Reference no: EM132084427

Assume that the speed of light is infinite. Suppose the limit order book for a relatively illiquid stock is the following at 10:00:00:000 (ten hours, zero minutes, zero seconds, zero milliseconds):

Asks Bids

Price Quantity Price Quantity

$7.72 9 $7.68 2

$7.75 2 $7.65 7

$8.00 5 $7.50 8

$10.00 120 $6.00 40

$20.00 100 $5.00 200

(a) What would be the average price paid per share for a hypothetical market buy order for 11 shares under the limit order book shown above

Average price paid per share:

(b) You still did not submit any order. A market buy order for 150 shares from another trader is submitted and executed at 10:00:00:100. How does the order book look like at 10:00:00:101 (i.e., immediately after this market buy order for 150 shares is executed)

Asks Bids

Price ($) Quantity Price ($) Quantity

(c) The proverbial blink of an eye takes around 300ms. Unfortunately, you start blinking at 10:00:00:000 and thus miss the change in the limit order book from part (b). At 10:00:00:200, you casually press the "Enter" key and place a market order to buy 11 shares, which is immediately executed. Note that your order is executed after the market buy order for 150 shares from the other trader. At 10:00:00:300 (i.e., when you reopen your eyes) you see the average execution price per share for your trade on the screen.

What number do you see on the screen

Average price paid per share:

(d) Let's now consider what would have happened if instead of placing the market buy order for 11 shares from part (c), you had placed a limit buy order at 10:00:00:200. How would the order book would have looked immediately after you submitted a limit order to buy 11 shares with a limit price of $7.75 per share (again, instead of the market buy order for 11 shares)? Note that your limit buy order is still placed after the execution of the market buy order for 150 shares from the other trader.

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Price ($) Quantity Price ($) Quantity