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Basic Question 3 of 6
Quoting security prices in decimals has accomplished the following:
B. Increased the profits of brokers and specialists.
C. Had no effect on market liquidity.
D. Thinly traded (low volume) stocks have benefited with increased trading activity.
E. Increased the signaling strength of the breadth of the market indicators.
A. Created smaller bid and asked spreads.
B. Increased the profits of brokers and specialists.
C. Had no effect on market liquidity.
D. Thinly traded (low volume) stocks have benefited with increased trading activity.
E. Increased the signaling strength of the breadth of the market indicators.
User Contributed Comments 11
| User | Comment |
|---|---|
| intj | Why? |
| John1965 | I think it's part of price continuity, right? |
| pablo | decimal convention has increased no of price points per $, which has allowed more granular price differentiation between competing intermediaries |
| kalps | Spread calculations are far more accurate with decimals otheriwse we would be overestimating the spread in our calculations. This is what Pablo has said I think. |
| stefdunk | spreads used to be in fractions of dollars, never smaller than a 32nd (and that was rare). a 32nd is a spread of just over 3 cents; now the spread is often just a penny or two. |
| stefdunk | calculations are not a big deal, though, because, generally speaking, shares trade in lots of 100. a 16th of a dollar, per lot, would be: .625 |
| AWR83 | why not D? |
| tagr | Because thinly traded stocks have already a wide bid-ask spread. Quoting security prices in decimals does not alter that. |
| mpapwa22 | A is the only one that looked right. |
| robbiecow | Can't be D. E.g., Berkshire stock is thinly traded because of the very high price |
| ascruggs92 | Berkshire stock will never be quoted in decimals so that example is irrelevant (even if it is, that isn't what's stopping it from being traded). D is correct because stocks with low trade volumes usually have wider spreads, therefore, they benefit more from the reduction of bid/ask spread than more liquid stocks. However, that means A must be correct for D to be correct. In such a situation, pick the answer that is right unconditionally (D is only true if A is true, but A being true is not conditional on D being true). |
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Learning Outcome Statements
describe characteristics of a well-functioning financial system
CFA® 2024 Level I Curriculum, Volume 3, Module 1.