Harvard Business School Case: T Rowe Price Case Questions

Note: all case questions are based on real world situations. Therefore, they do not

have solutions that can be directly found from text book. Solve these questions

require your creative thinking based on materials covered in class this week and next

week.

1. What would average market makers’ fair value for the two stocks around the time

period (say between 11:00 and 11:59) when Greg was negotiating with Goldman and

Kidder?

Hint: Each market maker’s fair value is usually the mid-point of his bid and ask prices. There

are usually multiple market makers/dealers for a stock on the OTC market. Goldman and

Kidder are market makers. T. Rowe Price is just one normal trader.

If the true value of the stock is 100 and a trader sells the stock to the market maker at 95,

the cost (relative to the fair value) for the trader is 5. Market maker makes a 5-dollar profit

(relative to the fair value).

Bid (sell) price is the price that market maker buy (sell) stocks. If a market maker believes the

true value of a stock is 100, his bid and ask are, say, 95 and 105, then traders are going to

trade with him at either 95 (sellers) or 105 (buyers). You are going to see a sequence of

transaction prices of, for example, 95, 105, 95, 105, 105… with 95 and 105 randomly

appearing, because buyers and sellers randomly arrive at the market and trade with the

market maker. So to find market maker’s bid and ask, as well as fair value, you only need to

look at the transaction price history during the time when T Rowe Price made the phone

call. To estimate what are the bid and ask, you need to read the exhibits (at the end of the

case) in which you can see the transaction price history for the two stocks and make an

estimate of what could be the bid and ask prices. 2. Using the average market makers’ fair value in Question 1 as a benchmark, please do a

transaction cost analysis for T Rowe Price. How much direct transaction cost would Greg

incur relative to the fair value if he sold to Kidder? Here, direct transaction cost is the

absolute value of the difference between transaction price and fair value. It is also the

compensation paid to market makers for their market making service. 3. How much direct transaction cost would Greg incur relative to the fair value if he were to

accept Michael's terms in CASE A? 4. Kidder provides research for T Rowe Price for nothing. Why they want to do that?

5. Why Greg went to Kidder first instead of Goldman?

6. Can a block be sold in several small lots? 7. Perhaps Michael is just being “greedy”. Can Greg walk away if better terms are not

forthcoming? 8. Why include Tandem in the deal? Wouldn’t that make the deal complicated? In other words,

was it a sweetener (more business to Goldman)? Or something more subtle? 9. What is the final transaction cost incurred relative to the fair values of Avantek and Tandem

after the traders’ negotiation in Case B? Is the trader Greg skillful (in the sense of reducing a

nontrivial amount of transaction cost)?

9. What is the basic problem Greg faces in trying to dispose the block of Avantek shares?

What advice would you give him if he could do it all over again given you have known

what he has done in both Case A and B?

Requirements: 1. You can solve the case questions by yourself or form a group to solve them.

2. If you would like to form a group, the group have to be no more than 4 people.

3. Please hand in the case write-up at Thursday Feb 25. There are no requirement on the total

number of pages. 4. The website link to obtain the Harvard Business School case is the following:

Case A

http://hbr.org/product/At-the-T--Rowe-Price-Trad/an/285041-PDF-ENG

Case B

http://hbr.org/product/at-the-t-rowe-price-trading-desk-b/an/285042-PDF-ENG



If you need to practice it,I will provide the questions and the answers


Let me know please.



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