The following questions regarding trade execution should be answered independently of each other and relate to the following limit order book:

Nb. Of Shares

Limit sell orders Price

1900 $34.56 1700 $34.54 1200 $34.53

400 $34.52

300 $34.51

Limit buy orders Price

1000 $34.49 1100 $34.48 1400 $34.47

1500 $34.46

2200 $34.45

a. What is the posted bid-ask spread in cents and basis points (one basis point equals 0.01%) of the mid price (i.e. the average between the best ask and the best bid price)? If you buy 100 shares with a market order and immediately (i.e., before any new orders arrive or any existing orders are cancelled) sell them with a market order, then what is your P&L (profit/loss)?

b. A limit order to buy 150 shares at $34.50 arrives in the market. What happens? That is, which transactions occur and what is the resulting bid-ask spread in cents? (In the rest of the exercise, assume that this order is subsequently cancelled.)

c. A limit buy order for 2000 shares at $34.53 arrives. Document all transactions, compute the volume- weighted average execution price of the transaction, and determine the bid-ask spread after the transaction(s). (Hint: it may not be possible to execute the entire order. If the order is executed only partially, the un-executed part of the order will be added to the limit order book.)

d. Compute the average execution price for market orders to buy and sell, respectively, 10, 1000, 2000, 3000, and 4000 shares. Plot the market impact curve, that is, the average execution price as a function of the size of the order. (You will plot two different curves, one for buying, one for selling.)