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information about potential trades by giving customers and their
advisers computer terminals with modems through which they could
dial into Merit. Printouts from these terminals also informed
customers of the status of their realized and unrealized gains
and/or losses in the Merit stock forwards trading.
(3) Nominal Pricing Formula
Merit instructed Mr. Auerbach to develop a formula to
determine the initial price to be charged for stock forwards
contracts. The formula was designed to replicate the price that
would be offered in a freely competitive market. Mr. Auerbach
created such a formula, taking into account the costs of holding
the stock as well as the payment of dividends.
(4) Actual Initiation of Trades
Merit's stock forwards market conducted trading activity from
early in the morning until 11 a.m. Pacific time. Merit's personnel
quoted the stock forwards prices to potential buyers as the
differential between the prices of two legs of a spread. Thus, if
the quoted forward price for a share of stock to be sold in May
were $1 more than the quoted forward price for a share of the same
stock to be sold in March, the quoted price of the spread was $1.
Customers could seek to negotiate cents off the spread price.
Trades would take place with Merit, which attempted to maintain a
market equilibrium by taking offsetting positions with different
customers, or with Merit insiders and market makers.
The final price was the price of the forward spread, based
upon the 11 a.m. price of the stock. The price took into account
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