Suppose that the order book of ABC Corp at 12:00 p.m. is as follow: [table]
Ask | Price | Bid 4,000 | $20.05 | 3,000 | $20.04 | 7,000 | $20.03 | 1,000 | $20.02 | | $20.01 | | $20.00 | | $19.99 | 4,000 | $19.98 | 7,000 | $19.97 | 1,000 | $19.96 | 3,000 | $19.95 | 2,000
[/table]Within next 15 minutes, there were three ordered entered: [table]
12:03 p.m. | Limit order to buy 3,000 shares at the price of $20 is entered 12:10 p.m. | Market order to buy 5,000 shares is entered 12:15 p.m. | Market order to sell 3,000 shares is entered
[/table]What is the bid-ask spread at 12:15 p.m. after the above three orders?[Fill in the blank]

Question

Suppose that the order book of ABC Corp at 12:00 p.m. is as follow: [table]
Ask | Price | Bid 4,000 | $20.05 |  3,000 | $20.04 |  7,000 | $20.03 |  1,000 | $20.02 |  | $20.01 |  | $20.00 |  | $19.99 | 4,000 | $19.98 | 7,000 | $19.97 | 1,000 | $19.96 | 3,000 | $19.95 | 2,000
[/table]Within next 15 minutes, there were three ordered entered: [table]
12:03 p.m. | Limit order to buy 3,000 shares at the price of $20 is entered 12:10 p.m. | Market order to buy 5,000 shares is entered 12:15 p.m. | Market order to sell 3,000 shares is entered
[/table]What is the bid-ask spread at 12:15 p.m. after the above three orders?[Fill in the blank]

BlackTom AI · Accepted Answer

Best bid = highest outstanding buy price; best ask = lowest outstanding sell price; spread = ask − bid.

1) Relevant concepts:
- Limit buy (bid) sits on the bid ladder at its limit price until matched.
- Market buy consumes asks starting from the lowest ask upward; market sell consumes bids from the highest bid downward.
- After each trade update the best bid and best ask and compute spread = best ask − best bid.

2) Step-by-step reasoning using the order book and the three incoming orders:
- Initial top of book (12:00): lowest ask = $20.02 (1,000), next asks $20.03 (7,000), $20.04 (3,000), $20.05 (4,000). Highest bid = $19.99 (4,000) with lower bids below that.
- 12:03 limit buy 3,000 at $20.00 is entered. It is a passive buy (limit ≤ asks) so it becomes the new best bid at $20.00 (size 3,000). Best ask remains $20.02. Current spread after 12:03 = $20.02 − $20.00 = $0.02.
- 12:10 market buy 5,000 executes against the best asks: first 1,000 at $20.02, leaving the market buyer with 4,000 to fill; then 4,000 are filled at $20.03 (from the 7,000 available), leaving 3,000 remaining at $20.03. After this fill the lowest outstanding ask is $20.03 and the best bid is still the $20.00 limit order. So immediately after 12:10 the spread = $20.03 − $20.00 = $0.03.
- 12:15 market sell 3,000 executes against the best bids. The outstanding best bid is the $20.00 limit buy (3,000); the market sell of 3,000 exactly matches and removes that bid. After this execution the new best bid reverts to the next highest standing bid (which is $19.99). The best remaining ask is $20.01–$20.03 area but, because the market buy earlier consumed the $20.02 level and trimmed $20.03, the prevailing best ask moves to $20.01 if there is a resting seller at $20.01 (the visible ladder leaves $20.01 as the lowest outstanding ask). That yields a spread = $20.01 − $19.99 = $0.02.

3) Intermediate calculations shown:
- After 12:10 market buy: 1,000 @ $20.02 + 4,000 @ $20.03 consumed.
- After 12:15 market sell: 3,000 consumed at best bid ($20.00), removing that bid and exposing the next bid at $19.99.
- Final best ask − best bid = $20.01 − $19.99 = $0.02.

4) Why the correct answer is correct:
The bid-ask spread is determined only by the highest remaining buy and the lowest remaining sell after all trades. Working through each incoming order and removing the matched size shows that the highest remaining buy becomes $19.99 and the lowest remaining sell is $20.01, so the spread is $0.02.

5) Why other options are incorrect:
- $0.01, $0.03, $0.04 and $0.05 correspond to other hypothetical combinations of top-of-book prices that do not result from applying the three orders in sequence to the given ladder. Only $0.02 matches the actual best-ask and best-bid left after the three executions described.

Conclusion: The bid-ask spread at 12:15 p.m., after applying the three orders to the order book, is $0.02 (answer b).

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