Examkin

Question

Difficulty: HardTypes of Orders and Order Execution Strategies

An investor submits two separate order instructions during pre-market trading for a volatile stock that closed previous-day trading at $70:

1. Order 1: A Buy Stop-Limit order for 500 shares at 75Stop,75 Stop, 75 Limit, GTC.
2. Order 2: An Immediate-or-Cancel (IOC) Buy Limit order for 500 shares at $74.

At the market open, the stock gaps up and executes its first trade at 77,tradingbetween77, trading between 76 and $78 throughout the remainder of the session. Which of the following statements correctly describe the execution mechanics and status of these orders?

  1. Order 1 is activated (triggered) at the market open because the trade price of 77meetstheconditionofbeingatorabovethestoppriceof77 meets the condition of being at or above the stop price of 75.Answer
  2. B
    Once activated, Order 1 immediately converts to a market order and fills at the opening price of $77.
  3. Order 2 will attempt an immediate execution at $74 or better upon entry, and any unfilled portion will be immediately canceled rather than remaining on the order book.Answer
  4. D
    Order 2 can only be executed by a broker-dealer operating as a principal from firm inventory because agency brokers cannot handle IOC execution qualifiers.

Answer

The correct statements are that Order 1 is activated when the stock opens at 77(since77 (since 77 is at or above the 75stopprice),andOrder2willattemptanimmediateexecutionat75 stop price), and Order 2 will attempt an immediate execution at 74 or lower with any unexecuted shares immediately canceled.
The statement regarding Order 1 activation is correct because a buy stop order is triggered as soon as a transaction occurs at or above the specified stop price (75),whichhappensatthe75), which happens at the 77 open. The statement regarding Order 2 is correct because Immediate-or-Cancel (IOC) orders require any portion of the order that cannot be executed immediately at the specified limit price ($74) or better to be canceled automatically.

Step-by-Step Solution

1
Analyze the activation condition for Order 1 (Buy Stop-Limit at 75Stop,75 Stop, 75 Limit).
A buy stop order triggers when market price reaches or exceeds the stop price (75).Sincetheopeningpriceis75). Since the opening price is 77, the trigger condition is met and the order is activated.
Buy stop triggers occur at or above the stop price.
2
Analyze the execution rule for Order 1 post-trigger.
Upon activation at 77,Order1convertsintoaBuyLimitorderat77, Order 1 converts into a Buy Limit order at 75. A buy limit order can only execute at 75orlower.Becausethestocktradesbetween75 or lower. Because the stock trades between 76 and $78, Order 1 remains unexecuted on the order book.
Stop-limit orders convert to limit orders, not market orders, guaranteeing price protection rather than execution.
3
Analyze the execution mechanics of Order 2 (IOC Buy Limit at $74).
An Immediate-or-Cancel order attempts to execute immediately in whole or in part at the limit price ($74) or better. Any portion that cannot be filled immediately is canceled without sitting on the order book.
IOC orders prohibit remaining on the order book for future execution.
4
Evaluate broker-dealer capacity rules for order qualifiers.
Order execution qualifiers like IOC, FOK, or GTC dictate timing and fulfillment terms for order handling; they do not dictate whether a broker-dealer operates as an agent or a principal.
Broker-dealers can execute qualified orders in either agent (broker) or principal (dealer) capacity.

Key Concept

Execution mechanics of Stop-Limit orders and Immediate-or-Cancel (IOC) time-in-force qualifiers
Estimated Time:2m 0s
Rate this question

Topics

Types of Orders and Order Execution Strategies