Lecture notes
ECON0001 Week 4
- Module
- Economics (ECON0001)
- Institution
- University College London (UCL)
In depth notes on ECON0001 week 4
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Other components of the spreadWeek 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
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c ompensates
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Inventory holding costs
Time mismatch between buy and sell orders:
• Dealers buy stocks at time t to
◦ Provide liquidity
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