You are one of the market makers. You quote a bid of 50 ¼ and an ask of 50 ½. You have a zero inventory.
(a) 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 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 twoday 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?