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Difficulty: MediumTypes of Orders and Order Execution Strategies

A registered representative is reviewing order types and execution qualifiers with a client preparing to trade corporate equities. Which of the following statements correctly describe the rules governing these order types and execution strategies?

  1. A Fill-or-Kill (FOK) order must be executed immediately in its entirety upon entry; otherwise, the entire order is canceled.Answer
  2. B
    A Buy Stop order, once triggered by a trade at or above the stop price, guarantees execution at or below the specified stop price.
  3. A Market-on-Close (MOC) order is intended to execute as close as possible to the official closing price of the trading session.Answer
  4. D
    When executing a customer's order from its own trading inventory, a broker-dealer acts in an agency capacity and charges a commission.

Answer

The correct statements are that a Fill-or-Kill (FOK) order requires immediate full execution or total cancellation, and a Market-on-Close (MOC) order is designed to execute as close to the market close as possible.
Fill-or-Kill (FOK) orders demand immediate total fill or cancellation, and Market-on-Close (MOC) orders are designed to execute at the market close. Both statements accurately describe standard exchange and market execution rules.

Step-by-Step Solution

1
Evaluate the execution qualifiers for Fill-or-Kill (FOK) orders.
Confirm that FOK requires immediate fill of the complete quantity with no partial executions allowed.
An FOK instruction combines immediate execution requirements with an all-or-none fill condition.
2
Analyze the execution mechanism of a Buy Stop order after activation.
Recognize that a Buy Stop converts into a market order upon activation, offering no guarantee of execution price.
Only limit orders guarantee a specific price or better; stop orders guarantee execution (if market conditions allow) at the prevailing market price once triggered.
3
Review the purpose of a Market-on-Close (MOC) order.
Confirm that MOC orders target execution at or near the closing bell price.
MOC orders are submitted to participate in the closing auction or fill at end-of-day market prices.
4
Differentiate between broker (agency) and dealer (principal) capacities.
Identify that inventory trades are principal transactions subject to mark-ups or mark-downs rather than commissions.
Brokers charge commissions when matching buyers and sellers as agents, whereas dealers trade for their own account as principals.

Key Concept

Order types, execution qualifiers (FOK, MOC), stop order activation dynamics, and broker-dealer capacity rules.
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Topics

Types of Orders and Order Execution Strategies