Other components of the spread
Week 4
FPR Ch3
Order processing costs
Processing an order requires time and money:
• Exchange, clearing and settlement
• Cost of paperwork and back o ce work, etc amongtradingp latform
competition
They can be a:
• Variable cost
• On a per-transaction basis: xed cost
We assume that OPC are variable, per share
y
Bid-ask spread with OPC
Augmenting the Glosten and Milgrom adverse selection framework with OPC:
areinformative IT01andh avec ostrpershare
Orders
dealers riskandope
selection
Spread
c ompensates
foradverse Opc Klapershare
aeMetres
bent r s stiff s2k1gtsetse pp.gg
adverse
s election
compensation compensation
mmmm
kperGBP
YY
Cost
Pete.IS
XHXetrXt slXtl
Mt PtMetkpedt def1.1
MINE at Itbe rattb
SIgnat
SHAINA LONGAN 2Mtk
s too
95
Weareattandwanttoforecastpatttt
me 2
Patmentlet
Buy
order
41.45
arrives
Pemetatsterm
says htt'tthat ytrp.y.my
sittislage
becomes
market liquidas
less spread uncertainty
enough
mom overvisresolved
says ienolongrunimpact
Mits m
Inventory holding costs
Time mismatch between buy and sell orders:
• Dealers buy stocks at time t to
◦ Provide liquidity
Week 4
FPR Ch3
Order processing costs
Processing an order requires time and money:
• Exchange, clearing and settlement
• Cost of paperwork and back o ce work, etc amongtradingp latform
competition
They can be a:
• Variable cost
• On a per-transaction basis: xed cost
We assume that OPC are variable, per share
y
Bid-ask spread with OPC
Augmenting the Glosten and Milgrom adverse selection framework with OPC:
areinformative IT01andh avec ostrpershare
Orders
dealers riskandope
selection
Spread
c ompensates
foradverse Opc Klapershare
aeMetres
bent r s stiff s2k1gtsetse pp.gg
adverse
s election
compensation compensation
mmmm
kperGBP
YY
Cost
Pete.IS
XHXetrXt slXtl
Mt PtMetkpedt def1.1
MINE at Itbe rattb
SIgnat
SHAINA LONGAN 2Mtk
s too
95
Weareattandwanttoforecastpatttt
me 2
Patmentlet
Buy
order
41.45
arrives
Pemetatsterm
says htt'tthat ytrp.y.my
sittislage
becomes
market liquidas
less spread uncertainty
enough
mom overvisresolved
says ienolongrunimpact
Mits m
Inventory holding costs
Time mismatch between buy and sell orders:
• Dealers buy stocks at time t to
◦ Provide liquidity
