Central limit order book
Encyclopedia
A central limit order book (CLOB) was a centralised database of limit orders proposed by the Securities Exchange Commission. However, the concept was opposed by securities companies who were afraid that such a system will cause them to lose business.
A Central Limit Order Book or ("CLOB") is a trading method used by most exchanges globally. It is a transparent system that matches customer orders (e.g. bids and offers) on a 'price time priority' basis. The highest ("best") bid order and the lowest ("cheapest") offer order constitutes the best market or "the touch" in a given security or swap contract. Customers can routinely cross the bid/ask spread to affect low cost execution. They also can see market depth
or the "stack" in which customers can view bid orders for various sizes and prices on one side vs. viewing offer orders at various sizes and prices on the other side. The CLOB is by definition fully transparent, real-time, anonymous and low cost in execution.
In the CLOB model, customers can trade directly with dealers, dealers can trade with other dealers, and importantly, customers can trade directly with other customers anonymously.
In contrast to the CLOB approach is the Request For Quote ("RFQ") trading method. RFQ is an asymmetric trade execution model. In this method, a customer queries a finite set of participant market makers who quote a bid/offer ("a market") to the customer. The customer may only "hit the bid" or sell to the highest bidder or "lift the offer" or buy from the cheapest seller. The customer is prohibited from stepping inside the bid/ask spread and thereby reducing its execution fees. Contrary to the CLOB model, customers can only trade with dealers. They can not trade with other customers, and importantly, they can not make markets themselves.
Currently, the Dodd-Frank Act (2010) as interpreted by the regulators requires that all OTC credit and interest rate swaps must, if clearable, trade on a Swap Execution Facility ("SEF") that employs either the CLOB or RFQ method.
A Central Limit Order Book or ("CLOB") is a trading method used by most exchanges globally. It is a transparent system that matches customer orders (e.g. bids and offers) on a 'price time priority' basis. The highest ("best") bid order and the lowest ("cheapest") offer order constitutes the best market or "the touch" in a given security or swap contract. Customers can routinely cross the bid/ask spread to affect low cost execution. They also can see market depth
Market depth
In finance, market depth is the size of an order needed to move the market a given amount. If the market is deep, a large order is needed to change the price. Market depth closely relates to the notion of liquidity, the ease to find a trading partner for a given order: a deep market is also a...
or the "stack" in which customers can view bid orders for various sizes and prices on one side vs. viewing offer orders at various sizes and prices on the other side. The CLOB is by definition fully transparent, real-time, anonymous and low cost in execution.
In the CLOB model, customers can trade directly with dealers, dealers can trade with other dealers, and importantly, customers can trade directly with other customers anonymously.
In contrast to the CLOB approach is the Request For Quote ("RFQ") trading method. RFQ is an asymmetric trade execution model. In this method, a customer queries a finite set of participant market makers who quote a bid/offer ("a market") to the customer. The customer may only "hit the bid" or sell to the highest bidder or "lift the offer" or buy from the cheapest seller. The customer is prohibited from stepping inside the bid/ask spread and thereby reducing its execution fees. Contrary to the CLOB model, customers can only trade with dealers. They can not trade with other customers, and importantly, they can not make markets themselves.
Currently, the Dodd-Frank Act (2010) as interpreted by the regulators requires that all OTC credit and interest rate swaps must, if clearable, trade on a Swap Execution Facility ("SEF") that employs either the CLOB or RFQ method.