Limit Orders

CFA Level III
#1

Hello friends, I am a Level 2 candidate. Have a very basic query. Let us consider a hypothetical situation: At a stock exchange, there are only two limit orders on a particular stock: Buy@25 and Sell@20. Both are limit orders and there are no market orders available. At what price does the trade happen in this situation? Wish you all great luck for your results.

#2

what do you mean? theres no market depth? if theres no volume except for those 2 orders B25 S20, then i’m assuming nothing gets crossed?.. I’m assuming the current stock price is between 20,25.

#3

Yes, this is a hypothetical situation. There are no other orders available. But, the Buy price is more than sell price, so ideally since the buyer is willing to pay more than what the seller is willing to charge, then the order should go through. My question is, at what price? 20 or 25? Who keeps the spread of 5, buyer, seller or the exchange?

#4

Not a terribly realistic situation. My guess is whoever places the order first gets their price, and the next keeps the spread. But maybe someone else knows better.

#5

thanks Bchadwick.

#6

The broker keeps the spread. What would you do?

#7

Yes first order get his price… Ponpon

#8

the specialist has a party at the local strip club and in between lapdances thanks the two generous traders.

#9

^ yep…

#10

bchadwick Wrote: ------------------------------------------------------- > Not a terribly realistic situation. My guess is > whoever places the order first gets their price, > and the next keeps the spread. But maybe someone > else knows better. This is on target. First of all, you cannot have two limit orders sitting out on the book in the manner in which you describe. The fill price will be determined by the person who places the first trade. i.e. i put a buy order out there at 25, someone comes in with a sell limit at 20, they would get filled at 25. OR i put a sell order out there at 20, someone places a buy limit at 25, they would get filled at 20

#11

JoeyDVivre Wrote: ------------------------------------------------------- > The broker keeps the spread. What would you do? only if one side is a market maker

#12

why are we talking about this and not checking what esle changed on the CFAI bookstore website?

#13

Yeah, if both orders are sent through the same broker, he could give each person their limit, keep the spread and party on. If that’s legal… which I think it is. If it’s two separate brokers, then whoever reveals their hand first doesn’t benefit from the potential surplus (but gets a price they presumably find acceptable).

#14

Thanks everyone … much appreciated. Wish you best of luck!