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Question

Difficulty: HardTypes of Orders and Order Execution Strategies

An investor submits an order to buy 5,0005,000 shares of XYZ stock at a limit price of $45.00\$45.00 with a Fill-or-Kill (FOK) time-in-force instruction. At the moment the order reaches the trading venue, the consolidated order book displays the following sell offers:

- 3,0003,000 shares at $44.90\$44.90
- 1,0001,000 shares at $45.00\$45.00
- 2,0002,000 shares at $45.10\$45.10

Which of the following describes the correct execution handling of this order by the trading venue?

  1. The entire order must be immediately cancelled without any partial execution.Answer
  2. B
    The venue executes 4,000 shares at $45.00 or better and immediately cancels the remaining 1,000 shares.
  3. C
    The venue executes 4,000 shares at $45.00 or better and leaves the remaining 1,000 shares open on the order book as a day limit order.
  4. D
    The broker-dealer fills the remaining 1,000 shares at $45.10 from its proprietary account to complete the order while charging a principal mark-up.

Answer

The entire order must be immediately cancelled without any partial execution.
A Fill-or-Kill (FOK) order requires that the entire order quantity be executed immediately at the specified limit price or better. If the total order quantity cannot be filled in full immediately upon arrival, the entire order is cancelled. In this scenario, only 4,0004,000 shares are available at or below the limit price of $45.00\$45.00 (3,0003,000 at $44.90\$44.90 and 1,0001,000 at $45.00\$45.00). Because the full 5,0005,000 shares cannot be filled instantly, the entire order must be cancelled immediately without any partial execution.

Step-by-Step Solution

1
Analyze the customer's order parameters and time-in-force restriction.
The order is a limit order to buy 5,0005,000 shares of XYZ at a maximum price of $45.00\$45.00, with a Fill-or-Kill (FOK) qualifier.
FOK orders require two conditions: the order must be executed in its ENTIRETY (no partial fills) and it must be executed IMMEDIATELY upon entry.
2
Evaluate available market liquidity at or below the limit price of $45.00\$45.00.
Available liquidity: 3,000 shares at $44.90+1,000 shares at $45.00=4,000 shares total3,000\text{ shares at }\$44.90 + 1,000\text{ shares at }\$45.00 = 4,000\text{ shares total}.
Shares offered at $45.10\$45.10 exceed the customer's maximum buy limit price of $45.00\$45.00 and cannot be used.
3
Compare available volume to required order quantity.
Only 4,0004,000 shares can be executed at $45.00\$45.00 or better, which is less than the requested 5,0005,000 shares.
Since the entire 5,0005,000-share quantity cannot be filled immediately, the FOK qualification dictates that no portion of the order may execute, and the entire order must be cancelled.

Key Concept

Fill-or-Kill (FOK) vs. Immediate-or-Cancel (IOC) order execution rules
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Topics

Types of Orders and Order Execution Strategies