Asset classes

The order-book mental model from M0.2 is really an equities/futures thing. The big lesson of this item: other asset classes trade completely differently, and knowing which model applies where is basic literacy an interviewer will assume.

                equities        bonds            FX               derivatives
   ───────────────────────────────────────────────────────────────────────────
   where        exchange        OTC / dealer     OTC interbank    futures: exch
                (lit book)      (RFQ)            + ECNs           swaps:   OTC
   driven by    orders          quotes           quotes           mixed
   transparency high            low              medium-low       varies
   standardized fungible        bespoke          currency pairs   futures: yes
                shares          (many ISINs)                      swaps:   bespoke
   liquidity    deep per name   thin per issue   enormous         deep in the
                                                 (top pairs)      front month
   settlement   T+1             T+1 / T+2        T+2 (spot)       daily margin

The four

Equities — shares of ownership. Exchange-traded, lit order book, order-driven, standardized and fungible (one Apple share = any other), T+1. The model everything else gets compared against.

Bonds (fixed income) — debt (you lend; they pay coupons + principal). Mostly OTC dealer markets: you ask a bank for a quote (RFQ — request for quote), it’s quote-driven and opaque, no central lit book. The kicker: one issuer floats many bonds (each its own ISIN, maturity, coupon), so any single bond trades thinly. Government bonds (gilts, Treasuries) are very liquid; corporate bonds much less. Priced in yield, not just price.

FX (foreign exchange) — currencies, traded in pairs (EUR/USD). The largest market on earth (~$7.5 trillion/day), decentralized, OTC, 24/5, with no central exchange — a network of banks (the interbank market) plus electronic venues (ECNs). Spot, forwards, swaps.

Derivatives — contracts whose value derives from an underlying. Two cultures: futures (exchange-traded, standardized, centrally cleared, margined daily) and swaps (mostly OTC, bespoke). Both deliver leverage and are used to hedge or speculate. This one paragraph is a placeholder for a whole world — M0.7 builds forwards, futures and swaps from first principles, and M0.8 does options.

The axes that separate them

Exchange vs OTC/dealer · order-driven vs quote-driven · transparent vs opaque · standardized vs bespoke · concentrated vs fragmented liquidity. Master those five axes and you can place any instrument you meet — and you’ll understand why a firm’s microstructure expertise in equities doesn’t automatically transfer to rates or credit.

Source: Harris ch.2–3 for the survey; for feel, skim an FX primer (BIS Triennial Survey summary) and any explainer on how corporate bonds trade OTC vs equities on-exchange.