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Business Knowledge for IT in Trading and Exchanges: A Complete Handbook for IT Professionals

Book Description

Business Knowledge for IT in Trading and Exchanges" deals with the alignment of IT and business in Trading and the Exchanges (market in which securities, commodities, options or futures are traded) where trading takes place. The idea behind this publication is to introduce IT professionals to the concepts of the trading in the financial markets. The chapters in the book cover the following topics: Overview of Trading; Products traded at the Exchanges; Overview of Major Exchanges and Trading firms such as brokerages; Trends in Trading;; And much more. The innovations in Trading and IT to be discussed include: Direct Market Access (DMA); Straight through Processing; Algorithmic Trading; Cloud Computing and Infrastructure optimisation and more.

Table of Contents

  1. Copyright
  2. Preface
  3. Acknowledgements
  4. Introduction
  5. 1. Overview of Trading and Exchanges
    1. Introduction
    2. The Players in Trading
      1. Sell Side
      2. Difference between a broker and a market maker
      3. Buy Side
    3. History of Trading
      1. History of Currency Trading
      2. History of Commodity Trading
    4. Traders’ and Investors’ Roles in the Marketplace
      1. Definition of an Investor
      2. The Major Investors
      3. Definition of a Trader
      4. The Major Traders
    5. Trading Sessions
      1. Continuous Markets
      2. Call Markets
      3. Trading Hours
    6. Insider Trading
      1. What is Insider Trading?
      2. Illegal Insider Trading
      3. Definition of “Insider”
    7. History of Exchanges
      1. History of Stock Exchanges
      2. History of Commodity Exchanges
    8. The Business of Running Exchanges
    9. Three Business Models for the Stock Exchange Industry
      1. The Global Exchange
      2. The Regional Exchange
      3. The Diversified Exchange
    10. The Global Exchange Industry
  6. 2. Trading in Different Asset Classes
    1. Introduction
    2. Definition of an Asset Class
    3. The Trading Life Cycle
      1. Pre-trade Events
      2. Post-trade Events
      3. Post-trade Changes
      4. Counterparty Changes
      5. Termination
      6. Servicing Events
    4. Trading in Equities
      1. Types of Stock
      2. Exchange Floor
      3. Electronically
    5. Trading in Fixed Income
      1. Types of Bond Markets
      2. Trading of Bonds
      3. Role of Traders
      4. Role of Interdealer Brokers in Bonds Trading
      5. What are Interdealer Brokers?
        1. IDBs’ value to the bond market
      6. Types of IDB Business Model
        1. Electronic brokerage
        2. Voice Brokerage
        3. Hybrid Brokerage
      7. The Five-handed Trade
    6. Trading in Foreign Exchange
      1. Types of Trading Activity
      2. Components of a Typical Spot Forex Trade
      3. Motivation for Buying and Selling
      4. Spreads, Prices, Quotes and Indications
      5. Outright Forward Transactions
      6. Illustration of an outright forward transaction
  7. 3. Types of Order
    1. Introduction
      1. A Typical Example of an Order
    2. Benefits of Using Orders
    3. Some Essential Terms
    4. Market Orders
      1. Example of a market order
    5. Limit Orders
      1. Example of a limit order
    6. Stop Orders
    7. Stop-Limit Orders
      1. Stop-Limit Order Example
    8. Trailing Stop Orders
    9. Tick-Sensitive Orders
      1. Tick-Sensitive Order Example
    10. Market-If-Touched Orders
      1. Market-If-Touched Example
    11. Market-Not-Held Orders
    12. Other Order Instructions
    13. Order Presentation Systems
  8. 4. The Business Environment
    1. Introduction
    2. Environmental Factors affecting the Trading Industry
      1. Regulatory
        1. Impact
      2. Economic
        1. Impact
      3. Socio-cultural
        1. Impact
      4. Technological
        1. Impact
    3. Competitive Landscape
    4. Profile of Major Exchanges around the World
      1. London Stock Exchange (LSE)
      2. Deutsche Börse
      3. NYSE Euronext Inc.
      4. NASDAQ OMX Group Inc.
      5. Tokyo Stock Exchange
    5. Profile of Major Players in Trading
      1. BGC Partners Inc.
      2. GFI Group
      3. ICAP
      4. Tullett Prebon
    6. Clearing and Settlement Firms
      1. Clearing Firms
      2. Settlement Agents
      3. Clearing Houses
    7. Depositories and Custodians
    8. Mechanics of T+3 Settlement Cycle
      1. Trade Date (T) – 25 August 2008
      2. T+1 – 26 August 2008
      3. T+2 – 27 August 2008
      4. T+3 – 28 August 2008
    9. Credit Rating Agencies
      1. Standard and Poor’s (S&P)
      2. Moody’s Investors Service
      3. Fitch Ratings
    10. Indices
    11. Security Identifier Types
      1. CUSIP
      2. Structure of a CUSIP
      3. Instrument coverage
      4. CINS
      5. Structure of a CINS
      6. ISIN
        1. Structure of an ISIN
      7. RIC
      8. Other Security Identifier Types
  9. 5. Trends in Trading and Exchanges
    1. Introduction
    2. The Growth of Electronic Communication Networks
      1. Benefits of the ECN Structure
      2. Competition amongst ECNs
      3. Fee Structure
    3. The Growth of Algorithmic Trading
      1. Brief History of Algorithmic Trading
      2. Market Growth
    4. Trading in CFDs
      1. What is a CFD?
      2. Advantages of CFDs
      3. CFD Trading Strategies
      4. Typical CFD Long Trade
      5. Overall Profit
    5. Trading of Structured Products
      1. What are Structured Products?
      2. Features of Structured Products
    6. Emergence of Retail FX Trading
      1. Definition of Retail FX and Retail Investor
      2. Retail FX Market
      3. Trading Strategies
      4. Impact of Technology
      5. The Arrival of Mobile Trading
    7. Popularity of Spread Betting
      1. How does Spread Betting work?
    8. Rise of Fixed-Odds Betting
      1. How does Fixed-Odds Betting Work?
      2. How are Fixed-Odds Bets Quoted?
      3. Popular Fixed-Odds Bets
    9. Increasing Popularity of Direct Market Access
      1. Key Benefits of DMA
      2. Impact of DMA on the Trading Industry
    10. Popularity of Day Trading
    11. Popularity of Swing Trading
      1. Difference between Swing Trading and Day Trading
    12. The Emergence of Liquidity Pools
    13. The Emergence of E-minis
      1. Definition of E-mini
      2. Some Benefits of Trading E-minis
      3. Comparison of Margins for Full-sized Futures Contracts and Mini Futures Contracts (E-minis)
      4. Case Study
    14. The Rise of Exchange-Traded Funds
      1. What is an ETF?
      2. Background
      3. Creation
      4. Comparison between ETFs and Mutual Funds
      5. The ETF Market
  10. 6. Liquidity and Volatility
    1. Introduction
    2. Definition of Liquidity
      1. Features of Liquid Markets
    3. The Search for Liquidity
      1. Active Traders
      2. Passive Traders
    4. Dimensions of Liquidity
    5. Liquidity Demanders and Suppliers
      1. Market Makers
      2. Block Traders
      3. Arbitrageurs
    6. Volatility
      1. Definition of Volatility
      2. Trading in Volatile Market Conditions
      3. Installation of Stop-losses
      4. Trends Trading
      5. Trading against the Short-term Trend
      6. Betting on Options
      7. Use of Binaries and Bungees
        1. Illustration of a Bungee bet
      8. Use of the Elliot Wave Theory
    7. The Volatility Index
      1. What is VIX?
      2. Benefits of VIX for Traders
  11. 7. Concept of Arbitrage
    1. Introduction
    2. Definitions of Arbitrage
    3. Theoretical Underpinnings of Arbitrage
      1. Efficient Market Hypothesis (EMH)
      2. Law of One Price
      3. Purchasing Power Parity (PPP)
      4. Big Mac PPP
    4. Types of Arbitrage
      1. Forex Arbitrage
        1. Example – Arbitrage currency trading
      2. Statistical Arbitrage
      3. Risk Arbitrage
      4. Merger arbitrage
        1. What is merger arbitrage?
      5. Convertible Arbitrage
      6. Index Arbitrage
      7. Illustration of an index arbitrage trade
    5. Conclusion
  12. 8. Electronic and Algorithmic Trading
    1. Introduction
    2. Definition of Electronic Trading
    3. Differences between Electronic Systems and Traditional Markets
    4. Overview of Electronic Market Structures
    5. Interaction between Various Market Participants in Electronic Trading
    6. Electronic Trading in Different Asset Classes
      1. Equity Markets
      2. Fixed Income
      3. Foreign Exchange
    7. Algorithmic Trading
      1. Algorithmic Trading Components
    8. Algorithmic Strategies
      1. Implementation Shortfall Measurement
      2. Illustration of IS
      3. Volume-Weighted Average Price (VWAP)
      4. Impact of Benchmark Choice on Trading Strategy
      5. Trading Strategies Adopted to Attain VWAP
      6. Time-Weighted Average Price (TWAP)
      7. Sample TWAP Trading Scenario
    9. Transaction Cost Analysis
  13. 9. Common Systems Used in Trading and Exchanges
    1. Introduction
    2. Comparison of Open Outcry and Automated Trading Systems
      1. Common Hand Signals
      2. An Example of a Hand Signal
    3. The Procedure of Online Order Execution
    4. Profiles of Systems
      1. Vendor: Progress Software
        1. System: Apama
      2. Vendor: Horizon Software
        1. System: Market Maker
        2. Key benefits
        3. Technology
      3. Vendor: Sungard
        1. System: Front Arena
      4. Vendor: ULLINK
        1. System: UL TRADER
        2. How it is used in the trading industry
        3. Benefits of using the system
    5. List of Other Systems
    6. Factors Driving Users’ Choice of Electronic Trading Platforms
      1. Explicit Trading Costs
      2. Implicit Trading Costs
      3. First Mover Advantages
      4. Historical and Institutional Factors
    7. Electronic Trading Platform Characteristics and Services
  14. 10. IT Projects
    1. Introduction
    2. Implementation of Electronic Trading Systems
      1. What is the Basic Role of a Trading System?
      2. Project Phases
        1. Planning
        2. Analyse
        3. Design
        4. Build
        5. Test
        6. Rollout
      3. Data Considerations
        1. Market data
        2. Potential static data issues
    3. Implementation of Cloud Computing in Exchanges
      1. What is Cloud Computing?
    4. Case Study on the Implementation of Cloud Computing
      1. Nasdaq Market Replay
      2. Data model
      3. User interface
      4. Conclusion
    5. Infrastructure Optimisation – Front to Back Office – Trade to Settlement
      1. fasterLAB
        1. Tuning front-office infrastructures for Formula 1 trading performance
      2. The fasterLAB deploys project management disciplines
  15. 11. Commonly Used Terminology
    1. Introduction
      1. List of Terms
  16. 12. The Future
    1. The Future: What does it Hold for IT and Business in Trading and Exchanges?
    2. Consolidation in the Exchange Sector
    3. Increased Competition from Alternative Execution Venues
    4. Increasing Role of Technology in Trading
    5. Emergence of New Trading Hotspots
    6. Changes in the Nature of Trading
    7. How did Credit Derivatives contribute to the Credit Crunch?
    8. Conclusion
  17. Appendix
    1. Bibliography
  18. List of Useful Websites
  19. Introducing Bizle.biz
  20. Other Titles in the Bizle Professional Series