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. |