Additional Notes About Markups
Note that the markups/markdowns on riskless principal transactions are calculated using the member’s cost.
Proceeds transactions occur when a customer gives an order to sell a security and uses the proceeds to buy another security. This type of transaction is considered a single transaction for purposes of calculating a markup. The markup is calculated by adding the compensation for each transaction and dividing by the inside ask/offering price for the security that was purchased times the number of shares of the security purchased.
Example Questions
|
ABCD Security |
|||
|
|
BID |
ASK |
SIZE |
|
Market Maker 1 |
10.25 |
10.80 |
10 – 20 |
|
Market Maker 2 |
10.15 |
10.85 |
20 – 20 |
|
Market Maker 3 |
10.10 |
10.75 |
50 – 10 |
|
Market Maker 4 |
10.05 |
10.90 |
10 – 10 |
- 1. ABCD is an actively traded security with an inside market of 10.25 – 10.75. Market Maker 3 receives a market order to buy 100 shares of ABCD. The market order is filled at the inside market and the customer is charged a net price of 11.25. What is the markup?
Answer: On a buy order in an active competitive market, the markup is calculated as a percentage of the best ask price. The markup amount is calculated by taking $11.25 – $10.75 = $.50. The markup percentage is $.50/$10.75 = 4.65%.
- 2.