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Difficulty: MediumTypes of Orders and Order Execution Strategies

A registered representative receives instructions from an institutional client to place two separate equity limit orders: Order 1 is entered with a 'Fill-or-Kill' (FOK) qualifier, and Order 2 is entered with an 'Immediate-or-Cancel' (IOC) qualifier. Which of the following statements correctly describe the execution rules governing these order types? (Select all that apply.)

  1. Order 1 must be executed immediately in its entirety; if full execution is not possible upon entry, the entire order is cancelled.Answer
  2. Order 2 permits immediate partial execution, after which any remaining unexecuted shares are cancelled.Answer
  3. C
    If Order 1 cannot be filled immediately, the unfilled portion remains on the order book as a Good-'Til-Canceled (GTC) order.
  4. D
    Order 2 must be held by the executing broker-dealer until the market close before any unexecuted portion can be cancelled.

Answer

The correct statements are that a Fill-or-Kill (FOK) order must be executed immediately in full or cancelled entirely, and an Immediate-or-Cancel (IOC) order allows partial immediate execution with the remaining unexecuted portion immediately cancelled.
Fill-or-Kill (FOK) order qualifiers mandate that the entire order quantity be executed immediately upon market arrival, or the entire order is cancelled. Immediate-or-Cancel (IOC) qualifiers also demand immediate execution, but they permit partial fills, cancelling any remaining portion that could not be executed right away.

Step-by-Step Solution

1
Analyze the mechanics of a Fill-or-Kill (FOK) order qualifier
An FOK qualifier requires that the entire order quantity be executed immediately at the specified limit price or better. If the market cannot immediately satisfy the entire quantity, no partial fill occurs and the order is completely cancelled.
This establishes that partial executions are strictly prohibited for FOK orders.
2
Analyze the mechanics of an Immediate-or-Cancel (IOC) order qualifier
An IOC qualifier requires immediate execution at the limit price or better for any available quantity. If only part of the order can be filled immediately, that portion is executed and the remaining unfilled portion is cancelled.
This distinguishes IOC from FOK by allowing partial execution.
3
Evaluate the incorrect choices regarding order book retention and market close timing
Neither FOK nor IOC orders remain open on the order book or wait for market close; both demand immediate fill-or-cancel processing upon market presentation.
Resting on the order book is characteristic of standard GTC or Day limit orders, not immediate qualifiers.

Key Concept

Order Execution Qualifiers (FOK vs IOC)
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Topics

Types of Orders and Order Execution Strategies