CFA Practice Question

CFA Practice Question

A specialist for IBM would derive most of his income from ______.
A. the salary the exchange provides him
B. his activities as a broker
C. knowledge gained from sole access to the limit-order book
Explanation: Because IBM is such an actively traded stock, its specialist will not have to act as a dealer for it very often. Since specialists routinely share the limit-order book with other brokers, this will probably also not be the source of most of his income. Instead, he will derive most of his income from his activities as a broker. He will profit off the bid-ask IBM's spread. Specialists do not receive a salary from the exchange.

User Contributed Comments 9

User Comment
robkaz "He will profit off the bid-ask spread of IBM." This is how dealers make money. Brokers make money by commissions they charge.
shasha confused about the explanation! specialist got two roles: earning broker commission when handling limit-order book; and, income from the bid-ask spread as a dealer. what the hell the explanation intended to tell us? which role at the end was more important for this IBM specialist?
tony1973 Shasha:
Yes a dealer has two sources of income. However for a dealer of IBM stock, he does not profit too much as a dealer. The question asks the major source of his income. Clear?
Rguerra Tricky, tricky, tricky. For any other company (besides IBM, Microsoft, Intel, Cisco, etc.) the answer would be C.
danlan Good point, Rguerra
pmandgi yes the stock would be highly liquid and the broker-dealer would make more money of the churn in the stock rather than the bid ask spread. Good question
nsmwaura Can a dealer trade on his own account? if so he will have an unfair advantage due to his access to the limit order book
mixer can someone give me a clue on the bid ask spread
MaresaJaden Bid ask spread is the difference between what a broker will pay and what they will sell for. They 'make a bid' on a stock and 'ask' for a price. The difference between these two acts as compensation.
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