Financial Innovation More and more of the back office tasks for ...

[burton19126]

Financial Innovation More and more of the back office tasks for commodity traders and market makers can be easily automated which lowers the costs of making transactions. What is the effect of these technical changes on the bid-ask spreads between commodity buyers and sellers at commodity exchanges?

Question 2

The optimal bidding strategy for an oral auction is
 a. To shade your bid below your true value and drop out well before it is reached
 b. To shade your bid below your true value and drop out just when the shaded amount is reached
  c. To drop out when the bidding exceeds your true value
 d. To size up your competition to determine how much to shade your bid

[spencer.martell]

Answer to Question 1

The cost of making a market falls. This means a market maker can complete a transaction at lower cost making an existing spread more profitable. He can increase the number of transactions he completes by lowering the spread. Moreover, if he does not lower the spread, traders may seek out a different market maker offering better terms. Therefore, the bid-ask spread within the market will succumb to price pressure and shift lower.

Answer to Question 2

c

[burton19126]

Thanks for the timely response, appreciate it

[ktidd]

Great answer, keep it coming