APPENDIX 3: GLOSSARY
AIFMD Alternative Investment Fund Managers
Directive.
Algorithm A process, or set of rules,
usually one expressed in algebraic notation,
now used especially in computing. In the
context of financial markets, it takes the form of a
mathematical formula which determines trading decisions.[126]
Algorithmic trading A form of trading in
which the decision to trade, its timing
or terms (e.g. as to price) are determined by conditions
specified in an algorithm. The objective
is to enable market participants and investors to
respond quickly (normally in an automated manner) to
new information or market trends which are relevant for
the price of financial instruments. It is a technique that
is often used in high-frequency trading (HFT, see below).
Asset class A category of financial
instruments which shares common characteristics
(e.g. equities, sovereign bonds, derivatives).
Best execution A principle which requires
an agent acting for an investor to execute
transactions on the best terms available.
Bid-offer spreads The difference between
the prices at which a dealer will buy
or sell a financial instrument. The spread is the
profit margin of the dealer.
Bonds Loans issued by legal entities
or sovereign states with an agreed rate
of interest and maturity date.
Broker An intermediary who acts
as the agent of investors for the purposes
of arranging transactions in financial instruments.
Broker crossing network A system operated by
an investment firm which matches
clients' orders outside organised venues (see below).
Such systems were categorised as 'OTC' under MiFID
I but will fall generally within the new OTF category
in MiFID II.
Buy-side firms Firms which manage investment
funds either on their own behalf or for
clients. Also referred to as "investors".
Capital Adequacy EC Directive 2006/49 on
the capital adequacy Directive of investment firms
and credit institutions. The Directive
sets capital requirements for investment firms by
reference to their 'trading book', which comprises all
positions in financial instruments that are held with trading
intent.
Central counterparties An entity that legally
interposes itself between counterparties
to financial contracts, becoming the buyer
to every seller and the seller to every buyer. A CCP
performs a risk management function for its members
by guaranteeing the performance of the legal obligations
of buyer and seller.
Certificates A document that evidences
ownership of a financial instrument.
Circuit-breakers Rules of organised markets
that typically require trading in
a financial instrument to be halted when prices
become volatile by reference to pre-determined parameters.
Commodity derivatives Markets (organised or OTC)
in which derivatives markets contracts based on
commodities are traded.
Consolidated tape A mechanism which publicises
post-trade information as to the prices
and sizes of transactions in financial instruments
which are executed on organised venues.
Counterparties The parties to a contract.
In a simple contract for sale, the seller
and the buyer.
Corporate bonds Bonds (above) issued by
a corporate entity.
Dark pools Generally, trading venues
in which transparency is poor. Within
the MiFID framework, the operation (by regulated
markets, MTFs or investment firms) of trading
venues with the benefit of waivers granted by national
regulators from the pre-trade transparency obligations
of MiFID.
Dark trading Generally, trading in
venues in which transparency is poor (including
OTC).
Depositary receipts Receipts issued by a
legal owner of securities specifying that
a depositary holds the securities as trustee for the depositary
receipt holder. Often used as a technique to overcome
the costs and regulatory barriers associated with
foreign investment.
Derivatives Financial instruments whose
value is derived from an underlying investment
or commodity. Can be used both to hedge
risk and to speculate on the value of the underlying
investment or commodity.
Dodd-Frank Act The Wall Street Reform and
Consumer Protection Act 2010 (US).
Electronic venues Trading venues in which
transactions are executed by means of
electronic inputs from investors or their agents.
EMIR The European Market Infrastructure
Regulation, expected to enter into force
in 2012 following adoption by the European
Parliament in March 2012.
Equities Shares in companies.
ESAs European Supervisory Authorities.
ESMA European Securities and Markets
Authority.
Execution The process by which client
orders are carried out by investment firms.
Execution-only Transactions executed by
a firm upon the specific instructions
of the client where the firm does not give advice
on investments relating to the merits of the transaction.
Exchanges Organised trading venues
for financial instruments.
Exchange traded funds Investment funds structured
as listed companies.
Financial instruments Investment-related contracts
or documents of title. Also referred to
as "securities".
Firm quotes Commitments to enter into
transactions on specific terms.
Flash crash A dramatic fall in US financial
markets that took place in May 2010.
Front-running A transaction for a person's
own benefit, on the basis of and ahead
of an order which he is to carry out with or
for another, which takes advantage of the anticipated
impact of the order on the market price. A form
of market abuse (insider dealing) under the FSA's
Code of Market Conduct.
FSA Financial Services Authority.
G20 The group of industrialised
countries and developing countries who
play a major role in the world economy.
Hedging The process of avoiding or
mitigating risk through the use of financial
instruments such as derivatives (see above).
HFT High-Frequency Trading. A
form of short-term trading that focuses on
high-speed access to trading venues so as
to benefit from small price differences and the division
of large orders into smaller units. HFT traders often
engage in algorithmic trading (above).
IOSCO The International Organization
of Securities Commissioners.
Level 1 EU directives (such as MiFID)
which contain framework principles
and which empower the Commission
acting at Level 2 to adopt delegated acts or
implementing acts.
Level 2 EU directives or regulations
which represent the exercise of delegated
authority under Level 1directives or implement
such directives.
Liquidity The availability and depth
of a market for financial instruments.
A measure of the potential to convert a financial
instrument into cash.
Lit trading Trading that is subject
to public disclosure obligations.
MAD/MAR Market Abuse Directive/ Regulation.
Market abuse Various types of market
conduct, in particular insider dealing
and market manipulation, which are prohibited by
the EU Market Abuse Directive and the Financial Services
and Markets Act 2000.
Mark to market Recording of financial instruments
in the balance sheet of an investment
firm at market value.
Market maker A person who holds himself
out on the financial markets on a
continuous basis as being willing to deal on
own account by buying and selling financial instruments
against his proprietary capital and at prices defined
by him.
Market operators Persons responsible for
the operation of organised venues (see
below).
Market participants Persons involved in
a professional capacity in the transaction
or execution of investment business. The term
excludes "buy-side firms" (above).
MiFID Markets in Financial Instruments
Directive.
MTFs Multilateral Trading Facilities,
a form of organised market which may be
operated by an investment firm and which
is not subject to Title III of MiFID (rules applicable
to regulated markets).
Non-equities Any financial instrument
other than equity (above).
Organised trading Trading in standardised
financial instruments according to
the pre-determined rules of an organised venue.
Organised venues Locations or systems through
which organised trading occurs.
OTC The 'over-the-counter' market,
comprising trading which occurs outside
organised venues, often in the form of
non-standardised contracts concluded on a bilateral
basis between counterparties.
OTFs Organised Trading Facilities.
A new category of organised venue
defined by the recast MiFID regulation
with the objective of extending transparency rules
to execution techniques that are functionally equivalent
to regulated markets and MTFs. The term encompasses
broker crossing networks (above).
Own account The use of a person's own
capital to fund a transaction.
Own capital A person or firm's own
resources.
Passporting The ability to establish
a branch or offer investment services
in another (host) Member State of the EU on the
basis of an authorisation granted in an investment firm's
home State.
Position limits Restrictions on the holdings
(long or short) of an investment firm
in a financial instrument.
PRIPs Packaged Retail Investment
Products, which offer exposure to underlying
financial instruments, but in packaged
forms which modify that exposure compared with
direct holdings (e.g. UCITS investment funds).
RDR The Retail Distribution Review,
launched by the FSA in 2007.
Regulated market An organised trading venue
that operates under Title III of MiFID.
Regulated venue An organised venue that
is a regulated market, MTF or OTF under
MiFID II.
Retail investors Investors who are not professional
investors, primarily private individuals.
Shares A share in the share capital
of a company.
SIs Systematic Internalisers,
meaning investment firms which, on an
organised, frequent and systematic basis, deal
on own account by executing client orders outside a
regulated market or an MTF or an OTF.
Smoking A process whereby HFT traders
post attractive limit orders to attract
slow traders then rapidly revise these orders
onto less generous terms, hoping to execute profitably
against the incoming flow of slow traders' market
orders.
Sovereign bonds Bonds issued by a sovereign
state.
Structured products A product, other than
a derivative, whose value is linked by
a pre-set formula to the performance of an index,
basket of securities or other conditions.
Third country A country outside the European
Union.
Trades Transactions in financial instruments.
Two-way prices An offer to buy or sell at
specified prices. The 'bid- offer' spread
(above) is the difference between the two prices.
Underwriting A commitment to buy financial
instruments that cannot be sold as part
of a public offer.
Venues See organised and regulated
venues above.
Volume A measure of the scale of transactions
in a particular security or market.
Wholesale market The financial market other
than the retail market (see retail investors
above).
WTO World Trade Organization.
126 See http://www.oed.com/view/Entry/4959?redirectedFrom=algorithm#eid. Back
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