Chapter 1

Trading Mechanics and Market

Structurh

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1.6 Exercises

2. Continuous order-driven market. Now suppose that the above orders arrive
on the market over time, in the order of arrival that is listed above (that is, at time
t = 1 the limit order to buy 100 at $3.00 is submitted, at time t = 2 the limit
order for 200 at $4.00, and so on, continuing until time t = 9, when the market
order to sell 200 arrives). Track the state of the LOB (show it after each new order
has arrived and any transactions are triggered, for t = 0, ..., 9, in the trading screen
format of figure 1.2) and the time, price and quantity of any transactions that take
place. Record the dollar bid-ask spread, that is, the dierence between the lowest
ask and the highest bid, in the continuous market as it evolves from t = 5 onwards.

1.7 Solutions

Exercise 2: The table below shows the transactions that take place in the continuous
order-driven market. For each transaction the average price is computed (see also
the file Ch1_solutions.xls).

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Time Buy Orders Sell Orders Bid-Ask Average
(t) (BID) (ASK) Spread Transactions Price
Shares Price Shares Price
1 100 3.00 n/a
2 200 4.00 n/a
100 3.00
3 200 4.00 n/a
200 3.50
100 3.00
4 200 4.00 n/a
200 3.50
100 3.00
500 2.50
5 200 4.00 500 5.00 1.00
200 3.50
100 3.00
500 2.50
6 500 2.50 100 3.00 0.50 500 shares $3.6
500 5.00 200 at $4
200 at $3.50
100 at $3
7 500 2.50 100 3.00 0.50
500 4.00
500 5.00
8 500 2.50 100 4.00 1.50 500 shares $3.80
500 5.00 100 at $3
400 at $4
9 300 2.50 100 4.00 1.50 200 shares $2.5
500 5.00