medium · Market Microstructure
A 'Value Trader' calculates that ZXC is worth $60 based on earnings data. The current market price is $55. The trader's total estimated cost to trade (spread + impact) is $1 per share.
Why might the trader still choose NOT to buy?
- Regulation NMS bars traders from trading against fundamental value.
- The mispricing does not exceed the required 'margin of safety' (risk premium)
- They are acting as a passive market maker and must stay inventory-neutral.
- The effective spread on ZXC is currently too narrow to be worth crossing for this trade
Sign up free to see the explanation and track your rank →
More Market Microstructure practice
- A stock is quoted at $50.00 bid x $50.10 ask. A buyer submit… — How does this action affec
- A stock is trading at $100.00. The Level 1 S&P 500 Market-Wi… — What is the status of trad
- If the stock price drops instantly from $50.05 to $49.00 in a 'flash crash,' what happens
- Under the National Market System (Reg NMS), if Exchange A is quoting a stock at $10.00 x
- If the stock gaps down and opens at $69.50 on Tuesday morning, at what price will the trad
- If the dealer uses a quote shading parameter of κ = 0.00004 to manage inventory, what is t
- A trader places a large sell order for 50,000 shares at $50.01 only to cancel it immediate
- Using the Lee-Ready algorithm, how should a trade occurring at $50.10 following a $50.00 t