Financial Markets

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Student Name Instructor’s Name Course Date Problem 1 (a). Explain why it might be valuable for market makers to observe the order flow, and why this might be bad for traders. The observation of the order flow allows market makers to comprehend the trend experienced by the traded securities. In essence, the value of the contribution associated order flow to market markers remains best attributed to the gains associated with the information. In the case of market markers, information that suggests possible gains in the pricing of the traded securities offers is to be treated with utmost importance. Assuming the trends in the order flow exposes the market markers to possible losses since they will be unable to predict the behavior of the buyers. In essence, such traits may be argued to be detrimental to the success of market markers when considering their role as security transaction (Hu, 627). Being unable to observe the order flow would imply being unable to buy the appropriate securities as well as inability to secure the orders considered favorable by the clients. In essence, the tracking of order flows allows appropriate pricing of securities to clients as well as the isolation of the ideal brokers upon which to engage in the respective transactions (Yuan, 552). Also, the adherence of the trends in order flow may be considered essential in cost cutting especially when considering the plight of small market markers. The concept of market markers following order flow may be argued to be discriminatory to the interests of traders when the prospect of compensation is considered. In essence, order flow reflects on the commissions associated with the execution of

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