Consider the following limit order book for a share of stock. The last trade in the stock occurred at a price of $50.

Limit Buy Orders Limit Sell Orders

Price Shares Price Shares

$49.75 500 $50.25 100

49.50 800 51.50 100

49.25 500 54.75 300

49.00 200 58.25 100

48.50 600

Required:

a. If a market buy order for 100 shares comes in, at what price will it be filled?

b. At what price would the next market buy order be filled?

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

a) The price for a market buy order for 100 shares would be $50.25.

Being a market order, the buyer is going to purchase at whatever the seller is offering. Out of the 4 orders on the table, the price of $50.25 is the lowest and what the buyer is more likely to go for.

b) The next market order would be filled at $51.50

As a market order, the buyer is still left to purchase at what the seller is offering, being the cheapest offer in the marker. The buyer would more like proceed with this offer.

c) As a security dealer, I am more likely to increase my inventory in this stock because the limit buy order are trading less than $50 while the sell orders are above $50 which would mean that there is a narrow risk of actual return being less than expected i. e downside risk. Also since the limit sell orders are minor, there is a greater possibility that an increase in demand would result in increase in price.