Business Case Studies & Business Publications

Gellibrand Partners

Schill, Michael J.

Case

Gellibrand Partners

Schill, Michael J.

F-1648 | Published June 7, 2011 | 3 pages Case

Collection: Darden School of Business

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Given widening bid-ask spread for a target stock, a small Australian portfolio manager considers front-running the market makers by posting its own quotes inside the spread. Organized in a series of rounds, the case asks students to post bid and ask limit orders for shares. Each round allows orders to come in that execute against the limit order book, cash flow and end-of-round inventory to be calculated, and the market to revise the bid and ask quotes for the next round. This structure starkly illustrates the tension for market makers between bid-ask spread profits and inventory trading uncertainty.

(1) Illustrate the impact of bid-ask spread on investment returns. (2) Introduce the mechanics and strategy of market making in securities markets. (3) Build understanding of price formation. (4) Demonstrate intuition about the three-legged stool of functioning security markets: informed traders, liquidity traders, and market makers.