Sunday, February 6, 2011

eSpeed/BrokerTec inter-dealer Treasury market workup

(In the offer case, “Lift-up” is similar, but “hit-down” is easier in English.)

 

The bids on the eSpeed order book is like a stack of cards. Top of the stack is one or multiple bids at the same bid price. For example 2 bids at 99.8. Needless to say, the trader who came earlier is first_among_equals, but remember both bidders are on the same price level, like 2 physical cards spread out horizontally, on top of the card stack [1].

 

When you  h i t  them, you potentially “lower” the market – “hit down”. 2 scenarios/outcomes, inspired by P117 [[Complete guide to capital markets]] --

 

Scenario/Outcome 1 - you lower the market - During the workup, you and "secondary" hitters make up a total  o r d e r  size exceeding the total bid quantity at 99.8, consisting of 2 original bids + secondary bids. Afterwards, all the "cards" at 99.8 are removed, exposing the cards at 99.7, which is the new top-of-stack.

 

Scenario/Outcome 2 - best bid remains at original level - similar to Scenario 1 but not "exceeding". After workup, top bidder is seldom the original top  bidders. Original 1st bidder has the first choice to "join" the workup [2]. If she doesn't  a b s o r b  all the sell orders, then she's removed at the 99.8 bid level.

 

Looking at both scenarios, you see that “hit-down” can never move the market up.

 

[1] In semi-technical terms, it’s like a linked list anchored at top slot of the card “stack”.

[2] This is often an automated trading system

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