Examkin

Question

Difficulty: Very hardTypes of Orders and Order Execution Strategies

An investor holding stock currently trading at 48.00pershareentersaGood−Til−Canceled(GTC)orderspecifiedas′Sell500sharesatStop45.00,Limit42.00′.Followinganegativeovernightearningsannouncement,thestockopensthenextmorningat48.00 per share enters a Good-Til-Canceled (GTC) order specified as 'Sell 500 shares at Stop 45.00, Limit 42.00'. Following a negative overnight earnings announcement, the stock opens the next morning at 40.00 per share and trades within a narrow range between 39.00and39.00 and 41.00 throughout the entire trading session. Which of the following statements correctly describes the status and execution of the investor's order for that trading day?

  1. The order is triggered because the opening price of 40.00isatorbelowthestoppriceof40.00 is at or below the stop price of 45.00, but it remains unexecuted because the market price never reaches or exceeds the limit price of $42.00.Answer
  2. B
    The order is executed immediately at the market opening price of 40.00becauseoncethestoppriceof40.00 because once the stop price of 45.00 is breached, the order automatically converts into a market order.
  3. C
    The order is automatically canceled by the trading system at the market open because the stock gapped down below the limit price of $42.00.
  4. D
    The broker-dealer must act in a principal capacity to fill the order from its own inventory at the limit price of $42.00 since the stop trigger was passed.

Answer

The order is triggered because the opening price of 40.00isatorbelowthestoppriceof40.00 is at or below the stop price of 45.00, but it remains unexecuted because the market price never reaches or exceeds the limit price of $42.00.
A Sell Stop 45.00, Limit 42.00 order requires two distinct steps: activation and execution. Activation occurs when the stock trades at or below 45.00.Becausethestockopenedat45.00. Because the stock opened at 40.00, the trigger condition is met immediately at market open. Upon activation, the order becomes a Sell Limit order at 42.00.Toexecuteaselllimitorder,themarketpricemustbeatorabove42.00. To execute a sell limit order, the market price must be at or above 42.00. Since the stock traded exclusively between 39.00and39.00 and 41.00 for the remainder of the session, the limit price was never met, leaving the order active and unexecuted.

Step-by-Step Solution

1
Analyze the trigger condition for a Sell Stop-Limit order.
A 'Sell Stop 45.00' order is triggered (activated) when the market price of the security trades at or below $45.00.
The stock opened at 40.00,whichisbelowthe40.00, which is below the 45.00 stop price, thereby activating the order.
2
Determine the resulting order type once triggered.
Upon activation, the order converts into a 'Sell Limit at $42.00'.
Unlike a market stop order, a stop-limit order becomes a limit order, not a market order, upon activation.
3
Evaluate the execution requirements for a Sell Limit order at $42.00.
A Sell Limit order at 42.00canonlybeexecutedat42.00 can only be executed at 42.00 or higher.
Limit orders guarantee a minimum execution price or better.
4
Compare market trading range against the limit execution condition.
During the trading day, the stock traded between 39.00and39.00 and 41.00.
Because no trades occurred at $42.00 or above, the limit order cannot execute and remains pending/unexecuted.

Key Concept

Stop-Limit Order Trigger vs. Execution Mechanism
Rate this question

Topics

Types of Orders and Order Execution Strategies