Reading 41: Execution of Portfolio Decisions－LOS c advantages, contrast, relative

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CFA Institute Area 3-5, 7, 12, 14-18: Portfolio Management
Session 14: Execution of Portfolio Decisions
Reading 41: Execution of Portfolio Decisions
LOS c: Compare and contrast alternative market structures and their relative advantages.

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Which of the following markets does NOT provide price discovery?

A) Auction markets.

B) Electronic crossing networks.

C) Automated auctions.

D) Electronic limit-order markets.

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Answer and Explanation

In an electronic crossing network, there is no price discovery because trades are executed at the average of the bid and ask quotes. The trader usually does not know the identity of their counterparty or of their trade size. In an auction market and automated auctions (also known as electronic limit-order markets), orders compete for execution and provide price discovery.

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In which of the following markets is an order most likely to go unfilled or partially filled?

A) Auction markets.

B) Automated auctions.

C) Electronic crossing networks.

D) Electronic limit-order markets.

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Answer and Explanation

In an electronic crossing network, trades are executed at the average of the bid and ask quotes. They do not adjust based on supply and demand. As such, prices do not adjust to fill orders. In an auction market and automated auctions (also known as electronic limit-order markets), orders compete for execution and prices can adjust to fill orders.

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Where would an illiquid security in a developing country most likely trade?

A) Broker markets.

B) Electronic crossing networks.

C) Automated auctions.

D) Electronic limit-order markets.

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Answer and Explanation

In brokered markets, brokers find the counterparties to a trade. This service is valuable when the trader has a large block to sell, when they want to remain anonymous, and/or when the market for the security is small or illiquid. Brokered markets are important in countries where public capital markets are not well developed.