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Contrast trade implementation features across spot currency, OTC derivative, futures and options, fixed-income and equity markets

CFA® Level III · Portfolio Management Pathway · Trade Strategy and Execution · L3.PM.7.f

The idea

Equities trade mainly on exchanges and alternative venues with visible order books, dark pools and algorithmic execution; liquidity is deep for large caps and patchy for small caps. Fixed income trades over the counter through dealers, with many issues rarely traded and less price transparency, so bid–ask and impact costs are higher. Exchange-traded futures and options are standardised, centrally cleared and margined, with liquidity concentrated in front-month futures and near-the-money options. OTC derivatives such as swaps are customised, negotiated with dealers, carry counterparty risk reduced by clearing and collateral, and can be costly to unwind. Spot currency trades in a deep dealer market, increasingly on electronic platforms. The trap is applying equity trading tools to dealer markets.

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