Question

10. General 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 $49.75 600 $50.25 200 49.5 2000 50.5 1000 49.25 5000 51 300 49 300 55.5 800 48.5 1000 10a. Is the limit-order book bullish or bearish now? Please explain in one sentence. 10b. If a market buy order for 600 shares comes in, what is the average price it will be filled? 10c. After the buy order in part (b) has been executed, if there is another buy order 200 shares comes in, what is the average price it will be filled? 10d. If a limit sell order $49 for 1000 shares comes in, what is the average price it will be filled?

Answer 1

1. The stock looks bullish. Reason : There are more number of buyers close to the last traded market price than the sellers.

2. If there is a market buy order of 600 shares, they will starting from the lowest sell order available

200 shares at 50.25

the remaining 400 shares from 1000 shares at 50.5

Hence the average price will be (400*50.5 + 200*50.25)/600 = 50.4167

3. If there is another market buy order of 200 shares, the lowest selling price at that point.

Post execution of above order the Limit sell orders looks like below

Price Shares

50.5 600

51 300

55.5 800

The 200 shares will be sold from 600 shares at 50.5. Hence the average price is 50.5

4. If there is a limit order sell at 49 for 1000 shares comes in, it will take the best buy orders already available before selling at 49

600 shares will be sold at 49.75

then remaining 400 shares will be sold at 49.5

Hence the average price will be (600*49.75 + 400*49.5)/1000 = 49.65