Question

Mark is also interested in reducing the cost of selling of his Christian Dior shares, Ali suggested that he should use European electronic crossing network to sell some of his shares. He told Mark that these networks are cheap, preserve anonymity and allows for 6 crossing opportunities of trades per day. They also allow participants to place some restrictions such as price and minimum fill. All orders submitted to the network is good for day which is means that any unfulfilled part of an order is automatically resubmitted to subsequent crossing sessions during the day. Following Ali’s advice, Mark has submitted his 150,000 CD shares to be sold in the European crossing network with a minimum fill of 125,000. The following orders are on the network for the shares of CD at the time of the first crossing session of the day. The most recent trading price of CD at the Paris Bourse is € 37.

A order: a market order to buy 100,000 shares

B order: a market order to sell 50,000 shares

C: an order to buy 20,000 shares at € 36

In the next crossing session new orders are submitted. The most recent trading price of CD at the Paris Bourse is € 38.

D order: a market order to buy 150,000 shares

E order: A market order to sell 50,000

1.In the first crossing session discuss what trades would take place on the crossing network and what orders remain unfilled?

2.In the second crossing session discuss what trades would take place on the crossing network and what orders remain unfilled?

Answer 1

Cross Trade is a system in which buyers and sellers of the same security are matched to each other outside the purview of the official stock exchange which essentially makes these kind of transactions similar to OTC or Over The Counter Trading. This essentially means that electronic cross trades are matched automatically without routing the transaction through the official exchange. The trade gets executed only when the seller and the buyer quote equal sale and buy price respectively. Additionally, this system has the advantage of transacting large volumes of share without impacting the public quote, being anonymous in nature and off course cheaper than regular exchanges. However, cross trades are banned in all major exchanges across the world and is allowed only under special circumstances in very liquid securities. Also certain electronic cross trades place restrictions on the price and minimum volume of each transaction which in this case is being referred to as 'minimum fill'. Any order volume less than the 'minimum fill' is rejected in its entirety.

In this example Mark is trying to sell 150000 CD shares and the electronic crossing exchange has a minimum fill of 125000 with a maximum of 6 crossings (matchings) allowed per day. Any unfulfilled order is resubmitted for the next crossing session till the order is completed.

Order A : The order volume is below the minum fill of 125000 and hence it will not trigger Mark's sell order on the crossing network (the order might get triggered on the regular exchange though as the exchange might not have a minimum fill requirement).

Order B: Mark's order is a sell order and not a buy one hence will not be matched by the exchange. Additionally, minimum fill requirement is not met.

Order C: Minimum fill requirement set by Mark not met and hence might not be executed on the crossing network.

(1) Hence no transaction will occur in the first crossing session

Order D: This order gets matched to Mark's sell order of 150000 shares, fulfills the minimum fill criteria and gets executed.

Order E: Might not get executed on the crossing network if either price or minimum fill requirement is not met.

(2) Only Order D gets executed for sure in the crossing network. Cannot say anything about Order E as long as other additional details are not known.