H. compare Compare Market Orders and Limit Orders

Question 1

Market Order

Answer 1

Market orders demand liquidity
– Execution is relatively certain but price
may be uncertain, especially for large
orders.
• Aggressively priced limit orders (a limit order above the best ask or a limit sell order below the best bid) are
immediately marketable—they behave
like market orders.

A market order is an order to execute the trade immediately at the best possible price. A market order is appropriate when the trader wants to execute a transaction quickly.

The disadvantage of a market order is that it may execute at an unfavorable price.

Market orders are never said to be behind the market.

An order to sell a security at the best price available is most likely a: market order

Question 2

Limit Order

Answer 2

A limit order is an order to buy at the specified limit price or lower, or to sell at the limit price or higher

• Standing limit orders offer liquidity.
• Limit orders may not execute.
– If they don’t, the trader may suffer a lost
opportunity to trade.
– The order may eventually be filled at an
inferior price.

A limit order is an order to trade at the best possible price, subject to the price satisfying the limit condition. A limit order avoids price execution uncertainty. The disadvantage of a limit order is that it may not be filled. A buy (sell) order with a limit of $18 will only be executed if the security can be bought (sold) at a price of $18 or less (more).

Which of the following orders is said to be “behind the market”?
A limit buy order is behind the market if its limit price is below the best bid.

A limit sell order is behind the market if its limit price is above the best ask

A stop order is an order to buy if the market price increases to the specified stop price, or to sell if the market price decreases to the stop price.

A buy limit order is said to be “inside the market” when: the limit is between the best bid and the best ask. :A limit order with a limit price between the best bid and the best ask is said to be “inside the market” or “making a new market.” A limit order that has not yet been executed is a “standing limit order.”