market and limit orders over computer networks.
Orders that can be crossed, matched against another order, are crossed automatically without the
intervention of a broker. I.e. order to buy at $50 and outstanding asked price of $50. Thus, ECNs
are true trading systems, not merely price-quotation systems.
Advantages: eliminates bid-ask spread when trades are crossed, cost of transaction is modest,
less than a penny per share. The trades are also quick. Offers anonymity in trades.