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                                             8
 Ranking Informational Content of Incoming Trade


                    Choice of Action


 Change Bid/Ask                    Trade on Interdealer Market
(Exogenous Trade)                      (Endogenous Trade)


                                      Choice of Counterpart


                                       Trade with Well Informed Dealer
                                       (Smart Market Timer, Contrarian)

                                          Trade with Informed Dealer
                                        (Market Timer, Quasi-Contrarian)

                                        Trade with Uninformed Dealer
                                                 (Averages)



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                                              47
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                                                 59
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                                          6:
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                                           6;
Wdeoh 41 Vdpsoh Ghvfulswlrq
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   Vshfldolvwv                                                        98;1;8        6;7179   74:8
   Rug1 Pdunhw Pdnhuv                                                 5;618:        58;183   5883
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   Vshfldolvwv                               Rug1 Ghdohuv             4881;3        434198   46:3
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                                                6<
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 Pdunhw Pdnhu          Rug1 Ghdohu                 7/4;5     03195       61;:   054175   5617:          04316

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                                                73
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                                                   74
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                                                   75
                        Sdqho D= Qrq0dxfwlrq shulrgv
Lqwhuphgldwlqj                                     Yduldeoh
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                                                            8™|          g&     T&8™|     sw
Ryhudoo          A31<         3193     :5157         0     04318      0<196   01335;3     31<<
+Q@57/7:;,                 +75159,    +;154,         0   +0619<,   +045143,    +0619<,
                 318 31<      3166    0451<9         0      <175       6177   0133347     3156
                           +5;15<,   +041<<,         0    +7193,     +:169,    +03158,
                 ?318         3184      8916         0     061;<      07184     013364    3145
                           +5<1<:,    +81:6,         0   +0418;,    +08197,    +06176,
                 A31<        08197         0      917:      313:      0;15<     01337<    3175
                           +0815<,         0    +81<9,    +3136,    +04616,    +0813:,
                 318 31<      8163         0     0813<      ;1:6       519:      13335    31<<
                            +81<<,         0   +08198,    +8165,     +817<,     +3164,
                 ?318       043199         0     4417:      31<9      05184     013374    3143
                           +09167,         0    +91:3,      3173      051<4       06196
Vshfldolvwv      A31<         3196     941<8         0    045196     043155     013363    314<
+Q@49/6:;,                 +68159,    +8183,         0   +07157,   +047145,    +0616<,
                 318 31<      3165     0;177         0      <134       51<5     013335    315:
                           +551<<,   +031<<,         0    +619;,     +8135,    +03159,
                 ?318         3187      5819         0     09148      08145     013364    31;4
                            +5818,    +5137,         0   +04196,    +08148,    +06147,
                 A31<        08144         0      81<5     06154      0<16:     013374    31:4
                           +0714<,         0    +71:;,   +0415;,   +045184,    +0713<,
                 318 31<      4183         0     04155      ;1<<       51:<      13339    315:
                            +4183,         0   +0414<,    +7163,     +7199,     +313<,
                 ?318        061;6         0      717;     061:9      07168     01336:    3173
                           +0514:,         0    +5184,   +0413<,    +07149,    +06154,
Pdunhw Pdnhu     A31<         3193      9518         0     05184       0;15     013367    31<<
Q@;/433                    +5815;,    +71<4,         0   +0318;,    +0:175,    +05146,
                 318 31<      3167    074156         0     45139       8158     013337    316:
                           +4<17;,   +0718;,         0    +61:5,     +918;,    +0316:,
                 ?318         3185     :3137         0     31:;:      0814:     013368    3155
                           +531;4,    +817;,         0    +3154,    +07135,    +05144,
                 A31<        09165         0      :14:      9155      091:;     01337;    31<:
                           +0615:,         0    +6196,    +41;3,    +09139,    +0618:,
                 318 31<      :14<         0     0:138      91:6       7156      1333:    31;;
                            +71;4,         0   +07196,    +5173,     +8147,     +3194,
                 ?318       0481;:         0     491;8      :157      06167     013386    3194
                           +0813:,         0    +815:,    +41:4,    +0514;,    +05144,




                                         76
                           Sdqho E= Dxfwlrq shulrgv
Lqwhuphgldwlqj                                     Yduldeoh
Pdunhw Pdnhu     IUD                   LF„      L' dD       2
                                                               8™|        g&     T&8™|    sw
Ryhudoo          A31<          319:     8<186         0     08144      0;1<7    0133<6   3175
+Q@6/:3<,                   +53167,    +51<6,         0   +03197,    +09194,   +061:7,
                 318 31<       315;      418;         0      :19;       716;     13345   3164
                            +43134,    +3143,         0    +4167,     +61:<,    +3189,
                 ?318          3185      ;91;         0     041:4      0:163    013394   3165
                            +4616;,    +6143,         0   +03155,    +07167,   +05164,
                 A31<         081::         0      9196      41<;      0:1;3    013453   3177
                            +051<:,         0    +6169,    +315<,    +0815;,   +07194,
                 318 31<       :13;         0     091<4     431::       6149     13344   314;
                             +61;9,         0   +061:4,    +5135,     +5189,    +3193,
                 ?318        04518<         0     46179     03155      0716<    013436   3147
                            +06149,         0    +6164,   +03136,    +041<9,   +06173,
Vshfldolvwv      A31<          319;     771;4         0      4196      08136    013363   31;4
+Q@4/533,                   +4:134,    +41<6,         0    +314<,    +08147,   +06147,
                 318 31<       3165    04416:         0      ;1<8       6165    01333:   317;
                             +<174,   +0318:,         0    +4166,     +5173,   +03166,
                 ?318          3185     :31;5         0      4196      0;175    0133::   3157
                             +<188,    +5138,         0    +314<,    +07158,   +05164,
                 A31<         0719:         0      8135     04134      0<13;    013444   3156
                            +05143,         0    +5178,   +03146,    +08174,   +06174,
                 318 31<       8179         0     08157      ;167       5184    013336   3164
                             +51;6,         0   +0519:,    +4164,     +41:8,   +03145,
                 ?318         0517<         0      614:      ;173      0;155    013449   3153
                            +03198,         0    +5134,    +4147,    +061;8,   +06193,
Pdunhw Pdnhu     A31<          31:4     4;146         0      ;137       0:18    013453   314:
Q@5/83<                      +9139,    +31:5,         0    +3185,    +0518:,   +06169,
                 318 31<       315;    065146         0     46168       :194     13357   3148
                             +914;,   +04157,         0    +4165,     +6187,    +31;9,
                 ?318          3174   45<1;4          0    059143      09153    013349   318<
                             +:14:,    +7199,         0   +0419:,    +05133,   +03169,
                 A31<         081;;         0      91:7      9185      07188    013443   3197
                            +0419<,         0    +41<4,    +3178,    +04178,   +06135,
                 318 31<       7173         0     07158      <157       917;     13365   3179
                             +4163,         0   +04156,    +4144,     +51<:,    +414;,
                 ?318        0471;6         0     481:9     0451<      0<166    0133;7   3165
                            +0516:,         0    +517:,   +03183,    +03155,   +04184,




                                          77
Wdeoh 81 Klglqj yv1 h{shulphqwdwlrq= Wudqvdfwlrqv0edvhg vshflfdwlrq1
    Zh uhsruw wkh uhvxowv ri wkh hvwlpdwlrq ri=

         oq+v&™| ,   oq+v& f™| , @  f . # oq+v|ƒec•t , .  F„ HY&™| .  j' 2 . & . &| =
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zkhuh/ v| > l @ 4> ===> 8 lv wkh suredelolw| wkdw m0wk pdunhw pdnhu zrxog vhohfw l0wk hqgrjhqrxv
dowhuqdwlyh1 v| lv ghqhg dv wkh udwlr ehwzhhq wkh rughuv wkdw wkh m0wk pdunhw pdnhu sodfhv zlwk
wkh pdunhw pdnhuv ehorqjlqj wr wkh l0wk jurxs lq wkh 43 plqxwhv iroorzlqj wkh ruljlqdwlqj wudgh/
dqg wkh wrwdo dprxqw ri wudghv +erwk hqgrjhqrxv dqg h{rjhqrxv, wkdw kh ghdov zlwk lq wkh vdph
lqwhuydo1 vf| lv wkh suredelolw| wkdw wkh m0wk pdunhw pdnhu zrxog vhohfw h{rjhqrxv dowhuqdwlyh= Lw
lv ghqhg dv wkh udwlr ehwzhhq wkh rughuv wkdw wkh l0wk pdunhw pdnhu uhfhlyhv iurp rwkhu pdunhw
pdnhuv lq wkh 43 plqxwhv iroorzlqj wkh ruljlqdwlqj rughu/ dqg wkh wrwdo qxpehu ri wudghv +erwk
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hqgrjhqrxv dqg h{rjhqrxv, wkdw kh ghdov zlwk gxulqj wkh vdph lqwhuydo1 v|ƒec•t @ v| @ D' v|
lv wkh suredelolw| ri wkh l0wk dowhuqdwlyh frqglwlrqdo rq kdylqj ghflghg wr jr hqgrjhqrxv1 Wkdw lv/
lw lv wkh udwlr ehwzhhq wkh rughuv wkh m0wk pdunhw pdnhu sodfhv zlwk rwkhu pdunhw pdnhuv ehorqjlqj
wr wkh l0wk fkrlfh jurxs lq wkh 43 plqxwhv iroorzlqj wkh ruljlqdwlqj rughu/ dqg wkh wrwdo qxpehu
ri rughuv wkdw/ gxulqj wkh vdph lqwhuydo/ wkh m0wk pdunhw pdnhu sodfhv1 # uhsuhvhqwv wkh ghjuhh
ri khwhurjhqhlw| dfurvv dowhuqdwlyhv frqglwlrqdo rq kdylqj fkrvhq wr jr hqgrjhqrxv1 HY&™| lv wkh
dyhudjh glhuhqfh lq h{shfwhg ydoxh ehwzhhq rxwjrlqj hqgrjhqrxv wudgh dqg lqfrplqj wudgh ryhu
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sulfhv ri wkh erqg lq wkh 43 plqxwhv diwhu wkh wudqvdfwlrq1
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_dyhudjhv%/ _txdvl0frqwuduldqv% dqg _frqwuduldqv%1 Wkh vpduw pdunhw wlphuv duh wkh ghdohuv zkrp
wkh pdunhw pdnhu lv frqghqw +zlwk frqghqfh lq h{fhvv ri <3(, duh deoh wr vxffhvvixoo| wlph wkh
pdunhw/ l1h1/ wkh| ex| ehiruh dq lqfuhdvh lq sulfhv dqg vhoo ehiruh d uhgxfwlrq lq sulfhv1 Wkh pdunhw
wlphuv duh wkh rqhv wkh pdunhw pdnhu eholhyhv wr eh deoh wr vxffhvvixoo| wlph wkh pdunhw zlwk
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nqrzohgjh derxw +frqghqfh ohyho orzhu wkdq 83(,1 Wkh frqwuduldqv duh wkh pdunhw pdnhuv zkrp
wkh pdunhw pdnhuv lv yhu| frqghqw +<3( frqghqfh ohyho, iroorz frqwuduldq vwudwhjlhv +vhoo ehiruh
lqfuhdvh lq sulfhv dqg ex| ehiruh d uhgxfwlrq lq sulfhv,1 Ilqdoo| wkh txdvl0frqwuduldqv duh wkh
pdunhw pdnhuv zkrp wkh pdunhw pdnhu eholhyhv wr iroorz frqwuduldq vwudwhjlhv zlwk d frqghqfh
ehwzhhq 83( dqg <3(1 Wkh prgho lv hvwlpdwhg iru hdfk pdunhw pdnhu vhsdudwho| rq wkh edvlv ri
wudqvdfwlrq wlph1 Wkhq wkh pdunhw pdnhuv duh fodvvlhg lqwr wkuhh jurxsv edvhg rq wkh qdwxuh ri
wkhlu uhvsrqvh wr lqiruphg wudgh +frhflhqw  F„ ,1 Wkh uhvxowv ri wkh hvwlpdwlrq djjuhjdwhg ryhu
wkrvh wkuhh jurxsv duh uhsruwhg lq Sdqho D1 Wkh uhvxowv ri wkh vlplodu hvwlpdwlrq djjuhjdwhg ryhu
wkh rfldo fodvvlfdwlrq ri ghdohuv duh uhsruwhg lq Sdqho E1
     Zh uhsruw wkh uhvxowv ri hvwlpdwlrq eurnhq grzq e| suhflvlrq ri lqfrplqj vljqdo1 Jurxsv L wr
Y fruuhvsrqg wr wkh wudqvdfwlrqv lqlwldwhg e| _vpduw pdunhw wlphuv/% _pdunhw wlphuv/% _dyhudjhv/%
_txdvl0frqwuduldqv% dqg _frqwuduldqv%/ uhvshfwlyho|1 Lq Sdqho F wkh vshflfdwlrq grhv qrw frqwdlq
2 / exw wkh hvwlpdwlrqv duh shuiruphg vhsdudwho| iru shulrgv ri %kljk% dqg %orz% yrodwlolw|  2 1
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%Kljk% yrodwlolw| shulrgv duh ghqhg dv wkh shulrgv zkhq wkh gdlo| yrodwlolw| h{fhhgv gdlo| yrodwlo0
lw| ryhu wkh odvw 43 wudglqj gd|v1 Wkh hvwlpdwlrq lv grqh xvlqj d yduldqfh0fryduldqfh frqvlvwhqw
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lqfrplqj wudgh  dqg  ri wkh suhfhhglqj wudqvdfwlrq duh hpsor|hg dv lqvwuxphqwv1 w0vwdwlvwlfv
ri hvwlpdwhv duh uhsruwhg lq eudfnhwv1 Wkh s0ydoxh ri Kdqvhq*v ryhulghqwlfdwlrq fulwhulrq +sw , lv
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                                                  78
Wdeoh 8/ frqwlqxhg1



     Sdqho D= Wudglqj0edvhg Fodvvlfdwlrq/ Vhsdudwlrq Ryhu Suhflvlrq ri Vljqdo
              L                LL                LLL              LY                 Y
 Vnhswlf
 f     03174 +04<189,   0316: +05715;,    03174 +04<173,   03164    +0;1<8,   03165   +071:8,
  F„ 0;7177    +08169, 0<9149    +07195,  8715;     +4194, ;:135     +7148,   69167    +41;4,
  j' 065136    +041<:, 0<:143    +0;1<8, 069183    +05199, 0716:    +031<9, 0436199   +06178,
 #       3165   +49185,   3168    +54185,   316;    +5:134,  3177    +49138,    316<    +:19:,
 sw          3157                31:<                317:                   31;<                  3143
 Q          </:54               45/46<              4</744                  6/649                 :88
 Vohhs|
 f     0315;   +0671<:,    0315:   +077157,    03157   +06<167,     0315<     +05714,      03164 +04617<,
  F„   6614:     +81;<,    641:6     +7174,    471:6     +4139,    0461:<     +04199,     043186     +0414;,
  j' 04:1<:     +07179,   043166    +05136,   045139    +0616;,    0441<<     +05179,     045195     +04166,
 #       317:    +93197,     3179    +9:1<4,     3178    +;4168,      3176    +741;8,        316<    +5319<,
 sw          315:                31<;                31<<                 3185                   316<
 Q          86/:6<              ;6/<98              499/;74              64/947                 ;/636
 Vqhdn|
 f    0316:    +05719;,   03169    +0641<;,    03164   +0661<4,     0317< +058145,         03189 +04:1:8,
  F„  99144      +:133,   <3143      +91<8,   04<148    +031;:,   045;177     +0;1:9,     0<<17<     +0;15:,
  j'  57158      +715<,   4717;      +5189,    43159     +5154,     65196      +6197,       8184      +317<,
 #      3185     +6:188,    3186     +791;5,     3187    +971<8,      318<      +6<1:,       3193    +5:177,
 sw          3147                314;                3143                 318<                   315:
 Q          54/:5;              6;/:;5              ;9/896               4</<4<                 9/467


      Sdqho E= Lqvwlwxwlrqdo Fodvvlfdwlrq/ Vhsdudwlrq Ryhu Suhflvlrq ri Vljqdo
              L                LL               LLL               LY               Y
 Vshfldolvw
 f     03167 +073177,   03167 +083173,   03165 +076148,    03175 +063146,   03184 +053133,
  F„   571:3    +61:7, 771:<      +71;8, 441<7     +3198, 0:7169   +0:165, 0;4158   +0;135,
  j' 044155    +05184,  0;1<;    +05179,  315<     +3145,   715<    +4184, 49155     +4189,
 #       317:   +89146,   317;    +951:9,  317<    +:<183,   3185 +771<:,     3184   +5:1:7,
 sw          317:                3157                31<<                3197                  313<
 Q          89/;4;              ;7/448              48</7:8             66/79:                </5<:
 Rug1 Pdunhw Pdnhu
 f    03159 +055193,  03159        +06316:,    03155   +0651<;,    0315;   +04<145,      0315;   +043134,
  F„  5<174   +7167, 5819<           +6146,    46157     +31<:,   04;1<<    +041<8,      05144    +03153,
  j' 0581<;  +071<6, 0461<5         +041:4,   0461<6    +06177,   045148    +05145,     05<183    +05147,
 #      3179  +7413<,   317:         +86144,     3177    +99179,     3179    +69144,       3179    +53187,
 sw          3177                31<9                314;                31;9                  3153
 Q          5;/6:3              83/::4              446/673             54/6;5                8/;<8




                                               79
Wdeoh 8/ frqwlqxhg1

       Sdqho F= Wudglqj0edvhg Fodvvlfdwlrq/ Vhsdudwlrq Ryhu Suhflvlrq ri Vljqdo
                                dqg Kljk2Orz Yrodwlolw| Shulrgv
                L                  LL                LLL                LY                 Y
 2'       Orz      Kljk     Orz        Kljk     Orz       Kljk     Orz      Kljk     Orz      Kljk
 Vnhswlf
 f       03174     03178    03178      03179   03174      0317<   03177     03178   03165     0316:
       +0551<5, +05519;, +064163, +065195, +053134, +0571:7, +046149, +0461:;,     +071:8,   +0813;,
  F„    0<;178    0:;155 046;154      09914;   9:15;      6:176   66167     6;15;   ;81:8     79148
        +0913<,   +07169,  +08158,    +051:8,  +4167,     +31<:,  +41<6,    +418<,  +6154,    +5156,
 #         3183      3179     3184       3184    3188       3186    3187      318:    3183      3184
        +6716:,   +63143, +6:19;,     +6;193, +7;196,    +7:198, +5517<,   +581:4, +4414:,   +4315:,
 Q        7/<55      7/:<<      9/454      9/34;       </;54      </8<3      4/943       4/:39         73;        67:
 sw        3163       3149       3148       3139        3188       31:3       31;9        314<        31;:       3148

 Vohhs|
 f     03173         03176      0316<      03174       0316;      03173      03174       03175       0317<      0317<
        +06617:,   +06814<,   +07:16;,   +08313:,    +076143,   +0771;3,   +05814:,    +05817:,    +048136,   +047148,
  F„      58195      4<189       <185       6175        31:8      5<187       :19<        8188      05:15;     04617:
          +6155,     +516:,     +31;9,     +3167,      +3137,     +4183,     +3193,      +3177,     +05148,    +04144,
 #          316;       316<       316<       3169        316;       3167       3167        316:        316<       315;
         +64136,    +65155,    +6:1:;,    +69148,     +7:176,    +7616:,    +5715<,     +571;3,     +461<5,    +431:<,
 Q        59/7:;     5:/594     74/438     75/;93      ;7/956     ;5/54;     48/:8<      48/;88       6/<9<      7/667
 sw         315;       3156       31;6       31;7        31<<       31<3       31<;        31:8        31;7       3155

 Vqhdn|
 f     03193         03193      0318:      03188       0317<      03183       0319:       0319<      03199      031:3
        +054135,   +0531::,   +05;1;7,   +05<1:8,    +06519;,   +06718<,   +05413;,    +0561;;,    +04714:,   +0471;7,
  F„      8;1;5     445175     46:196     479166      04;1<3     085153    0485168     04;71;:      0;4153     0;:154
          +6178,     +9157,     +9179,     +81;4,     +03187,    +04187,     +08187,     +0:15<,    +071;3,    +071<6,
 #          3178       3183       317<       3185        317<       3186        3185        3193       3197       3186
         +4<145,    +541;8,    +59143,    +5;167,     +6;199,    +7415;,    +5617:,     +5:17<,     +53184,    +4;166,
 Q        43/754     44/63:     4</373     4</:55      75/5<9     77/59:       </:84     43/49;       5/;;<      6/578
 sw         31<9       313;       314;       3166        319;       3167        318<        313:       31:8       31<:




                                                7:
    Wdeoh 9= Vwdwlvwlfdo ghvfulswlrq ri vqhdnlhv/ vohhslhv dqg vnhswlfv

     Zh uhsruw wkh vxppdu| vwdwlvwlfv iru wkh wudglqj0edvhg fodvvlfdwlrq ri wkh ghdohuv1 Wkh
iudfwlrq ri wkh wudgh lqwhuphgldwhg e| d fodvv ri ghdohu lv fdofxodwhg dv wkh shufhqwdjh ri wudqvdfwlrqv
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ghyldwlrq ri gdlo| wudgh shu ghdohu1 Wkh| duh h{suhvvhg dw wkh idfh ydoxh ri wkh erqg wudghg1
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lv udqnhg lq ghvfhqglqj rughu1 Wkh dyhudjh udqnlqj lv fdofxodwhg iru hdfk jurxs1 Yroxph0zhljkwhg
udqnlqj lv fdofxodwhg e| xvlqj yroxph dv zhljkw1
                                                    S
                                                       Y u
                                            U„ @ S           =
                                                        Y
Wzr udqnlqjv duh uhsruwhg1 Wkh uvw lv edvhg rq wkh wrwdo wudglqj yroxph wkh pdunhw pdnhuv
lqwhuphgldwh/ zkloh wkh vhfrqg lv edvhg rqo| rq wkh yroxph wkh| jhqhudwh +hqgrjhqrxv wudgh,1


                                                                              Vohhs|      Vqhdn|      Vnhswlf
 Qxpehu ri ghdohuv lq fdwhjru|                                                      74           43             8
 Vkduh ri ryhudoo h{rjhqrxv wudglqj +qxpehu ri wudqvdfwlrqv,                    9415(        5713(         471;(
 Gdlo| H{rjhqrxv Wudgh/ Phdq +Eoq Oluh,                                          69418        7<316         93<1<
 Gdlo| H{rjhqrxv Wudgh/ Vwg1 Ghy1 +Eoq Oluh,                                     63713        6<916         7:;15
 Dyhudjh udqnlqj ryhu h{rjhqrxv wudgh+rxw ri 89,                                    64           44            47
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