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When customers deliver a traditional buy and sell order for simultaneous
execution (a barter order), they realize tighter bid/offer spreads than for
traditional orders. This is because marketmakers respond to barter orders
more aggressively than they do to traditional orders. Marketmakers can be
more aggressive because they take on less exposure to market movement, so
their risks and hedging costs are reduced or eliminated.
Moreover, customers benefit from groups of pending limit orders that are
internal to the BarterSecurities system, because they may provide execution
prices that are inside marketmakers bids and offers. Many orders may be
combined to make one execution. For example, an order to sell IBM and buy
INTC, an order to sell INTC and buy CSCO, and an order to sell CSCO and buy
IBM, could form a three-way internal match. Accordingly, a customer wishing
to sell CSCO and buy IBM could find a single offer on the BarterSecurities
Limit Order Book that was generated by a combination of two or many other
barter orders. In fact, the number of implied offers grows geometrically
with the number of limit orders that reside in the system.
By delivering buy and sell orders for simultaneous execution (a barter
order), customers greatly reduce their execution risk. The specifications
of a barter order prohibit a buy order to be executed at the desired price
unless the sell order is also executed at the desired price, and vice versa.
Customers who use traditional orders do not have this protection. In a
falling market, for example, customers may find it easy to buy one security,
but may find it impossible to then sell the second security at the desired
price, because the price of the second security has fallen with the market.
Customers who enter traditional limit orders are subject to significant
adverse selection. That is, if the order is to buy, then unprofitable
purchases tend to be made in falling markets, but no trade tends to be made
in rising markets. BarterSecurities eliminates adverse selection by
allowing customers to access firm offers for their barter orders (which can
be accepted at the click of the mouse) while NOT showing their own limit
prices.
Now, customers have the option of trading at the moment that market
conditions suit them, rather than relinquishing this option to professional
marketmakers.
Customers can access Limit Order Books for their specific barter orders, and
can trade against existing offers on the book with the click of a mouse, at
the moment that the market suits them. Often, only one click is necessary
to trade a barter order in its entirety, even when trades at more than one
price level must be executed.
Customers who access the Limit Order Book to execute their barter orders
(rather than creating and submitting a limit or market order) receive
instantaneous trade confirmation whenever the contraside of the executed
trade is internal to the BarterSecurities system. Internal offers may be
shown by marketmakers, or may be available from combinations of barter limit
orders that have been previously submitted.
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