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LOS b: Calculate and interpret the effective spread of a market order and contrast it to the quoted bid-ask spread as a measure of trading cost.
Q1. Suppose a trader is quoted a market bid price of $16.00 and an ask of $16.10. The execution price of a sell order is $16.03. What is the effective spread?
A) $0.02.
B) $0.04.
C) $0.03.
Q2. Suppose a trader is quoted a market bid price of $30.00 and an ask of $30.07. The execution price of a buy order is $30.04. What is the effective spread?
A) $0.06.
B) $0.01.
C) $0.02.
Q3. Suppose a trader is quoted a market bid price of $40.40 and an ask of $40.49. The execution price of a buy order is $40.47. What is the effective spread?
A) $0.025.
B) $0.050.
C) $0.090.
Q4. Patty Benson and Terry Wortek are portfolio managers of a life insurance fund, Arbutus Insurance. Benson is the more experienced of the two, and oversees all investment decisions as well as the execution of trades. Wortek assists her with her decisions. Benson has placed a strong emphasis on trade execution efficiency because her analysis of trades during last year suggests that Arbutus Insurance is not receiving best trade execution.
Discussing the types of trading venues, Benson remarks that electronic crossing networks are types of order-driven markets. In these markets, she states that their advantage is that trading costs are low. She states that their disadvantage is that an order may not be filled.
Wortek notes that Arbutus has positions in several international stocks, several of which are illiquid. She states that in these markets where public capital markets are not well developed, Arbutus would likely trade in a brokered market. Wortek notes that a disadvantage of these markets is that Arbutus could lose their anonymity, especially when they have a large block to sell.
Benson asks Wortek to analyze a series of trades for the firm so that she can evaluate the firm’s trading effectiveness. The bid and ask volumes as well as bid and ask quotes are provided in the table below. The trading data below represents the quotes for a single stock, Papineau Pharmaceuticals, on a single day.
|
Time of Trade |
Bid Price |
Bid Size |
Ask Price |
Ask Size |
|
10 a.m. |
$10.00 |
800 |
$10.07 |
700 |
|
12 p.m. |
$9.90 |
500 |
$9.96 |
600 |
|
1 p.m. |
$9.88 |
400 |
$9.94 |
500 |
At 10 a.m. the trader for Arbutus Insurance placed an order to sell 900 shares of Papineau Pharmaceuticals. The execution price was $9.98.
At 12 p.m. the trader for Arbutus Insurance placed an order to sell 500 shares of Papineau Pharmaceuticals. The execution price was $9.92.
At 1 p.m. the trader for Arbutus Insurance placed an order to sell 300 shares of Papineau Pharmaceuticals. The average execution price was $9.91.
Regarding Benson’s statement concerning electronic crossing networks:
A) Benson is incorrect because orders are necessarily filled in electronic crossing networks.
B) Benson is correct.
C) Benson is incorrect because trading costs are high in electronic crossing networks.
Q5. Regarding Wortek’s statement concerning brokered markets:
A) Wortek is incorrect because brokered markets allow traders to remain anonymous.
B) Wortek is incorrect because auction markets are more common in lesser developed capital markets.
C) Wortek is correct.
Q6. What is the average quoted spread Wortek should calculate for the Arbutus Insurance trades?
A) $0.0200.
B) $0.0633.
C) $0.0433.
Q7. What is the average effective spread Wortek should calculate for the Arbutus Insurance trades?
A) $0.0233.
B) $0.0200.
C) $0.0433.
Q8. What is the weighted average effective spread Wortek should calculate for the Arbutus Insurance trades?
A) $0.0641.
B) $0.0266.
C) $0.0633.
Q9. Which of the following best represents the analysis Wortek should provide for the Arbutus Insurance trades?
A) One of the trades resulted in price improvement but the other two did not.
B) Two of the trades resulted in price improvement but the third did not.
C) None of the trades resulted in price improvement. | 
发表于 2009-4-10 11:23
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