Explanation:
To understand which buy order would make a new market, we need to analyze the current order book:
Current Market Structure:
Current Market:
Analysis of Options:
€43: This price is below the current best bid of €44, so it would not improve the market. It would simply be added to the bid side below the existing bids.
€44: This price equals the current best bid, so it would not create a new market. It would just add to the existing bid at €44.
€45: This price is above the current best bid of €44 and below the current best ask of €46. A buy order at €45 would:
Why €45 makes a new market: A new market is created when a buy order is placed at a price higher than the current best bid, or when a sell order is placed at a price lower than the current best ask. Since €45 is higher than the current best bid of €44 but still lower than the best ask of €46, it improves the bid side and creates a new, tighter market.
Key Concept: In market microstructure, "making a new market" refers to improving the current bid or ask price, thereby narrowing the spread and providing better liquidity to the market.
Ultimate access to all questions.
An analyst gathers the following information about the current order book for a stock:
| Bids | Offers |
|---|---|
| -- | €48 |
| -- | €47 |
| -- | €46 |
| €44 | -- |
| €42 | -- |
| €41 | -- |
A buy order placed at which of the following prices would most likely make a new market?
A
€43
B
€44
C
€45
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