How many stocks left in your inventory after the first day

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Question - You are one of the market makers in the stock of a new smartphone company. You quote a bid of 49 ¼ and an ask of 49 ½. Since this is your first day, you have a zero inventory.

(a) Suppose that you receive market sell orders for 5000 shares and market buy orders for 3000 shares. How much do you earn on the 3,000 shares that you sold and bought? How many stocks left in your inventory after the first day?

(b) Before trading begins on the second day, the company announces new smartphone will be delayed. As a result, the quoted bid and ask declined to 45 ¼ and 45 ½. During that day you receive market sell orders for 3000 shares and buy orders for 5000 shares. What is the total profit or loss over the two-day period? How many stocks left in your inventory?

(c) What is a marker maker's objective? Is there anything you could have done during the first day, consistent with a market maker's objective that would have improved your performance over the two-day period?

Reference no: EM132997984

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