Glossary: Stock Market Structure Terms
Introduction
This glossary defines 30 stock market structure terms that every investor should understand when analyzing how US equity markets operate. Terms are organized alphabetically within functional categories.
Market Participants
Authorized Participant (AP): A broker-dealer with the contractual right to create and redeem ETF shares directly with the fund sponsor, typically by delivering or receiving baskets of underlying securities.
Designated Market Maker (DMM): A firm assigned by the NYSE to maintain orderly trading in specific listed stocks by providing continuous bid and ask quotes and facilitating the opening and closing auctions.
Institutional Investor: An organization (mutual fund, pension fund, insurance company, or hedge fund) that pools money to invest in securities, typically trading in block sizes of 10,000+ shares.
Market Maker: A firm that continuously posts bid and ask prices for securities, standing ready to buy from sellers and sell to buyers while profiting from the bid-ask spread.
Retail Investor: An individual investor who buys and sells securities for personal accounts rather than on behalf of an organization.
Wholesaler: A market maker specializing in executing retail order flow, typically purchasing orders from retail brokerages through payment for order flow arrangements.
Order Types and Execution
Bid-Ask Spread: The difference between the highest price a buyer is willing to pay (bid) and the lowest price a seller is willing to accept (ask) for a security.
Fill: The execution of an order, either in whole or in part, at a specified price.
Limit Order: An order to buy or sell a security at a specified price or better, which may not execute if the market price does not reach the limit price.
Market Order: An order to buy or sell a security immediately at the best available current price, prioritizing speed of execution over price.
National Best Bid and Offer (NBBO): The highest bid price and lowest ask price available across all US exchanges for a given security at any moment.
Price Improvement: Execution of an order at a better price than the NBBO, such as buying below the ask or selling above the bid.
Stop Order: An order that becomes a market order once the security reaches a specified trigger price, used to limit losses or protect profits.
Market Structure and Regulation
Alternative Trading System (ATS): A non-exchange trading venue, such as a dark pool, that matches buyers and sellers without publicly displaying quotes before execution.
Circuit Breaker: A regulatory mechanism that temporarily halts trading across all US exchanges when major indexes decline by specified percentages (7%, 13%, or 20%) within a trading session.
Consolidated Tape: The electronic system that collects and disseminates real-time trade and quote data from all US exchanges and trading venues.
Dark Pool: A private trading venue where institutional investors can execute large orders without publicly displaying their trading intentions before execution.
Payment for Order Flow (PFOF): Compensation paid by market makers or wholesalers to retail brokerages in exchange for routing customer orders to them for execution.
Regulation NMS: SEC rules governing the US national market system, including requirements for trade-through protection, access to quotes, and market data distribution.
Securities Information Processor (SIP): The system that consolidates quote and trade data from all exchanges to produce the NBBO and consolidated tape.
Trading Mechanics
Creation Unit: The minimum basket of securities (typically 25,000 to 100,000 ETF shares) that an authorized participant exchanges with an ETF sponsor during the creation or redemption process.
Days to Cover: The number of trading days required to cover all short positions in a stock, calculated by dividing short interest by average daily trading volume.
Float: The number of shares available for public trading, calculated as shares outstanding minus restricted shares, insider holdings, and large block holdings.
Float Rotation: The ratio of cumulative trading volume to float shares over a specified period, indicating how many times the available shares have theoretically changed hands.
Liquidity: The ability to buy or sell a security quickly without significantly affecting its price, often measured by trading volume and bid-ask spread width.
Short Interest: The total number of shares of a security that have been sold short and not yet covered or closed out.
Short Interest Ratio: Short interest expressed as a percentage of float or shares outstanding, indicating the proportion of available shares currently held in short positions.
Trade-Through: Execution of a trade at a price worse than a better price available on another exchange, prohibited under Regulation NMS for protected quotes.
Turnover: A measure of trading activity expressed as a ratio of trading volume to shares outstanding or float, often annualized for comparison purposes.
Volume-Weighted Average Price (VWAP): The average price at which a security traded throughout a session, weighted by the volume traded at each price level, commonly used as an execution benchmark.
Cross-References
For detailed explanations of these concepts, see related articles:
- The Role of Market Makers and Wholesalers
- How ETFs Impact Underlying Stock Liquidity
- Float Rotation and Turnover Metrics
- Reading Short Interest and Days to Cover
Updates
This glossary is updated quarterly to incorporate new terminology and regulatory developments. Terms related to SEC market structure proposals will be added as rules are finalized.
Source: SEC Regulation NMS and market structure rules.
Source: FINRA Rule 5310 (Best Execution) and related guidance.
Source: NYSE and Nasdaq exchange rule books and market structure documentation.