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Difficulty: MediumTypes of Orders and Order Execution Strategies

An investor wants to acquire shares of Zenith Financial, currently trading at 40pershare.Expectingarapidupwardpricemovementifthestockbreachesresistanceat40 per share. Expecting a rapid upward price movement if the stock breaches resistance at 45, but refusing to pay more than 47pershare,theinvestorplacesabuystop−limitorderat47 per share, the investor places a buy stop-limit order at 45 Stop, 47Limit.Duetopositivenewsovernight,ZenithFinancialopensthenextmorningat47 Limit. Due to positive news overnight, Zenith Financial opens the next morning at 48 per share. What is the immediate execution status of the order upon market open?

  1. The order is triggered because the opening market price exceeds 45,butitremainsunexecutedasanopenlimitorderat45, but it remains unexecuted as an open limit order at 47.Answer
  2. B
    The order is executed immediately at $48 because triggering the stop converts the instruction into a market order.
  3. C
    The order is automatically canceled by the exchange because the market opening price exceeded the specified limit price.
  4. D
    The broker-dealer must fill the order at the $47 limit price from its own inventory while acting in a dealer capacity.

Answer

The order is triggered because the opening market price exceeds the 45stopprice,butitremainsunexecutedasanopenbuylimitorderat45 stop price, but it remains unexecuted as an open buy limit order at 47 because the market price of $48 is above the limit price.
A buy stop-limit order requires two distinct events: first, the market price must reach or pass the stop price (45)toactivatetheorder;second,onceactivated,theorderbecomesabuylimitorder(45) to activate the order; second, once activated, the order becomes a buy limit order ( 47) which can only be filled at the limit price or lower. Because the market opens at 48,thetriggerconditionissatisfied,buttheexecutionconditionisnot,leavingtheorderopenat48, the trigger condition is satisfied, but the execution condition is not, leaving the order open at 47.

Step-by-Step Solution

1
Evaluate the trigger condition for the buy stop-limit order.
The stop price is 45.Sincethemarketopensat45. Since the market opens at 48 (which is ≥$45\ge \$45), the order is activated/triggered.
Buy stop orders trigger when the market price trades at or above the specified stop price.
2
Determine the resulting order type once triggered.
Upon activation, the order turns into a Buy Limit Order at $47.
A stop-limit order converts into a limit order at the limit price upon triggering, not a market order.
3
Assess execution feasibility at the current market price.
A buy limit order at 47canonlyexecuteat47 can only execute at 47 or better (lower). Since the current market price is $48, the order cannot execute immediately and remains open.
Buy limit orders enforce a maximum purchase price constraint.

Key Concept

Buy Stop-Limit Order Execution Rules
Estimated Time:1m 15s
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Topics

Types of Orders and Order Execution Strategies