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Compact case
Case
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Reference no. UVA-F-1648
Authors: Michael J Schill
Published by: Darden Business Publishing
Originally published in: 2011
Version: 4 March 2021
Revision date: 09-Mar-2021

Abstract

Given widening bid-ask spread for a target stock, a small Australian portfolio manager considers front running the market makers by posting its own quotes inside the spread. Organized in a series of rounds, the case asks students to post bid and ask limit orders for shares. Each round allows orders to come in that execute against the limit order book, cash flow and end-of-round inventory to be calculated, and the market to revise the bid and ask quotes for the next round. This structure starkly illustrates the tension for market makers between bid-ask spread profits and inventory trading uncertainty.
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Abstract

Given widening bid-ask spread for a target stock, a small Australian portfolio manager considers front running the market makers by posting its own quotes inside the spread. Organized in a series of rounds, the case asks students to post bid and ask limit orders for shares. Each round allows orders to come in that execute against the limit order book, cash flow and end-of-round inventory to be calculated, and the market to revise the bid and ask quotes for the next round. This structure starkly illustrates the tension for market makers between bid-ask spread profits and inventory trading uncertainty.

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