Question

Problem 1 Assume that the limit order book is as shown in the table below. 1) What is the bid-ask spread in cents and basis points of the mid price? 2) If you buy 100 shares with a market order, an immediately sell them also with a market order, what is your P&L? 3) A limit order to buy 150 shares at $34.50 arrives in the market. What transactions occur, and what is the resulting bid-ask spread in cents? 4) A limit order buy order for 2000 shares at $34.53 arrives. List all transactions, and determine the bid-ask spread after the order is executed. Orders offer offer offer offer offer bid bid bid bid bid Shares Price 1900 34.56 1700 34.54 1200 34.53 400 34.52 300 34.51 1000 34.49 1100 34.48 1400 34.47 1500 34.46 2200 34.45

Any help is appreciated!

Answer 1

Bid-ask spread is difference between ask i.e offer/sale and bid price i.e purchase/buy of a security. Ask price is the value point at which seller is ready to sell and bid price is the point at which buyer is ready to buy.

1) In this given problem mid price are

Ask = 34.53

Bid = 34.48

Spread at mid price = 0.05

in % term = 0.05/34.53 x 100 = 0.145% (Approx)

2) If we buy and sell 100 shares immediately. For understanding this first know that whenever you are willing to buy your intention will be buy at least price and whenever you are willing to sell your intention will be to sell at higher price. Since offer of 300 shares at 34.51 available which is least price your order will be executed at price of 34.51 and it will cost you 3451. And you sell immediately there are buyer who wants to buy at highest price i.e at price of 34.49 @1000 shares. Your trade will be execute at this price and you will receive 100x34.49 = 3449 and this transaction will result in loss to you $2.(ignoring brokerage)

3) When a buyer and seller agree to prices being offered by each other a trade/transaction takes place.. Since no one is offering to sell at this price the trade shall not executed . The best offer is available at 300 shares @ 34.51 the spread is the difference between the highest price a buyer is willing to pay and the lowest price a seller is willing to accept. i.e 34.50-34.51 = 0.01

4) A limit order to buy 2000 shares at 34.53 the following trade shall happen

First 300 shares will be purchased at 34.51 because as i told your earlier buyer want to buy at least price thereafter 400 shares will be bought at 34.52 and after that 1200 shares at 34.53 . For remaining 100 shares trade buying offer shall be remain open because there is no shares remain offered at price of 34.53. Here the highest price the buyer is willing to pay is 34.53 and lowest price the seller is willing to accept is 34.54 so the spread is 0.01