- Method of Trade Execution
Method of trade execution is largely classified into individual auction and negotiated trading. The individual auction is further classified into a single price auction and continuous trading at multiple prices. The negotiated trading is classified into negotiated block trading, trading of exchange of futures for physicals (EFPs) and negotiated FLEX trading.
A derivative trading is executed by individual auction where buyers compete with each other and sellers also compete with each other. Trades are executed at the price where the lowest ask and highest bid are matched through such competitions.
Individual auction has price and time priorities for the orders to execute. That is, a lower ask has the priority over a higher ask and a higher bid has the priority over a lower bid. Among the orders with same prices, the order received earlier has the priority over those received later.
However, in case of single price auction, if the price is determined at the upper or lower price limit, the time priority is not applied to those orders at the price limit. Orders are matched based on quantity priority where the larger order has the priority over the smaller order and the execution quantity is allocated from the larger ones to the smaller ones until the whole quantity is matched. Among the orders with same quantity, time priority is applied.
The individual auction is classified into a single price auction (call auction) and a multiple price auction (continuous trading).
- Single Price Auction
- Orders received for a certain period of time are matched by a single price through the competition among buying orders, the competition among selling orders, and the competition among the best buying and selling orders. The single price auction is used for determining the opening price, the closing price, and the first price resuming trading after a trading suspension.
- Continuous Trading
- Orders are matched based on the price and time priorities at the price of order placed earlier among the bid and ask orders in a case where the bid price is the same as or higher than the ask price or where the ask price is the same as or lower than the bid price.
The method of negotiated trading is used to make a transaction between a single buyer and seller. Each party selects the counterparty at their discretion and negotiates and determines the trade conditions such as the price and the quantity to file an application with the exchange which executes the trade.
- Negotiated Block Trades
- Negotiated block trading is used for the convenience of the block traders like institutional investors who intend to trade a large amount of securities without any sudden impact on the market price. Trading parties negotiate the transaction details such as the issue, price and quantity and file an application with the exchange via members to execute the block trade. Block trading is applied to KOSPI 200 futures, KOSPI 200 options, USD futures, JPY futures, EUR futures, 3-year KTB futures, and Mini-Gold futures.
- Exchange of Futures for Physicals (EFPs)
- EFP trading is a method of block trading for the convenience of the block traders like institutional investors who intend to trade a large amount of EFPs avoiding sudden fluctuations in the market price from the large volume. Trading parties negotiate the transaction details such as the issue, price and quantity and file an application with the exchange via members so that the trades are matched. EFPs are available for USD futures, JPY futures, EUR futures and 3-year KTB futures.