Question

Consider the following limit-order book for a share of stock. The last trade in the stock occurred at a price of $52.

Limit Buy Orders				Limit Sell Orders
Price			Shares	Price			Shares
	$	51.75	500		$	52.25	100
		51.50	300			52.50	100
		51.25	500			55.75	300
		51.00	200			59.25	100
		50.50	600

a.	If a market buy order for 100 shares comes in, at what price will it be filled? (Round your answer to 2 decimal places. Omit the "$" sign in your response.)

Price

$

b.	At what price would the next market buy order be filled? (Round your answer to 2 decimal places.Omit the "$" sign in your response.)

Price

$

c.

If you were a security dealer, would you want to increase or decrease your inventory of this stock?

	Increase
	Decrease

References

eBook & Resources

Answer 1

a.) $52.25

The market-buy order will be filled at $52.25, the best price of the limit-sell orders in the book.

b.) $52.50

The next market-buy order will be filled at $52.50, the next best limit-sell order price.

c.) Increase.

As a security dealer, you would want to increase your inventory. There is considerably buying demand at price just below $52, indicating that downside risk is limited. In contrast, limit-sell orders are sparse, indicating that a moderate buy order could result in a substantial price increase.