Question

P2-2 (similar to) Question Help Transaction costs In late December you decide, for tax purposes, to sell a losing position that you hold in Twitter, which is listed on the NYSE, so that you can capture the loss and use it to offset some capital gains, thus reducing your taxes for the current year. However, since you still believe that Twitter is a good long-term investment, you wish to buy back your position in February the following year. To get this done you call your Charles Schwab brokerage account manager and request that he immediately sell your 1,000 shares of Twitter and then in early February buy them back. Charles Schwab charges a and for broker-assisted trades there is an additional $25 service charge, so the total commission is $29.95. a. Suppose that your total transaction costs for selling the 1,000 shares of Twitter in December were $59.95. What was the bid/ask spread for Twitter at the time your trade was executed? b. Given that Twitter is listed on the NYSE, do your total transaction costs for December seem reasonable? Explain why or why not. c. When your February statement arrives in the mail, you see that your total transaction costs for buying the 1,000 shares of Twitter were $47.95. What was the bid/ask spread for Twitter at the time your trade was executed? What are total und trin teneantian sete for hath eolling and humine the chane and what could not have done a. The bid/ask spread for Twitter, at the time your trade was executed, is $ 0.0600 (Round to the nearest cent.) b. Given that Twitter is listed on the NYSE, do your total transaction costs for December seem reasonable? Explain why or why not. "Twitter is listed on the NYSE, a broker market. So, had Charles Schwab routed the order to the NYSE, it could have been executed against a buy order, and total transaction costs would have been only the $29.95 brokerage commission. But transaction costs included half the bid/ask spread per share traded, so either: (i) the order went to the NYSE, no public buy order was available, and the market maker bought the 1,000 shares for her inventory (at a cost of half the bid/ask spread per share) or (ii) Charles Schwab routed the order to a dealer market like NASDAQ, and a market maker added the shares to her inventory (at half the spread per share)." This statement is true. (Select the best answer from the drop-down menu.) c. The bid/ask spread for Twitter, at the time your trade was executed, is $ 0.0018. (Round to the nearest cent.)

Answer 1

a. Calculation of Bid/Ask spread ;

Bid/Ask Spread = ( Total Transaction cost - Total Commission / Number of shares )

= ( $ 59.95 - $ 29.95 / 1000 )

= ( $ 30 / 1000 )

= $ 0.03

b.

  The statement is “False”.

Justification: The bid-ask spread is a capacity from liquidity of stock. On the off chance that the stock is traded on the NYSE (New York Stock Exchange) and can be thought to be practically liquid. The total transaction cost together with bid/ask spread is on the greater side, yet this is because of short ticket range of the transaction.

c.  Calculation of Bid/Ask spread at the time trade was executed;

  Bid/Ask Spread = ( Total Transaction cost - Total Commission / Number of shares )

= ( $ 47.95 - $ 29.95 / 1000 )

= ( $ 18 / 1000 )

= $ 0.018 or 0.20