Consider the following limit order book for a share of stock. The last trade in

Question

Consider the following limit order book for a share of stock. The last trade in the stock occurred at a price of $130. Limit Buy Orders Limit Sell Orders Price $129.75 29.50 129.25 29.00 28.50 Shares 150 150 300 150 $130.25 400 700 400 200 500 131.50 34.75 138.25 a. If a market buy order for 150 shares comes in, at what price will it be filled? (Round your answer to 2 decimal places.) Best price $ b. At what price would the next market buy order be filled? (Round your answer to 2 decimal places) Next best price c. If you were a security dealer, would you want to increase or decrease your inventory of this stock? Increase Decrease

Explanation / Answer

a.

If a market buy order for 150 shares comes in, it will be filled at the best or lowest limit-sell order price of $ 130.25

b.

After 100 shares filled, next market buy order for 150 shares will be filled by next best limit-sell order price $ 131.50

c.

Increase.

There is considerable buying demand at price just below $ 130. This shows that downside risk is limited.

But limit-sell orders are infrequent, which conflict with the limited risk. Equal probability can be assumed for next expected order in market as a sell or buy order. Price is more likely to rise for a moderate size buy order. Otherwise it will drop when moderate size sell order comes.

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