LOS a: Compare and contrast market orders to limit orders including the price and execution uncertainty of each.

Q1. In which of the following markets would the calculation of market impact costs be inappropriate?

A)   Electronic crossing networks.

B)   Auction markets.

C)   Electronic limit-order markets.

Q2. 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 limit order.

B)   A market order.

C)   A principal order.

Q3. A limit order has:

A)   execution uncertainty but not price uncertainty.

B)   both price uncertainty and execution uncertainty.

C)   price uncertainty but not execution uncertainty.

Q4. A market order has:

A)   price uncertainty but not execution uncertainty.

B)   both price uncertainty and execution uncertainty.

C)   execution uncertainty but not price uncertainty.

LOS a: Compare and contrast market orders to limit orders including the price and execution uncertainty of each. fficeffice" />

Q1. In which of the following markets would the calculation of market impact costs be inappropriate?

A)   Electronic crossing networks.

B)   Auction markets.

C)   Electronic limit-order markets.

Correct answer is A)

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.

Q2. 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 limit order.

B)   A market order.

C)   A principal order.

Correct answer is A)

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.

Q3. A limit order has:

A)   execution uncertainty but not price uncertainty.

B)   both price uncertainty and execution uncertainty.

C)   price uncertainty but not execution uncertainty.

Correct answer is A)

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.

Q4. A market order has:

A)   price uncertainty but not execution uncertainty.

B)   both price uncertainty and execution uncertainty.

C)   execution uncertainty but not price uncertainty.

Correct answer is A)

A market order is an order to execute the trade immediately at the best possible price. The emphasis in a market order is the speed of execution (the reduction of execution uncertainty). The disadvantage of a market order is that the price it will be executed at is not known ahead of time, it thus has price uncertainty.

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