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financial trading and investing

Questions and Answers of Financial Trading And Investing

The following table presents sample daily historical price data for a stock whose returns are given in the third column.a. Based on a traditional sample estimator, calculate a daily variance
The following daily prices were collected for each of three stocks over a 12-day period.Based on the data given above, calculate the following:a. Returns for each day on each of the three stocks.
a. Suppose that stock price changes in a given market from transaction to transaction are clearly and statistically inversely correlated, bouncing between prices in a definable range. Is it more
Based on models described in this chapter, why does the dealer spread widen as the uncertainty associated with the relevant security increases?
This exercise is related to a trading practice called quote matching, which occurs when a small trader places an order one uptick (downtick) from that of a large trader so as to profit from the large
Suppose that dealer inventory costs were the sole source of the dealer spread. Further suppose that a transaction was executed at the bid. Would subsequent bid and offer quotes tend to be higher or
Describe how transaction costs will tend to increase inverse correlations between trade-to-trade transaction prices.
Suppose that a dealer with $20,000 in capital and zero stock inventory has a logarithmic utility of wealth function: U5ln(W).a. Assuming a small risk (the Arrow-Pratt model, as used by Stoll, 1978),
Based on his estimates of the risk of a security, a trader believes that the price of a stock traded in a dealer market will fall within a $3 range, with potential prices being uniformly distributed.
a. In the Glosten and Milgrom Information Asymmetry Model, are dealer spreads greater if all traders (excluding the dealer) are fully informed and know what prices will be or if all traders are
In the Glosten and Milgrom (1985) model, dealer spreads will tend to be smaller when arrivals of buy and sell orders are balanced. Why do such balanced order arrivals tend to produce smaller dealer
We saw in Chapter 4 that in a statistical study of stock market data, Barclay and Warner (1993) found that very small trades and the very large trades did not have a significant impact on stock
An informed trader has private information that the value of a stock is $100 per share. Without this information, the variance of payoffs on the stock would be $60; this is the level of payoff
The model of demand in the Kyle (1985) assumes that perfectly informed trader demand x increases linearly in his expected value of the traded stock. This assumption is important to Kyle’s results.
Members of tribal fishing societies often undertake efforts to share information on where the fish are biting. Modern fishermen often purchase information identifying locations of schools of fish
Consider a stock that is traded 4 times per year with an average spread of 1% and paying annual dividends equal to $2, discounted at 3%.a. Based on the 1% spread and annual turnover equal to 4, what
The United States Congress and the SEC worked towards and issued Regulation NMS anticipating that traders would post their best quotations, to the benefit of other traders and the marketplace. Have
What is the primary difference between compensation clawback and malus provisions?
A non-U.S. company incurs a significant expense due to regulatory and exchange requirements when it lists its stock (or an ADR for its stock) on the NYSE. Furthermore, many such firms will remain
As a shareholder-owned business, the primary responsibility of the NYSE is to its shareholders. As an SRO, the primary responsibility of the NYSE is to maintain the integrity of markets and to
a. Discuss the differences between “best price” and “best execution” with respect to order handling.b. Describe how following the SEC’s Order Protection Rule (best price) can conflict with
The United States has maintained a “rules-based” approach to securities regulation while the UK has been progressing to a “principles-based” system of securities regulation.a. Consider the
This chapter discussed several of the advantages of maintaining private regulatory bodies for securities markets. What might be some of the disadvantages to this type of securities market regulation?
How is the Volcker Rule related to the moral hazard problem in banking institutions?
a. Insider trading law has been described as a field largely belonging in the arena of common law rather than arising from statutes (e.g., Langevoort 2020). Why might insider trading in some respects
The following was taken from the Securities Exchange Act of 1934, Section 10, amended as of January 3, 2012:It shall be unlawful for any person, directly or indirectly, by the use of any means or
Prepare an argument to dispute the following statement made by your acquaintance:“As an individual investor, I cannot compete in the stock market today. In fact, even if I had access to the best
a. What is meant by “naked access”?b. How might naked access harm securities markets?c. What is meant by “naked short sales”?d. How might naked short sales harm securities markets?
a. What characterizes a “fragile market”?b. What defines a “resilient” or “robust” market?c. Market spreads have declined considerably over the past 25 years. Why might much or at least
When the NYSE reduced the typical minimum tick size (also known as a Minimum Price Variant—MPV) from 1/8 to 0.01, spreads and transactions costs were reduced, resulting in, according to most
Pegged orders are created to follow the NBBO as it moves. In addition to the installation of the “speed bump,” the IEX has provided the primary peg order, which is intended to protect small or
What are “crumbling quotes”?
How are slow traders’ quotes picked off by HFT traders when the NBBO shifts?
Front-running is an unethical and often illegal practice in which a broker, with the knowledge of a client’s order, places her own order ahead of the client’s, seeking to profit from the
What is the difference between an “immediate or cancel” order and a flash order?
Explain how and why a “speed bump” in a particular market might be beneficial to slower traders competing against HFT traders.
a. Prepare an argument to support the view that securities markets benefit from high frequency trading (HFT).b. Prepare an argument to support the view that securities markets are impaired by HFT.
Critics of high-frequency trading often complain that the practice is unfair because most investors do not have the technical ability to compete with the larger, betterfinanced institutions. For
a. Prepare an argument to support the view that the practice of payment for order flow diminishes the liquidity of markets.b. Prepare an argument to support the view that the practice of payment for
Sniffing algorithms often attempt to discern competitors’ algorithms. In some instances, mere observations of competitor trading activity can reveal information as to competitor strategies, latent
Suppose that a client of the ABC brokerage firm seeks to have her order of X = 500,000 shares executed within three hours with the best possible execution; that is, she wants to realize the lowest
Suppose that Investor X executed a sale transaction at 4.22 when the stock was quoted at 4.21 bid and 4.27 ask, and that another investor’s subsequent transaction executed 4.23. Calculate the
Suppose that you are a trader at a large trading firm. You have just received a sell order from a mutual fund for 1,000,000 shares of stock that has an average daily volume of 250,000 shares. What
Long-term U.S. Treasury bonds are considered to be very high-quality investments with virtually zero default risk. Is it reasonable to assume that the risk of settling U.S. Treasury bonds is also of
During the winter of 2021, Robinhood Securities, a brokerage firm popular with retail investors, temporarily restricted trading certain highly volatile securities, including shares of GameStop. The
Some observers suggest that real-time clearing (T + 0) would improve market efficiency relative to (T + 1) or (T + 2) clearing.a. How would real-time clearing affect the netting process?b. How would
The table below represents transactions executed during a given trading day in a given stock market:a. What is the net change of shareholdings in each of the broker accounts with DTC?b. What is the
Support the argument that central counterparties (novation) in derivatives markets standardize credit risk for all traders.
Netting and novation are important activities of most clearing firms. What is the difference between these two activities?
Describe how real-time clearing differs from batch processing. Why is netting less expensive than real-time processing?
Each stock trading venue provides quote and trade information to the SIP, which disseminates the information to the market. On which tape would the NBBO for shares of the Bats-traded Global X U.S.
The SIP evolved from the ticker tapes providing price and volume data from the exchanges. It is said that now, the SIP is far busier than it was more than a century ago when the ticker tapes were
Congress and the SEC have attempted to enhance market competition among U.S. trading venues without intensifying the harmful effects of market fragmentation. What is market fragmentation, and what
Some stock brokerage firms have offered temporary “specials” where they don‘t earn commissions on stock trades and a few (e.g., Robinhood Financial, discussed in the chapter) have made zero
Assume that exchange rates of Swiss francs per dollar are 1.6 and 1.8 in the spot and one-year forward markets, respectively. Thus, an investor can transact for 1.6 francs per dollar today and
Equity swaps have been used by investors to reduce their risk in an equity investment without actually selling shares. For example, corporate managers have used the executive equity swap to reduce
Why must a forward price equal the spot price on the settlement date of the forward contract? That is, why do many forward prices converge to spot prices at settlement?
Assume that $1 will purchase £0.60 and ¥108; that is, one U.S. dollar will purchase 0.6 UK pounds and 108 Japanese yen. Assume that goods in the three countries are identically priced after
Suppose that the Swiss franc is currently trading at 2 per U.S. dollar. The franc is expected to be revalued to CHF2.5 per dollar.a. Has the franc been devalued relative to the dollar?b. Has the
Suppose that the spot price of gold is $1100 per ounce. The current one-year riskless rate of interest is 3%.a. Provide a forecast for the price of gold in one year based on a relevant expectations
Might a bond’s credit rating imply any information about the liquidity risk or interest rate risk of a bond?
Why is the NYSE trading model often referred to as a hybrid model of trading?
An ATS (Alternative Trading System) might be defined as an exchange that does not operate as a self-regulatory body. True or false?
For a 20-year period beginning in 1986, the NYSE was regularly criticized for making less use of electronic and computer technology than most of its competitors around the world, even less than
Suppose that investing $10 million on eradicating mosquitoes carrying the Zika or other infectious virus will have a clear and significant impact on the spread of this disease, saving over 500 lives
Suppose that the last sale of Company X stock was at a price of $100.00. Further suppose that an investor wishes to place a market order to purchase 25,000 shares of Company X stock.Which of the two
Suppose that orders arrive at the market in the following timed sequence, after the best-bid-offer (BBO) has been set at 49.9850.02:11:01.01 DMM bids 50.00 for 1,000 shares, setting the best bid
High frequency trading is the practice of executing multiple transactions for securities followed by extremely short holding periods. Such market practices often require highly sophisticated
Exactly what does an investor expect from her broker when she places a stop limit order with a stop price to buy at 50 and a limit price of 50.10? Why might an investor place such an order?
a. How does a stop order differ from a limit order?b. Suppose that a given market accepts only market and limit orders. Which of these two order types are more likely to be placed by buy-side market
a. In an all-pay auction, all bidders pay the amounts that they bid for the object to be auctioned, but only the winner, that is, whoever places the highest bid, takes possession of the object. This
There are two ways to purchase T-Bills. The first is to enter a competitive bid at the auction where the bidding institution competes for a given dollar amount of the new issue based on how much it
An auction house has decided to sell a sculpture in an open outcry second-price auction. The auction house manager does not know the value any bidder will place on the work, but does know that every
Suppose there was an open outcry English second-price auction. All bids are public. You are willing to bid a maximum of $100 for the auctioned item. You know that no one else will be willing to pay
How does trading differ from speculating?
How might long-term investors benefit from vigorous competition among short-term traders?
Is a futures contract a security?

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