Question

Consider the following limit order book for a share of stock. The last trade in the stock occurred at a price of $135.

Limit Buy Orders			Limit Sell Orders
Price	Shares		Price	Shares
$134.75	600		$134.80	200
134.70	900		134.85	200
134.65	600		134.90	400
134.60	200		134.95	200
133.65	700

a. If a market buy order for 200 shares comes in, at what price will it be filled? (Round your answer to 2 decimal places.)

b. At what price would the next market buy order be filled? (Round your answer to 2 decimal places.)

c. If you were a security dealer, would you want to increase or decrease your inventory of this stock?

• Increase

• Decrease

Answer 1

Answer for a:
The market buy order will get executed at the price of $134.80 for 200 shares as it the best price of limit sell order available in the market. A buyer won't get any other best buy price as the next sell order price available is $134.85 which is higher than $134.80.

Answer for b:
The next market buy order will be filled at $134.85 which is the next best available limit sell order price.

Answer for c:
We would increase our inventory for this stock. This is because, wee see that the buying demand is higher just below $134.8. We can see this from the number of shares for buy orders in the order book (like 600 shares at $134.75, followed by 900, 600, 200 and 700). This gives an indication that the down side risk will be limited. The demand (number of shares in the buy orders) is high compared to the supply (number of shares in the sell orders) and also the limit sell orders are sparse. This might result in the increase in price of the stock.