Question

Explain the difference between a limit order and a market order. What type of order provides immediacy? With respect to a real-world case, explain whether financial intermediaries may play any role in a market with an electronic order book.

Answer 1

Diff between market order and limit order

A market order is a transaction that is meant to be executed as quickly as possible at the existing/market price. On the other hand, a limit order sets the minimum or maximum price at which one is willing to buy or sell. The order gets executed once the price level is triggered.

If market orders are large in numbers, there is a threat of difference in price at the time order was placed, and when it was executed since placing large orders can be time-consuming. No such issues will exist in case of limit orders as the buy/sell price is pre-determined. However, in limit orders, if the target price is reached, there may not be enough liquidity in the stock to fill in the order when its turn comes. It may receive partial or no fill due to price restrictions.

Market orders are primarily dealing with the execution of the order with the speed of the transaction is more essential than the price. However, limit orders primarily deal with the price, and if the value of the security is outside the parameters of the limit order, the transaction will not occur.

Market orders placed after trading hours will be filled at the market price and open at the next trading day, whereas limit orders placed outside market hours are common. In such cases, the orders are placed into a queue for processing as soon as trading resumes.

Market orders can have lower brokerage fees, but since limit orders can be complicated to execute, it may charge higher brokerage.

Market orders are feasible for any kind of stock, but limit orders are beneficial when a stock is thinly traded, high volatile or has a wide bid-ask spread

2)market order provides immediacy

3)Market makers are typically large banks or financial institutions.5 They help to ensure there's enough liquidity in the markets, meaning there's enough volume of trading so trades can be done seamlessly. Without market makers, there would likely be little liquidity. In other words, investors who want to sell securities would be unable to unwind their positions due to a lack of buyers in the market.

Market makers help keep the market functioning, meaning if you want to sell a bond, they are there to buy it. Similarly, if you want to buy a stock, they're there to have that stock available to sell to you.

Market makers are useful because they are always ready to buy and sell as long as the investor is willing to pay a specific price. Market makers essentially act as wholesalers by buying and selling securities to satisfy the market—the prices they set reflect market supply and demand. When the demand for a security is low, and supply is high, the price of the security will be low. If the demand is high and supply is low, the price of the security will be high. Market makers are obligated to sell and buy at the price and size they have quoted.