Block J · Market structure & trading
‹ Financial markets handbook: overview
Independent working reference. Product and feature names mentioned are trademarks of their respective owners. No investment advice.
Market structure is the mechanics behind every price; whoever knows it trades more cheaply and interprets prices correctly.
131 · Exchanges vs. OTC
Definition: Exchange = a central, regulated trading venue with a public order book; OTC = bilateral trading (bonds, FX, derivatives predominantly).
Use: Determines transparency, price discovery and counterparty.
Interpretation: Bond "prices" on screens are often indicative; tradable is what a dealer quotes.
Typical mistake: Confusing indicative OTC prices with executable exchange prices.
See also: 132 · Market makers & liquidity · 133 · Bid-ask spread · 139 · Best execution
132 · Market makers & liquidity
Definition: Dealers who quote binding buy and sell prices and live off the spread.
Use: A liquidity source beyond natural buyers/sellers.
Interpretation: Market makers thin out in stress phases; liquidity is procyclical.
Typical mistake: Extrapolating today's liquidity to the crisis case.
133 · Bid-ask spread
Definition: The difference between buy and sell price; the immediate trading costs.
Use: Cost control; a liquidity indicator.
Interpretation: Spread + market impact = true transaction costs; for bonds often larger than any fee.
Typical mistake: Comparing only order fees, ignoring spreads.
See also: 132 · Market makers & liquidity · 139 · Best execution
134 · Order types (limit, market, stop)
Definition: Market = immediately at the best price; limit = a price boundary; stop = a trigger order (becomes a market order!).
Use: Execution control per situation.
Interpretation: Stop orders do not protect against gaps; execution can be far below the stop.
Typical mistake: Trading illiquid securities with market orders.
135 · Settlement (T+1/T+2) & clearing
Definition: Fulfilment of the trade (USA T+1 since 2024, EU predominantly T+2, switch to T+1 planned for 2027); clearing via central counterparties reduces default risk.
Use: Liquidity and FX planning (value date differences!).
Interpretation: T+1 USA vs. T+2 EU creates funding/FX gaps in cross-border transactions.
Typical mistake: Not synchronizing value dates when shifting between markets.
136 · Custody/account structure
Definition: A chain of custodian bank, (inter)national central securities depositories; segregated fund assets vs. notes decides in insolvency.
Use: Safety and operational capability (corporate actions, taxes) of the custodian.
Interpretation: Fund units/securities are segregable; deposits and certificates are not.
Typical mistake: Thinking through custody risk only in a crisis.
137 · Indices & benchmarks (construction, weighting)
Definition: Rule-based market representations; weighting by market capitalization (standard), equal-weighted, factor- or price-weighted (Dow).
Use: A yardstick, the basis for ETFs, target market definition.
Interpretation: Construction rules create properties; cap weighting = momentum/concentration tendency.
Typical mistake: Choosing a benchmark whose rules one does not know (concentrations! check the top 10 share).
See also: 48 · ETFs (physical/synthetic) · 41 · Sector logic (GICS/BICS) · 141 · Strategic vs. tactical asset allocation
138 · Fixings (WM/Refinitiv, BFIX, Bund auctions)
Definition: Reference prices at fixed times (FX fixings, bond auction results, closing auctions in equities).
Use: Valuation (NAV), benchmark replication, settlement.
Interpretation: Volume concentrates around fixings; good for execution close to the reference, prone to distortion.
Typical mistake: Valuing the portfolio against a fixing but trading at other times; price in the deviations.
139 · Best execution
Definition: The obligation (MiFID II) to execute client orders at the best possible overall result (price, costs, likelihood).
Use: A basis for claims against banks/brokers; internal evidence for own execution.
Interpretation: "best possible" is a process promise, not a single-case promise; policy and controls count.
Typical mistake: Never spot-checking best execution.
See also: 133 · Bid-ask spread
140 · Primary vs. secondary market
Definition: First sale of new securities (issuance) vs. ongoing trading of existing ones.
Use: New issues sometimes offer premiums (NIP for bonds), the secondary market determines the ongoing valuation.
Interpretation: Allocation logic in the primary market favors large/loyal orders; the NIP fluctuates with market conditions.
Typical mistake: Comparing the new issue yield with the secondary market curve without quantifying the premium.