Appendix C Markets Glossary
| Ask | There are often several resting limit orders to sell in any liquid market. Each of these orders has a price associated with it. These prices associated with offers to sell are called offers or asking prices. The lowest of these asking prices or offers is generally referred as “the ask” or “the offer” or the best offer. In a dealer market, the dealer or market maker will have a single offer or ask at which customers can buy from the dealer. |
| Basket Trade | This is a trade in which a group of securities, currencies or futures contracts is bought or sold with a single order. Fidelity, for example, will take basket orders for 2-50 securities, with a minimum size of $2,000. |
| Bid | There are often several limit orders to buy in any liquid market. Each of these orders has a price associated with it. All of these limit buy orders are bids, but the highest of these prices or bids is generally referred to as the bid or the best bid. In a dealer market, the dealer or market maker will have a single bid at which customers can sell to the dealer. |
| Bid-Ask spread | The difference between the highest bid and the lowest offer is known as the bid ask spread. A small bid-ask spread is generally a sign of a liquid market. |
| Bond | A debt security, issued by a corporation or government entity. The most common is the bullet bond where the issuer agrees to pay the face value of the bond on the bond's maturity date and to pay an annual or semi-annual amount equal to the “coupon interest rate” times the face value of the bond. For example, a $1,000 face value bond with a coupon interest rate of 10% would require the issuer to pay $100 interest each year, typically divided into two equal payments of $50 every six months. |
| Buy side | The “buy side” refers to those who buy exchange services, those who do the investing like pension funds, mutual funds, and hedge funds. This is distinguished from sell side, which are firms that sell exchange services, firms like brokerage firms. |
| CCP | A central counterparty (CCP) is a financial institution that facilitates the trading process between the buyers and sellers. It functions as a buyer to the sellers and as a seller to all buyers. |
| Dark Pool | Dark pools are markets, generally used by institutional investors, in which large orders can be matched without a big effect on the prices quoted in the public markets. The bids, offers and trades are not publically quoted and participants can remain anonymous until the trade is made. Dark pools are owned by exchanges, broker-dealers but can be independent like Liquidnet. |
| ETF | ETF's are instruments that hold a basket of assets, usually stocks and bonds, that generally track some index. These instruments are traded on stock exchanges. The value of ETFs are generally quite close to the underlying basket of assets, unlike closed end funds whose value can deviate significantly from the value of the underlying assets, referred to as the net asset value. Available since the early 1990s, ETFs have become very popular. |
| Futures | A futures contract is a legal contract between two parties to transfer a particular financial instrument or commodity (standardized by the exchange) at a particular time and at a particular price in the future. Beginning in 1981, some futures contracts have been designed to avoid the need for physical delivery by being “cash settled” which means there is one last marking to market to some cash price or index, thus ensuring convergence between cash and futures prices. All stock index futures contracts are cash settled as is the 3-month Eurodollar contract, the world's largest. Marking to market is one of the financial safeguards in futures markets whereby funds are transferred from the accounts of losers to winners on a daily basis based on each day's settlement (closing) price. |
| Limit order | A limit order is an order to buy or sell a financial instrument or derivative at a price equal to or better than some specified price. |
| Market Maker | A firm or individual who continuously quotes both a buy and a sell price in the market for a financial instrument or commodity, creating the opportunity for customers to buy and sell when they wish and allows the market maker to make a profit from the bid/offer spread. |
| Market order | A market order is an order to buy or sell a financial instrument or derivative immediately at the “best” price currently available in the market. |
| Options | An options contract gives the holder or buyer the right (but not an obligation) to buy some asset (a call option) or sell some asset (a put option) at a specified price (called the strike or exercise price). Options are traded both on exchanges as well as OTC. The most popular exchange traded options are based on individual stocks or stock indexes, though they are also available on debt, foreign exchange and physical commodities. Like futures, exchange-traded options are highly standardized. American options can be exercised at any time on or before the expiration date, whereas European options can be exercised only on the expiration date. |
| OTC | Financial assets can be traded either on exchanges or over the counter (OTC). An OTC trade is directly between two parties, traditionally over the telephone, but increasingly on electronic platforms. The term comes from early times when stocks and bonds would be purchased over the counter at a bank window. The OTC market is bigger than the exchange traded market and includes stocks, bonds, foreign exchange, commodities and derivatives. The world's largest market, the $3.2 trillion per day foreign exchange market, is over 95% OTC. Unlike exchange traded products, which are highly standardized, the OTC market allows for transactions to be customized to traders needs. The downside is that counterparty risk is much greater, which is why increasingly OTC trades are being moved into exchange clearing houses to reduce that risk. |
| Sell side | Sell side refers to firms, like broker/dealers and futures commission merchants, that sell securities to buy side firms or investors. |
| Settlement | Settlement is the process that involves delivering shares, bonds, foreign currency or commodities in return for payment. This is the last step in a trade that fulfils the obligations of both parties. In US equities, for example, settlement occurs on the third business day following the trade, referred to as T+3 (for trade date plus 3 days). Most OTC foreign exchange transactions are settled T+2. |
| Specialist | Specialists are members of an exchange who oversee the floor and are responsible for maintaining a fair and orderly market. They electronically execute orders that are passed to them by various traders and brokers. |
| Spread | The spread can refer to the bid-ask spread, the difference between the bid and ask prices in a specific market. Or the difference in prices or rates in two related markets or instruments, such as the interest rate spread between junk bonds and AAA corporate bonds. |
| Stock | A stock or equity is a financial instrument that denotes an ownership right in a corporation. |
| Scalper | Scalpers, or locals for local trader on a floor, are traders who trade to benefit from small price movements in the market. In effect they act as market makers by providing liquidity to a market by being ready to buy a little lower and sell a little higher than the last trade. They may only keep their positions only for seconds or minutes. |
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