Investment—Trading Jargon 101

The below information was shared by @FabiusMercurius on her twitter thread:

Trading Jargon 101

1. Market maker vs Market taker 

Markets are made up of makers & takers. Makers: "producers" of buy/sell orders (they create quotes based on the max price at which they'd buy & min at which they'd sell) Takers: "consumers" (they buy or sell instantly at the maker's price quote)

2. Passive vs Aggressive Order (Limit vs Market Order) 

Passive/limit order: a trader sets a new price, different from the going rate (e.g. buy $TSLA at $800, while current price is $616) Aggressive/market order: a taker executes a buy/sell immediately @ whatever the going rate

3. Liquidity

People often describe market makers as "liquidity providers." Liquidity is the degree to which one can quickly buy/sell a security. In markets with lots of quotes flying around, orders get matched & filled fast (high liquidity). Makers add liquidity; takers remove.

4. Bid-Ask (Bid-Offer) 

The 2-part price quote that market makers put out for each tradable security. Bid: highest price the Market Maker is willing to buy at Ask/Offer: lowest price the Market Maker is willing to sell at Bid-ask spreads widen during greater market uncertainty & lower liquidity.

5. "Hit the Bid" & "Lift the Offer"

A trader "hits the bid" when s/he agrees to sell at the market maker's bid price. A trader "lifts the offer" when s/he agrees to buy at the MM's offer price. In both cases, the trader is a market taker, i.e. placing an aggressive order.

6. "Cross the spread"

When a trader "crosses the spread" this means the exact same thing as placing an "aggressive order", aka acting as a "market taker" by either hitting the bid or lifting the offer. I think you get the trend now... traders have 99 ways to express 1 concept.

7. "Fill or kill" 

An order to buy/sell that must be executed immediately & entirely; otherwise the whole order gets cancelled. No partial execution allowed, which can arise if there's low liquidity (e.g. buyer wants 10k shares of $AUVI @ 10.50 but only 8.5k available to sell)

8. Open vs. Close (options) 

When trading options - Buy/sell to open: buy/sell a call or put to initiate a long or short position, i.e. take on directional risk - Buy/sell to close: buy/sell a call or put to close out of a position, i.e. bring net directional risk back to zero

9. Margin 

There's a couple nuances in how to use the term "margin." - To "buy on margin" means to buy an asset by borrowing the balance from a bank or broker (e.g. 20% down, 80% financed) - "Margin" itself is the collateral a trader deposits w/ a broker to cover credit risk.

- Brokers may ask traders to "post margin" before initiating a trade, esp. in options. - Such "margin requirements" are specified as minimum %s of total contract value that a trader needs to post to ensure that if the price moves adversely, s/he has enough money to cover losses.

10. Margin calls 

A trader gets "margin called" when some security in the portfolio suddenly super rallies or super crashes (depending if s/he was short vs long) and there's not enough collateral to reflect the new risk. The trader can then either put more money in or unwind.

11. Puke 

Traders "puke" when some position in their portfolio is losing so much value that in order to minimize further losses the trader must unwind. Long traders that puke are forced to sell at a loss; shorts that puke are forced to cover at a loss (e.g. $GME, $AMC scenarios).

12. Short Squeeze 

A special case where short-sellers get margin called, i.e. puke. The squeeze usually begins when short interest is high & buyers start bidding up the stock. Initial shorts panic-buy to cover & push the price up in a vicious cycle that causes more shorts to puke.

13. Basis points, bps, "bips" and "pips" 

They all mean the same thing. 1/100th of a percentage point (0.01%) Bips are used to describe the change in value of securities or the rate change in an index or other benchmark. In forex, traders typically use "pips."

14. Par 

More nuances again (traders really know how to use language to keep outsiders out). If you google par, you'll get something really confusing about face values specified in some charter for stock & bond issuance. Ignore the stock part; no equities trader talks par, ever.

Par is only colloquially used for bonds. It means $1000, i.e. the standard denomination at which all bonds are issued (in the US). Bonds that trade "at par" are still worth $1,000 per contract. Instead of "at par," traders may say "at 100" (aka at 100% of par value).

Order book

15. Order Book 

"How to read an order book" is worth a thread of its own, but for now think of it as an exchange's placard of buy & sell orders. Use case: Order books give traders a sense of demand levels and support & resistance (e.g. buy walls / sell walls, see next posts)

16. Market Depth 

Most order books show two green & red histograms visualizing real-time volume of bids & asks for a security across specified prices, aka the "market depth." The deeper the order book, the more traders can place large block orders w/out moving the price.

Buy wall & sell wall

17. Buy wall & sell wall 

A disproportionately large spike sloping upwards on either side of the market depth chart is called a wall. Buy walls are spikes on the bid (green) side; sell walls are spikes on the ask (red) side. It means there is a large whale putting up a big block.

18. Block trade 

A block trade is basically one giant order to buy or sell -- so big that it's usually executed outside of the public exchanges so as to not move the market (i.e. over the counter via "dark pools" or "block houses" where these transactions stay hidden from public).

19. Dark Pools 

Private trading systems that buy/sell large blocks of securities on behalf of whale clients who wish to preserve anonymity & avoid moving the market. They execute blocks by either finding another whale counterparty or chunking up large orders into smaller batches.

20. Slippage 

Say you execute a market order to buy 100 shares @ $20. You blink & see that it was filled at... $20.33? Very annoying. This is called slippage. What coulda happened under the hood: 67 shares were available at $20; You ate through them; the next 33 were offered at $21.

The darker the color the riskier the financial asset.
The darker the border the less liquid the instrument