Nevermind, I may have figured it out…
The answer only makes sense from the perspective of the customer. “Selling 200 shares” to the market maker @ $16.88 aligns with the market maker’s “bid.”
Maybe the keyword at play here is: “customer-submitted” trade, and the question wants you to look at it from the perspective of the customer, because some of the follow up questions were like that.
The same logic would apply if the customer were to buy 700 @ 16.91, but that’s not an available answer. I answered the question according to the bid/ask, not the written question…
EDIT: but unfortunately the next practice question confuses me even more.
How is selling at $35.71 (below the ask) not the appropriate answer here? The question is not clear to me who is who, and I am getting confused between who is doing what in the transaction.
The bid/ask is clear to me, but the answers are not. The explanation is not explaining why this is the wrong choice.
This is how I am reading the quote:
- The MM is willing to buy from customers 800 shares @ $35.75 (their “bid”).
- The MM is willing to sell 700 shares @ $35.77 (their ask).
- A customer can sell [up to??] 800 shares to the MM @ $35.75.
- A customer can buy [up to??] 700 shares from the MM @ $35.77.
This is pretty much all this section (12.3) covers. Now, in the practice quiz I feel like share amounts and prices are changing, but the textbook doesn’t explain why, or if they can change or why a transaction would be above/below the “bid/ask” because the textbook presents the quotes as fixed amounts. Any ideas?
EDIT 2: I just got to the 12.4.1 on the NYSE and DMMs, and there is a video explaining more about bid/ask and it helps with my understanding of these bid/ask questions because it gives an example of these questions:
https://player.vimeo.com/video/803319235?h=3ef0818c7b
EDIT 3: After reviewing the video again, I am understanding better, but am still not understanding the answer to Q9/12. :\ My brain is mashed potatoes for the night … i will have to take a break and come back to this question. Any explanations are welcome.
