Market Structure & Trading Mechanics Flashcards

What is a 'limit order' and what is its key advantage over a market order?

Answer: An order to buy or sell at a specified price or better; guarantees price but not execution

A limit order specifies the maximum price to pay (buy limit) or minimum price to accept (sell limit), guaranteeing the investor won't pay more or receive less than their specified price, though execution is not guaranteed.

What is 'algorithmic trading' (algo trading)?

Answer: Computer-automated trading that executes orders based on pre-programmed rules at high speeds

Algorithmic trading uses computer programs to automatically execute trades based on predefined criteria (price, timing, volume), allowing for faster and more systematic order execution than human traders.

What is a 'stock exchange' listing requirement and why does it matter?

Answer: Standards (minimum shares, revenue, market cap) a company must meet to be listed on an exchange; ensures a baseline quality of listed companies

Listing requirements set minimum standards for financial health, governance, and size that companies must meet to be listed on major exchanges like NYSE or Nasdaq, providing investors with a quality baseline.

In US equity markets, what is the 'National Best Bid and Offer' (NBBO)?

Answer: The highest bid and lowest offer across all trading venues that broker-dealers must consider when routing orders

The NBBO aggregates the highest bid price and lowest ask price across all registered exchanges and trading venues, and broker-dealers are required to execute customer orders at or within the NBBO to ensure best execution.

What is a 'margin call' and what triggers it?

Answer: A demand to deposit additional funds when the equity in a margin account falls below the maintenance margin requirement

A margin call is issued by a broker when losses in a margin account reduce the customer's equity below the maintenance margin requirement, demanding the customer deposit additional funds or securities.

What distinguishes a 'floor broker' from a 'market maker' on a stock exchange?

Answer: Floor brokers execute orders for clients and earn commissions; market makers quote both buy and sell prices using their own capital to provide liquidity

Floor brokers act as agents executing customer orders on behalf of clients for commissions, while market makers act as principals, posting continuous buy and sell quotes and using their own capital to facilitate trading.