Macro And Micro Case Study
1.1.3 Importance of the topic from macro and micro perspective
Regulatory requirements will affect profits via their impact on capital, funding and hedging costs, as well as the direct costs of compliance. It follows that market-makers will set their bid and ask prices based on their expectations of the cost and risk of holding assets in inventory. Spreads will tend to be narrow if market-makers believe they can execute trades quickly and cheaply, or if funding and hedging costs are low. Thus, a market's liquidity depends on the depth and efficiency of related markets, such as those for funding and hedging.
The difference between actual and desired inventory levels is important to market-makers, who all have risk management frameworks that …show more content…
Market orders are guaranteed immediate execution, but not price. That is to say, if an agent places a market order to buy or sell a certain number of shares, those shares will be bought or sold at the prevailing market prices. This is what is commonly thought of as a buy or sell order in the market. A typical market order will be of the form “Buy/Sell X shares.” The prices at which market orders execute are determined by the limit order book. Traders may also place limit orders of the type “Buy/Sell X shares at price Y.” the highest buy limit order and the lowest sell limit order constitute the market bid and ask prices, and the difference between them is known as the bid-ask spread or just the spread. When a market buy order arrives, it is executed against the lowest limit sell order, and, similarly, a market sell order is executed against the highest limit buy …show more content…
As of now Citizens Investment Trust has been chosen as tentative market maker for selected stocks in the economy. Since it will be a very new concept for the market, it is important to introduce such a concept with adequate caution.
A market-maker’s expected average costs increase with the size (absolute value) of his inventory position; the cost of financing inventory increases with its size. Further, in the case where the market-maker faces increasing marginal financing cost, expected average costs increase with security price and order flow volatility. These costs, in equilibrium, must be covered out of the bid/ask spread. Consequently, the bid/ask spread varies directly with security price and order flow volatility and with the size of the market-maker’s security inventory position. Since an increasingly turbulent asset market is characterized by imbalance of public buy and sells orders and by increasing price volatility, the model predicts and explains that such a market is likely to be accompanied by deterioration in market
Regulatory requirements will affect profits via their impact on capital, funding and hedging costs, as well as the direct costs of compliance. It follows that market-makers will set their bid and ask prices based on their expectations of the cost and risk of holding assets in inventory. Spreads will tend to be narrow if market-makers believe they can execute trades quickly and cheaply, or if funding and hedging costs are low. Thus, a market's liquidity depends on the depth and efficiency of related markets, such as those for funding and hedging.
The difference between actual and desired inventory levels is important to market-makers, who all have risk management frameworks that …show more content…
Market orders are guaranteed immediate execution, but not price. That is to say, if an agent places a market order to buy or sell a certain number of shares, those shares will be bought or sold at the prevailing market prices. This is what is commonly thought of as a buy or sell order in the market. A typical market order will be of the form “Buy/Sell X shares.” The prices at which market orders execute are determined by the limit order book. Traders may also place limit orders of the type “Buy/Sell X shares at price Y.” the highest buy limit order and the lowest sell limit order constitute the market bid and ask prices, and the difference between them is known as the bid-ask spread or just the spread. When a market buy order arrives, it is executed against the lowest limit sell order, and, similarly, a market sell order is executed against the highest limit buy …show more content…
As of now Citizens Investment Trust has been chosen as tentative market maker for selected stocks in the economy. Since it will be a very new concept for the market, it is important to introduce such a concept with adequate caution.
A market-maker’s expected average costs increase with the size (absolute value) of his inventory position; the cost of financing inventory increases with its size. Further, in the case where the market-maker faces increasing marginal financing cost, expected average costs increase with security price and order flow volatility. These costs, in equilibrium, must be covered out of the bid/ask spread. Consequently, the bid/ask spread varies directly with security price and order flow volatility and with the size of the market-maker’s security inventory position. Since an increasingly turbulent asset market is characterized by imbalance of public buy and sells orders and by increasing price volatility, the model predicts and explains that such a market is likely to be accompanied by deterioration in market