karoliukas

Suppose a trader is quoted a market bid price of $40.40 and an ask of $40.49. The execution price of a buy order is $40.47. What is the effective spread?

A) $0.025.

B) $0.050.

C) $0.090.

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If a trader placed a buy order, a dealer may offer a better ask price than the previous ask to earn the trader’s business. The midquote of the quoted bid and ask prices is $40.445. The effective spread for this buy order would then be calculated as: 2 × ($40.47 - $40.445) = $0.05, which is 4 cents better than the quoted spread of $0.09 ($40.40 - $40.49).

karoliukas

In which of the following markets would the calculation of market impact costs be inappropriate?

A) Auction markets.

B) Electronic limit-order markets.

C) Electronic crossing networks.

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In an electronic crossing network, orders are executed at the average of the bid and ask quotes. Prices do not adjust based on supply and demand.

karoliukas

A trader submits a buy order that specifies that the trade must be executed at $40 by the end of the day. The execution price is $39.88. What type of order has the trader executed?

A) A market order.

B) A principal order.

C) A limit order.

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A limit order is an order to trade at the best possible price, subject to the price satisfying the limit price. For buy orders, the execution price (here $39.88) must be lower or equal to the limit price (here $40). Limit orders also have an expiration date, beyond which they expire.

karoliukas

Which of the following statements best characterizes a limit order? A limit order has:

A) price uncertainty and execution uncertainty.

B) reduced price uncertainty but retains execution uncertainty.

C) price uncertainty but not execution uncertainty.

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A limit order is an order to trade at the best possible price, subject to the price satisfying the limit price. A limit order emphasizes the price of execution (the reduction of price uncertainty). It however, may not be filled immediately and may even go unfilled or partially unfilled. A limit order thus has execution uncertainty.