Question

Essay question

22. The present limit order book for stock A looks like the following:

	Price ($)	Quantity (# of shares)
ask5	10.50	50,000
ask4	10.40	45,000
ask3	10.30	5,000
ask2	10.25	20,000
ask1	10.20	10,000
bid1	10.10	5,000
bid2	10.05	10,000
bid3	10.00	4,000
bid4	9.90	10,000
bid5	9.85	20,000

If there is an

1. Arrival of a market sell Q=18,000
2. Arrival of a sell @$10.00， Q=18,000

Discuss

(a) how many trades occur?

(b) what is limit order book change?

(c) what is the change in bid-ask spread?

(d) what is the change in the depth?

Answer 1

(A) In market sell, entire order quantity is executed at best available rates,

In limit sell, order is executed only if ask price or price above ask price is available.

(A) If there is an Arrival of a market sell Q=18,000,

(a)following bid orders will get executed:

	Price ($)	Quantity (# of shares)
bid1	10.1	5,000
bid2	10.05	10,000
bid3	10	3,000
Total		18000

(b) Limit book will change as

	Price ($)	Quantity (# of shares)
ask5	10.5	50,000
ask4	10.4	45,000
ask3	10.3	5,000
ask2	10.25	20,000
ask1	10.2	10,000
bid3	10	1,000
bid4	9.9	10,000
bid5	9.85	20,000

(c) Change in bid ask spread:

Bid ask spread before order is executed = 10.20 - 10.10 = $ 0.10

Bid ask spread after order is executed = 10.20 - 10.00 = $ 0.20

Change in bid ask spread = $0.20 - $0.10 = $ 0.10

(d) change in depth will be quantity executed that is 18,000 quantiy lower on bid side.

(B)

(A) If there is an Arrival of sell @ $10 for Q=18,000,

(a)following bid orders will get executed:

	Price ($)	Quantity (# of shares)
bid1	10.1	5,000
bid2	10.05	10,000
bid3	10	3,000
Total		18000

Since trades executed are same in both market and limit order, all other answers will be same as above.

(b) Limit book will change as

	Price ($)	Quantity (# of shares)
ask5	10.5	50,000
ask4	10.4	45,000
ask3	10.3	5,000
ask2	10.25	20,000
ask1	10.2	10,000
bid3	10	1,000
bid4	9.9	10,000
bid5	9.85	20,000

(c) Change in bid ask spread:

Bid ask spread before order is executed = 10.20 - 10.10 = $ 0.10

Bid ask spread after order is executed = 10.20 - 10.00 = $ 0.20

Change in bid ask spread = $0.20 - $0.10 = $ 0.10

(d) change in depth will be quantity executed that is 18,000 quantiy lower on bid side.

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