Question

Refer to the below limit order book for the stock QQL.

		100	6.40	6.80	300
Time	Trader	Size	Price	Price	Size	Trader	Time
09:55	HSU	100	6.40	6.80	300	CTI	09:15
10:11	HKB	300	6.20	6.95	1000	WHB	09:30
09:45	BEA	550	6.00	7.05	100	CCB	10:00

The following scenarios are independent of each other.

a. If you execute a market buy order of 500 shares of QQL, how much money would you receive?

b. If a limit order to sell 700 shares at $6.40 arrives, what would be the new market best bid and ask?

c. Suppose at 10:15, one of your clients requests to buy 300 shares of QQL “by the end of the trading day”. There are two possible strategies you may take to handle this order. Explain the pros and cons of ONE of the strategies.

Answer 1

In the market order, the shares are traded at the best price available for the quantity.

A) in the case if a trader buys 500 shares at the market order, he would get 300 shares available at $6.80 and the remaining 200 at the next best price of $6.95. He will have to pay 300*6.80 + 200*6.95 = $3430. The broaker will receive this amount from the investor and will have to pay to the sellers's broaker.

B) If a new limit order for 700 shares is arrived for $6.40, then the first 100 shares will be sold for $6.40 and the remianing shares will be left pending to be sold at $6.40. The best bid would become $6.2 for 300 shares and the best ask would be $6.40 for 600 shares.

C)The two available options with the broaker is that he can place the market order and buy the shares at the prevailing prices or wait until the end of the day to purchase the shares.

The risk associated by making the purchase at 10;15 in the morning is that a news ay come for the stock and it may drag the prices down, had the investor wait until the end of the day, he would have got the same quantity at less price. Advantage is that, a positive news may come to drag the prices up and investor would beneit from making the purchase at the lesser prices in the morning.