Suppose stock Y trades on the New York Stock Exchange. Information from the limi
ID: 2772874 • Letter: S
Question
Suppose stock Y trades on the New York Stock Exchange. Information from the limit order book (LOB) for stock Y is contained below.
Limit buy orders Limit sell orders
Price Shares Price Shares
$80.50 1000 $81.00 1500
$ 80.38 700 $80.75 700
$ 80.30 500
Suppose the specialist’s quotes are as follows:
Bid price $80.30 Ask price $80.70
Bid depth 600 shares Ask depth 800 shares
(a)What is the bid-ask spread?
(b)For each of the following scenarios answer all the questions below:
Scenarios.
1.A market buy order for 400 shares comes in.
2.A market sell order for 600 shares comes in.
Questions.
(I) At what price is it executed? (Remember that the market orders will be executed at the best bid or ask prices).
(II) Did the LOB change? Why or why not?
(III)Did the specialist’s inventory of stock Y change? Why or why not?
(IV)Did the specialist act as a dealer, broker or both in this transaction?
Explanation / Answer
Solution.
A. What is the bid-ask spread.
If you're investing in individual securities, particularly less-liquid ones, it pays to be aware of bid-ask spreads when you're buying and selling. The bid is the price that someone is willing to pay for a security at a specific point in time, whereas the ask is the price at which someone is willing to sell. The difference between the two prices is called the bid-ask spread.
Bid price $80.30
Ask price $80.70
bid-ask spread. = $.40
B. 1. (I) At what price is it executed
Ask price $80.
(III) Did the specialist’s inventory of stock Y change.
Yes,
(IV) Did the specialist act as a dealer, broker or both in this transaction.
In this case dealer act as a Both in this transaction.
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