Maybe missing something obvious here but can’t understand how they got the midpoint for the effective spread question. This is from Ahmed problem set question 1.
Order book at time of entry is below.
Bid
Ask
Dealer
Price
Size
Dealer
Price
Size
C
£15.42
800
B
£15.48
1,800
B
£15.38
2,000
A
£15.50
1,000
A
£15.36
500
C
£15.52
600
I calculated midpoint as (15.42+15.48)/2 = 15.45.
However, answer key has 15.43. Thoughts? Thanks.
You’re looking at the wrong thing… Look at exhibit 2, not 1.
But isn’t exhibit 2 the bid/ask at time of execution? I thought for midpoint we want to use time of entry, which is presumably immediately before the time of the first trade.
First trade is listed as 11:15:09 and Exhibit 1 is listed as at 11:15:08. I see that they used exhibit 2, just confused why. Thanks.
I’m confused by this as well. PM Mock exam 2017 #49
Why isn’t the effective spread using the midquote from Exhibit 1?? The answer key uses the midquotes from when the order was executed - can someone help with this?
Because the trade has been executed at 11:15:09, not 11:15:08. You need to take the prices at the time of execution, not before. Clearly, the question has been poorly designed 
I’m still confused - effective spread compares execution price to the quote at time order is entered. In text examples, “time order is entered” refers to first set of bid/asks the manager sees, and when he executes trade after, it compares execution price to initial seen order book. So this example is now assuming time of entry = time of execution?? Text went out of its way to separate the two.
bump
I think there is a difference between “current order book” and “time order is entered/executed” - the CFAI text is a different thing, “Exhibit 1” from the mock isnt a part of the problem at all in reading 29 page 12/13. Just entry and execution, compared to the mock showing you before, then entry/execution.
Well it was the first question in the case. Seems reasonable to assume it’s part of first question since it comes before exhibit 2, given CFAI’s style has always been questions and answers come in order with case. Ah well, hopefully real exam more clear.
I have a different question related to midquotes - in the 2017 M/C PM CFA Mock (Q#49) the midquote is calculated in the beginning and that same midquote is then used to calculate the effective spread for both trades.
In the readings, Volume 6, Reading 29, page 13, similar question, and the midquote is recalculated for each trade rather than using the initial midquote as above.
In 2016 Mock Essay AM, Q#5-B, same thing, midquote is recalculated for each trade.
I’m missing something here - when do we use the initial midquote and when do we recalc for each trade?
Hahaha. Wow.
.
I still have no clue. If that was on the test I would have spent 10 minutes on it without finding a correct answer
does someone know how you actually find effective spread?
Yep. I always thought it was time of execution. You sit there thinking do we include commission?
Yep I recalculated that thing over and over, couldn’t make sense of it.
Here is what they say :
The effective spread is two times the deviation of the actual execution price from the midpoint of the market quote at the time an order is entered. (If parts of the order execute at different prices, the weighted-average execution price is used in computing the deviation from the midpoint.)
I’ve seen problems in practice test that if you solved it that way you would not come up with an answer choice
If this question was on the PM portion of the current year’s exam, I would have already reported it to the CFAI with full detail showing how the 2017 CBOK, 2016 AM exam, and 2017 Mock PM all treated the exact same concept differently. The f* chowder head who wrote this question or material doesn’t even know the right way to do it. I would recommend anyone else frustrated alo visit the complaint section:
https://www.cfainstitute.org/programs/cfaprogram/candidate/Pages/exam_question_comments.aspx
PM if you are unsure
.
i’d say execution time’s spread is closer to real world. who cares what was the spread at time of entry if it then changed later during the day before it was executed. also it’s easier to game it if it’s at order entry - you just wait until it’s in your favor. and the curriculum’s general line is that IS cannot be gamed
.