It talks about the exchange operation at high level

1. EXCHANGE OPERATIONS
Anurag Singh
Jan 2008

2. AGENDA
Overview of Trade Flow
Exchange/Trading House Operations
Member Registration
Market Place
Deal/Trade Capture
Information/Market Dissemination
Market Control/Regulation & Supervision
Exchange Trading Terminal
Other Functions of Exchange

3. OVERVIEW
- Trade Flow & Entities Involved

4. 1 - Client request TM to place
TRADE FLOW
order
2 – TM places order at
Exchange
1’ – Client can directly place
order using DMA
3 – (a) TM can modify existing
order (b) Exchange provides
Order status/Executions/Market
Data
4 – TM updates client on order
rejection/executions
3’ – TM updates CM about
Executions
4 – Exchange sends deal/trades
info to Clearing House
4’ – Client informs CM about
trades
5 – CM sends clearing
instructions to CH
6 – CM-CH interaction for risk
management/position
management/settlement
instruction
7 – CM updates Client about
positions/settlement
status/margins
8,8’ – Settlement Instructions
sent to & tracked from
Bank/Settlement House
9 – CM sends SI to SP
10 – SP sends SI to SH
11 – Physical settlement
updates to SP
12 – Settlement Status updated
back to CM

5. ENTITIES

6. EXCHANGE OPERATIONS
- Trading point of view

7. EXCHANGE FUNCTIONS
Member Registration
Market Place
Deal/Trade Capture
Information/Market Dissemination
Market Control/Regulation & Supervision
Exchange Trading Terminal

8. MEMBER REGISTRATION - FUNCTIONS
Deals with Registration of Member
Membership Capacity/Role Set up
Member Suspension/Revocation
Market in which Member will act
TM-CM relationship set up

9. MARKET PLACE - FUNCTIONS
Order/Quote Handling
• Orders & Quotes are received &
• Validated based on Exchange rules & regulations
• Processing of orders and quotes
• Storable orders are placed in order books
Order Matching
• Ranking of orders in the order book
• Matching of orders
Order/Trade Information
• Real Time order/trade information dissemination
• Trade info provided to other departments of Exchange

10. EXECUTION MODELS/TRADING MECHANISM
Automatic Order Book [Both order-driven/quote-driven]
Continuous Execution
Auction Execution
Odd Lot Execution
Standard Strategy (Exchange Defined Basket)
Execution
Non – Standard Strategy (TM Defined Basket)
Execution
Trade Reports Execution
Bulletin Board (Pink Boards) Execution
Quote Requests & their Execution
Non- Tradable Instrument Execution

11. CONTINUOUS EXECUTION
Orders successfully received are immediately eligible for matching
Fill & Store orders with remaining quantity left after earlier
matching attempt, are stored in order book
Order Ranking used for matching is mostly price-time
Execution price recognition logic
if incoming order price matches with the highest rank counter order then
the order price is the Execution Price
if the incoming order price is better than the existing counter order in the
order book then Execution Price can be determined as:
Alternative 1: use the price of the existing order in the order book as the deal price
Alternative 2: use the average price of the existing order in the order book and the
incoming order as a deal price
Execution price dissemination logic
if the incoming order results in single trade then the price disseminated
will be the trade/deal price
If the incoming order results in multiple trade then the price dissemination
will happens as:
If incoming order is a buy order, the deal prices are sent out in increasing order
If incoming order is a sell order, the deal prices are sent out in decreasing order

12. CONTINUOUS EXECUTION - EXAMPLE
Bids Asks
Price Quantity Time Price Quantity Time
100 6 10:04 100 5 10:02
99 15 10:01 100 7 10.03
101 10 10:01
Execution Price - 100

13. CONTINUOUS EXECUTION - EXAMPLE
Bids Asks
Price Quantity Time Price Quantity Time
101 6 10:04 100 5 10:02
99 15 10:01 100.50 7 10.03
101 10 10:01
The result is two trades – one of order quantity 5 (Trade 1)
and another 1 (Trade 2)
Alternative 1:
Execution Price of Trade 1 – 100 & Trade 2 – 100.50.
Disseminated in the same order
Alternative 2:
Execution Price of Trade 1 – 100.50 ( Avg of 101 and 100) &
Trade 2 – 100.75 (Avg of 101 & 100.50). Disseminated in the
same order

14. AUCTION EXECUTION
Auction Execution consists of two phase
Order Entry Phase
In this the orders are placed and the same are stored in the
order book after validation & processing
No matching is performed during this phase
Indicative Equilibrium/Auction price is calculated during
this phase
Auction Phase
This is the phase in which actual auction happens
The Equilibrium price becomes the auction price
When disseminating price information in the order entry
phase, orders that have a better price than the EP are
masked with price equal to Equilibrium/Auction Price

15. EQUILIBRIUM/AUCTION PRICE (EP) LOGIC
EP is the price at which the highest volume gets traded
All orders considered in identification of EP
If multiple EPs with same traded volume, then the one with
lowest Normal Order Imbalance is selected
If multiple EPS with same order imbalances, then the price
closest to Instrument Reference Price is selected
In case none of the above price exists, theoretical price is
calculated and EP is compared with that
Note:
Normal Order Imbalance – this is the volume/quantity of the orders
which didn’t get traded due to missing volume on the opposite side of
the EP, even though their prices are better than EP
Instrument Reference Price – It is first of these values - last traded
price, last settlement price, closing price. If none exist then it is the
theoretical price calculated by Exchange

16. AUCTION EXECUTION EXAMPLE
Bids Asks
Price Quantity Price Quantity
51 45 50 75
50 45
The EP in this scenario is 50 (match quantity is max = 75)
Bid Ask
Price Quantity Price Quantity
50 90 50 75

17. AUCTION EXECUTION EXAMPLE
Bids Asks
Price Quantity Price Quantity
52 45 49 75
51 45
50 25
If EP is 49, matched quantity is 75 & order imbalance is 40
If EP is 50 matched quantity is 75 & order imbalance is 0
Thus EP is 50
Bid Ask
Price Quantity Price Quantity
50 115 50 75

18. STANDARD STRATEGY EXECUTION
Standard Strategy (SS) is
Compound instrument, defined by Exchange for trading strategy
Also have their own order book
Generally have two to four legs
All legs traded to same decimal places and same currency
SS Execution
SS are executed only if all the legs are matched
SS matching can happen either in the SS order book or leg books
In order to perform SS matching at legs book, most exchange use Bait
order
SS Execution – Price dissemination
If matched in leg books, then price disseminated is same as matched
If SS matches with SS, then the leg price disseminated is generally as
below:
Bid Price – ‘Current Bid Price + 1 tick’ or closing price or settlement price
Sell Price – ‘Current Ask Price + 1 tick’ or closing price or settlement price

19. STANDARD STRATEGY – BAIT ORDER EXAMPLE
Series:
GFARMNTH – Google Far Month Series
GNERMNTH – Google Near Month Series
GFRNRSPRD – Google Near Month (S) – Far Month (B) series
Series Bids Asks
Price Quantity Price Quantity
GFARMNTH 5.00 7 Bait Order
GNERMNTH 7.00 20
GFRNRSPRD 2.00 7

20. NON-STANDARD STRATEGY EXECUTION
Non-Standard Strategy is
Defined by trading members
No order book exists for the same
The matching happens only at leg books
Partial execution can happen
Execution happens as for each leg as normal
instrument order

21. TRADE REPORTS
Trade Reports is for Deals closed outside the Exchange
Each trading participant reports the Trade independently
Exchange validates each leg individually based on rules
and regulations
Exchange performs matching of these reported trade legs
Dissemination happens in a independent and transparent
method

22. BULLETIN BOARD
Bulletin Board is used by TMs for announcing the interest
to buy or sell an instrument
The execution model of bulletin board orders doesn’t follow
price-time ranking
Amendment/Deletion is allowed on Bulletin orders
It allows to trade on single instrument and strategy
Instrument may or may not be traded on Automatic
Market

23. QUOTE REQUESTS
Generally used when markets are illiquid
TM can request quote for an instrument
Quote request received by Exchange is forwarded to
Market Makers and other Trading Members (depends on
rules & regulation)
Actual quote comes in the generic Automatic Continuous
Market
Quote requests are not related to actual order matching

24. NOTES: ORDER ATTRIBUTES
Instrument
Order Type
Limit Order (Order validity – F&S, F&K, FoK)
Market Order (Order validity – F&S, F&K, FoK)
Market to Limit Order
Best Limit Order
Iceberg
Order Validity
Rest of Day
Good till Date (Number of Days)
Good till Cancelled (Unlimited)
Side – Bid/Ask
Price
Quantity
Trade Quantity
Hidden Quantity
Lot Size/Block Size
Open/Close Indicator
Client Information
Give Up Information

25. NOTES: SESSIONS
Generally there are two main sessions :
Trading Session – defined for each Market
Instrument Session – defines activation/suspension of
instruments/series
Every session is defined by its state:
Pre-Open
Open
Closed

26. DEAL/TRADE CAPTURE
After the orders are matched trade is formed
The trade information needs to be stored for following
purpose:
To disseminate the information to the trading members
To disseminate the information to the clearing &
settlement houses
For regulatory purpose
Cancel/Amendment of trades

27. INFORMATION/MARKET DISSEMINATION
Exchange Disseminates Market, Trade & Order Information
to the Trading Participants
The Information is provided at two levels:
Market Level – Price Statistics, Market Depth
Market per Order Level
The other information which are disseminated are:
Product Information
Historical Trade Information
Corporate Actions
Session Information

28. MARKET CONTROL/REGULATION & SUPERVISION
Trading Surveillance
Checks
Price Limits/Circuit Filters
Best Price Movements
Trade Quantity Limit etc.
Alarms are set for these checks
Market Making Surveillance
Checks
Market Maker performance metrics
MM Performance reports
Alarms are set for these checks

29. EXCHANGE TRADING TERMINAL
Acts as the direct interface for Trading Members to access
Exchange.
Main Functions supported on the Terminal:
Market Match (use default & create own Market watches)
Place Orders
Market Making – placing quotes
View/Modify orders
View Historical Data
View of news and alerts published by exchange
View own Trades
Rectify own Trades
View Intra-day Open trade positions at account level
View Market Watch/Depth and Symbol details
Define/View Trading Limits
Download Reports

30. OTHER IMPORTANT FUNCTIONS OF EXCHANGE
Defining Market Structure
Instrument Set up
Series Generation
Providing API interface for Members to connect using own
Application
Fees & Billing
Regulatory Reporting