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Trading and Exchanges Discussion Thread

  • Post #1
  • Quote
  • First Post: Apr 2, 2010 3:14pm Apr 2, 2010 3:14pm
Here's a place to discuss the book: Trading and Exchanges by Larry Harris

http://ecx.images-amazon.com/images/...iL._SL500_.jpg

The draft PDF is here. Copies available at Amazon, etc. and at many libraries through the World Cat system here.

All (civil) discussion welcome. If we want to make specific references I don't see a problem with posting some sentences or a couple of paragraphs. Please don't post extensive sections or the whole book (or torrent) since it's obviously copyright material.
based on that World Cat link, it's cheaper in BetterWorldBooks.com.
& u get to help too ('every book u buy at BWB helps fund global literacy')

http://www.betterworldbooks.com/Trad...195144708.aspx
("..Eco-Shipping is free in the USA, and $7.97 worldwide..")
Quoting supremeChaos
World Cat link
Hiya SC!

The World Cat System is a free (maybe costs a few dollars here in the US) inter-library resource for books that can be borrowed from, on your behalf, by your local library. Maybe not available there in the Philippines.
I got mine used from Amazon and saved a nice bit. The seller exaggerated on the condition, like they tend to do, but still a good deal.
Quote
...The seller exaggerated on the condition, like they tend to do, but still a good deal.
like how?
Thanks for the heads up Sir.
Quoting supremeChaos
like how?
Thanks for the heads up Sir.
The copy of T&E that I just bought was advertised as "like new" - it was full of highlighting. Still it was in super good shape for $47. The sellers basically know that you're not going to mess around with returning it - which I'm not.
well, at least u save time (reading & searching for the important points in the book)
& u save money & highlighter pens.
So far this thread has gone no where. Here is my attempt to talk about the content of the book, not the condition, lol.

These are notes I took on the first 5 chapters when I read them over a year ago. I have notes on the whole book, but this should get you started.

Quoting Marsh
Pg 3: Market Microstructure - the branch of financial economics that investigates trading and the organization of markets.

Pg 4: Understanding the origins of certain characteristics of market quality is important. Such terms are liquidity, transaction costs, informative prices, volatility, trading profits. I think that liquidity and volatility to hand-in-hand and are most essential to a market. Everything else revolves around managing the two.

Organized trading is categorized in instruments such as common stocks, preferred stocks, bonds, convertible bonds, warrants, options futures contracts, forward contracts, foreign exchange contracts, swaps, reinsurance contracts, commodities, pollution credits, water rights and even betting contracts. These terms are divided into securities (represent ownership of assests like stocks and bonds), and derivatives (derive values from something).

Pg 5: A market is the place where traders gather to trade instruments. Either a physical trading floor, or electronic system. Therefore trading is really just a search problem. Buyers must find sellers, sellers must find buyers. Dealers and brokers provide this service. Speculators do not trade for any purpose other than to profit from info they have on future prices.

Pg 6: Traders want to trade in well-established markets because of other traders there. Therefor markets compete over activity, and starting new markets is hard.

Pg 7: Fungible markets are when one unit of the instrument is economically indistinguishable from all other units.

Key themes are information asymmetires, options, externalities (orderflow externality), market structure, copetitions with free entery/exits, communication and computing technologies, price correlations, pricipal-agent problems, trustworthiness and creditworthiness, the zero-sum game.

Pg 16: Falling prices often make large buys easier to fill than large sells. Rising prices indicate the opposite.

This chapter provides clear real life examples of how trades are managed in different markets. The only problem is the question of how this process has changed technologically due to electronic brokers and dealers.

Pg 32: Mentions two sides to a market. The buy side and a sell side. Harris says that sellers sell liquidity to the buyers. What about in a falling market? Aren't buyers buying liquidity from the sellers?

Pg 34: Quick communication very important to traders. Exchanges provide places to communicate a trade. Must understand why the buy side trades before we can understand when the sell side is profitable.

Pg 35: Exchanges are cometing with brokers and dealers. Brokers and dealers provide OTC trading, where no trading takes place at an organized exchange, but rather through a medium such as the broker/dealer. Automated trading is making the clearing process trivial.

Pg 36: Settlments might also be getting quicker as people deposit money with their broker/dealers and the transaction is automated instantly.

Pg 45: Stock markets are not as big as the media says they are.

Pg 48: Volumes reported in markets are often double/triple counted, therefore inflating the result and giving false or else nonintuitive meaning.

Overall there was tons of info in this chapter regarding the big picture.

Pg 68: It is important to understand how orders are matched. For example how limit orders are filled at certain levels, etc. This is essentially order flow. How orders react to liquidity.

Pg 69: The public market displays the bid/offer prices as presented by brokers/dealers etc. Private traders have their own personal bid/offer prices, and they use orders to convey that message.

Pg 70: Highest bid is the best bid, lowest offer is the best offer.

----------------- Ask/Offer
Spread
----------------- Bid

Liquidity is offered by people creating trading opportunities. Dealers then essentially sell traders liquidity, as they simply wait for the opportunity to trade. If a dealer is not available, then liquidity is offered by standing (limit) orders, while market orders demand the liquidity.

Pg 71: Spreads are mentioned and my brain is having a difficult time calculating the costs. I need to go over this in detail, perhaps later in the book?

Pg 77: Dealers do not like to trade with traders who are informed, so they have "adverse selection risk", which is primary cause of ex post regret.

Pg 79: Stop orders accelerate price changes, prices often change because traders on one side of the market demand more liquidity than is available.

Pg 89: Market structure is simply the trading rules and systems used by a market. It is important because this determines what people can know and do in a market, and since power comes from knowledge and the ability to act on it, market structure helps determine power relations among various types of traders.

I must understand market structure, how it affects trader behaviors, in order to understand the origins of market liquidity, price efficiency, volatility, and trading profits. These variables all depend on trader behavior, so it helps to determine whether markets will be liquid, whether prices will be informative, and which traders will trade profitably.

Pg 92: Quote-driven dealer markets - dealers are on every trade, and therefore they supply all of the liquidity.

Pg 94: Order-driven markets - buyers/sellers regularly trade with each other without the intermediation of dealers.
Price discovery - prices that best match buyers to sellers.

Pg 96: Brokers must find counter parties to large blocks of trades (broker market characteristic). Liquidity and block trades is important.
The execution system that a market uses to arrange its trades is the most important characteristic of its market structure.

Pg 97: In dealer markets where interdealer brokers help dealers arrange trades among themselves, the brokers collect much information about market conditions.
Enjoy
All I ask for is a chance to prove that money cannot make me happy.
Pg 32: Mentions two sides to a market. The buy side and a sell side. Harris says that sellers sell liquidity to the buyers. What about in a falling market? Aren't buyers buying liquidity from the sellers?

Hmm?

"The buy and sell sides of the trading industry have nothing to do with whether a trader is a buyer or a seller of an instrument. Traders on both sides of the trading industry regularly buy and sell securities and contracts."
Harris says that sellers sell liquidity to the buyers. What about in a falling market? Aren't buyers buying liquidity from the sellers?

In retrospect I see that I double stated the same thing. Sellers selling liquidity to buyers is the same as saying buyers buying liquidity from sellers. Mind you these are my personal book notes and have not been edited or even read in a long time.

My outlook at this point would be something like this. Liquidity is something that is needed by both buyers and sellers. When a buyer wants to buy, he seeks a seller, so the seller holds the liquidity. When a seller wants to sell, he seeks a buyer, so the buyer holds the liquidity. Liquidity is supplied to those who demand it. Both buyers and sellers can demand it.

Quote
"The buy and sell sides of the trading industry have nothing to do with whether a trader is a buyer or a seller of an instrument. Traders on both sides of the trading industry regularly buy and sell securities and contracts."

Thanks for the quote, but this was not what I was questioning at the time of my book notes. Although to be honest I don't know exactly what I was asking when I wrote that. Oh well. Either way, describing market participants as "buyers and sellers" merely simplifies things so that other topics can be discussed more clearly.
All I ask for is a chance to prove that money cannot make me happy.
Quoting Marsh
Thanks for the quote, but this was not what I was questioning at the time of my book notes. Although to be honest I don't know exactly what I was asking when I wrote that. Oh well.
Meh story of my life haha. I just saw that question mark and everything else I agree with.
Quoting Deusomega
Pg 32: Mentions two sides to a market. The buy side and a sell side. Harris says that sellers sell liquidity to the buyers. What about in a falling market? Aren't buyers buying liquidity from the sellers?

Hmm?

"The buy and sell sides of the trading industry have nothing to do with whether a trader is a buyer or a seller of an instrument. Traders on both sides of the trading industry regularly buy and sell securities and contracts."
Harris is talking about the sell side as in brokers and dealers. Oanda for example, is on the sell side of the market, because they sell me a service in that they enable me to buy or sell. On the other hand, the dealing banks that supply liquidity to Oanda put them on the buyside, while those banks are the 'official sell side.' To us little guys, both Oanda and their dealing banks are on the sell side. Those who make markets are on the sell side. When you issue a limit order on a real exchange (non-retail), you will find yourself on the sell side because you are providing a service (immeadiacy) to the broad market. When you issue a market order on any market, you are on the buy side.

So it's not about buying or selling instruments necessarily here, it's about services within the trading industry.
Quoting Scotty B
Harris is talking about the sell side as in brokers and dealers. Oanda for example, is on the sell side of the market, because they sell me a service in that they enable me to buy or sell. On the other hand, the dealing banks that supply liquidity to Oanda put them on the buyside, while those banks are the 'official sell side.' To us little guys, both Oanda and their dealing banks are on the sell side. Those who make markets are on the sell side. When you issue a limit order on a real exchange (non-retail), you will find yourself on the sell side...
I know this that's why I quoted that Harris passage.
I have a copy of this book you can have if you are in the UK
Quoting Porkpie
I have a copy of this book you can have if you are in the UK
Are you just finished with it or did you not find it useful? Just wondering.

I'm really liking the content. The guy did a heck of a piece of work IMO and wrote it so the knuckleheads like me could comprehend it. Ha!
I know a supplier who gets them cheap. Excellent book what happened to the discussion?

Ok lets make a start to a specific chapter: He quotes "The most important lesson that you may learn from this book appears in this chapter" (Chapter 14 'Bid/Ask Spreads).
You can also get them cheap off ebay. Mine was the "Indian Edition" which was paperback and not all that good quality but pretty cheap, but the annoying thing was the text was very small. I'll be going through the book again in the future and I'll check out what the legit edition looks like, if it's easier to read then I'll just buy it.
  •  Czech
  • | Joined Feb 2010 | Status: You Don't Know What You Don't Know | 111 Posts
Quoting Porkpie
I know a supplier who gets them cheap. Excellent book what happened to the discussion?

Ok lets make a start to a specific chapter: He quotes "The most important lesson that you may learn from this book appears in this chapter" (Chapter 14 'Bid/Ask Spreads).

The most important lesson being:
Quoting pg303
"Uninformed traders do not lose because they systematically want to trade on the wrong side..." "...but the costs of filling their orders will cause them to lose on average.
Uninformed traders thus ultimately lose to informed traders regardless of how they trade. They lose simply because they trade."
I feel like that should be stickied somewhere. The effect is largely multiplied for "scalpers".

What i take from this is you cannot win in the long term without an edge. And i don't think a statistical edge counts because you don't know why its working and when it will stop.
  • Post #18
  • Quote
  • Last Post: Aug 11, 2010 4:55pm Aug 11, 2010 4:55pm
They lose simply because they trade.

Yeah, this seems incredibly blunt but, there's so much truth to it!

It reminds me of the currently active thread: "Why are so many retail traders on the wrong side of the market?"

Answer: Because they are on the wrong side of the market. The Buy side. They are just consumers of a service and they pay dearly for it.

Of course, that's just part of the equation. Another huge part, that's off topic (sorry!) but, a main theme of the book, is who are the participants that you're up against?
Who's better prepared to weather a storm, better informed, more experienced, more disciplined etc. etc. - them or Joe Retail?
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