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Difficulty: HardTypes of Orders and Order Execution Strategies

Prior to the market opening, an investor places two separate orders for stock in Omega Corporation (currently trading at 82.50):Order1isaBuyStoporderat82.50): Order 1 is a Buy Stop order at 85.00 Good-Til-Canceled (GTC), and Order 2 is a Sell Limit order at 90.00Dayorder.Duringthetradingday,thestockpriceopensat90.00 Day order. During the trading day, the stock price opens at 83.00, reaches a high of 86.50,andpullsbacktocloseat86.50, and pulls back to close at 84.00. Based on these market mechanics, which of the following statements regarding the execution and status of these orders are correct?

  1. Order 1 was triggered when the market price reached $85.00 and immediately converted into a market order to buy.Answer
  2. B
    Order 1 guaranteed that the investor purchased the stock at an exact price of $85.00 once activated.
  3. Order 2 remained unexecuted because the market price never reached or exceeded the specified limit price of $90.00.Answer
  4. D
    Order 2 will automatically remain active in the order book for the next trading session if it is not canceled by the investor.

Answer

The correct statements are that Order 1 was triggered when the market price reached 85.00andimmediatelyconvertedintoamarketorder,andOrder2remainedunexecutedbecausethemarketpriceneverreachedorexceededthespecifiedlimitpriceof85.00 and immediately converted into a market order, and Order 2 remained unexecuted because the market price never reached or exceeded the specified limit price of 90.00.
The Buy Stop order at 85.00isactivatedassoonasthemarkettradesatorthrough85.00 is activated as soon as the market trades at or through 85.00, converting it into a market order to buy at the next available price. The Sell Limit order at 90.00requiresthemarketpricetoreach90.00 requires the market price to reach 90.00 or higher for execution; since the intra-day high was only $86.50, it could not be executed.

Step-by-Step Solution

1
Analyze Order 1 (Buy Stop at $85.00 GTC).
Buy stop orders are entered above the current market price (82.50).Whenthemarketpricetradedupto82.50). When the market price traded up to 86.50, it crossed $85.00, triggering Order 1 into a market order to buy at the next available market price.
Stop orders turn into market orders once triggered, guaranteeing execution but not price.
2
Analyze Order 2 (Sell Limit at $90.00 Day).
Sell limit orders require execution at the limit price or better (higher). The stock's highest price during the session was 86.50,sothelimitpriceof86.50, so the limit price of 90.00 was never met. Because it was designated as a Day order, it expires at the end of the day.
Limit orders mandate minimum price bounds, and Day orders expire at session close if unfilled.

Key Concept

Stop Order Activation Mechanics and Time-in-Force Rules
Estimated Time:2m 0s
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Topics

Types of Orders and Order Execution Strategies