Problem 3: Suppose stock X trades on the New York Stock Exchange. Information fr

Question

Problem 3: Suppose stock X trades on the New York Stock Exchange. Information from the limit order book (LOB) for stock X is contained below. Limit buy orders Price $ 80.10 $ 80.18 $ 80.30 Shares 1000 700 500 Limit sell orders Price $81.00 $80.75 Shares 1500 700 Suppose the specialist's quotes are as follows: Bid price$8030 Bid depth600 shares Ask priceS80.70 Ask depth800 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 60o shares comes in. Questions (I)Awhat price is it executed? (II) Did the LOB change? Why or why not? (III)/Did the specialist's inventory of stock X change? Why or why not? (IV) Did the specialist act as a dealer bröker or both in this transaction?

Explanation / Answer

Part A)

The bid is the price at which the buyer is willing to purchase or demand price

The ask is the price at which the selling is willing to sell or supply price

Bid-Ask spread is the difference ask/sell price and the bid/buy price of an asset/security.

Part B)

I) Market orders are fulfilled at the lowest available BUY or SELL price, hence:

II) LOB will not change will the trade will be executed with the inventory available with the specialist.

III) Since the trade happened with the inventory available will the specialist hence it will change (updated by the remaining quantities of stocks available if any).

IV) Specialist facilitates trade orders on behalf of other customers or brokers and hence is a broker. A dealer is a person who is trading for his/her own.

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