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Difficulty: HardTypes of Orders and Order Execution Strategies

An investor submits a limit order to buy 1,0001,000 shares of XYZ common stock at $25.00\$25.00 per share marked Immediate-or-Cancel (IOC). At the time of entry, the inside market for XYZ is $24.90\$24.90 Bid – $25.00\$25.00 Offer, with 400400 shares available at the offer price of $25.00\$25.00. Which of the following best describes how this order will be executed by the broker-dealer?

  1. A
    The entire 1,000-share order is immediately canceled because the full quantity cannot be filled at the limit price upon arrival.
  2. 400 shares are executed immediately at $25.00, and the remaining 600 shares are immediately canceled.Answer
  3. C
    400 shares are executed immediately at 25.00,andtheremaining600sharesremainopenontheorderbookasadaylimitorderat25.00, and the remaining 600 shares remain open on the order book as a day limit order at 25.00.
  4. D
    The broker-dealer acts as a principal to fill the remaining 600 shares from its proprietary inventory at $25.10 to complete the order.

Answer

400 shares are executed immediately at $25.00, and the remaining 600 shares are immediately canceled.
An Immediate-or-Cancel (IOC) order requires that any portion of the order that can be executed immediately at the specified limit price or better must be filled, and any unexecuted balance must be immediately canceled. Since 400 shares were available at the offer price of $25.00, those 400 shares execute immediately, and the remaining 600 shares are canceled.

Step-by-Step Solution

1
Identify the key order qualifier and its execution rules.
An Immediate-or-Cancel (IOC) order requires immediate execution of all or any part of the order at the limit price or better.
IOC orders permit partial execution unlike Fill-or-Kill (FOK) orders.
2
Determine the available market liquidity at the specified limit price.
The offer price of $25.00\$25.00 matches the customer's buy limit price, but only 400400 shares are available at that price.
A buy limit order can only be executed at the limit price of $25.00\$25.00 or lower.
3
Apply the IOC rule to the remaining unexecuted portion.
The 400400 shares are filled immediately at $25.00\$25.00, and the remaining 600600 shares cannot be filled immediately at $25.00\$25.00 or better, so they are canceled.
Unfilled portions of an IOC order cannot rest on the order book and must be canceled automatically.

Key Concept

Immediate-or-Cancel (IOC) Order Execution Rules
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Topics

Types of Orders and Order Execution Strategies