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CFA Level I · CFA Level I Exam · Equity Issuance and Trading

The current best bid is 20.10 and the best offer is 20.14. A trader submits a limit buy order for 1,000 shares at 20.16 and a second limit buy for 1,000 shares at 20.08. Assuming no price change, which outcome is most likely?

The first order is marketable and most likely executes at the 20.14 offer, since it fills at the resting order's price, not its own limit. The second, at 20.08, is below the best bid of 20.10, so it rests in the order book.

  1. ANeither order executes immediately because limit orders wait for the quote to reach the limit
  2. BThe first order executes at 20.16 and the second rests at 20.08
  3. CThe first order executes at 20.14 and the second rests in the book at 20.08Correct

Explanation

A marketable limit buy at 20.16 is above the offer of 20.14, so it executes against the offer at the better price of 20.14 (assuming sufficient size). The limit at 20.08 is below the best bid of 20.10, so it is not marketable and joins the book behind higher bids. Executing at 20.16 is wrong because limit orders fill at the resting order's price.

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