FINRA Series 7Processes and Confirms TransactionsMedium
A customer enters a GTC buy limit order at $48 for a stock currently trading at $50 and does not mark the order 'do not reduce.' The stock then goes ex-dividend for a $0.50 cash dividend. What happens to the customer's order?
- AThe order is automatically cancelled
- BThe limit price remains unchanged at $48
- CThe order is converted to a market order
- DThe limit price is reduced to $47.50
Show answer & explanationAnswer & explanation
Correct answer: D. The limit price is reduced to $47.50
Exchange rules require that open buy limit and sell stop orders below the market be reduced by the amount of an ordinary cash dividend on the ex-dividend date, unless the customer specified 'do not reduce' (DNR). $48 − $0.50 = $47.50.
Why the other options are wrong
- A. GTC orders are not cancelled for dividends; they are adjusted.
- B. Without a DNR instruction, the price must be adjusted.
- C. Dividend adjustments do not change the order type.
GTC Order Dividend Adjustment
Open buy limit and sell stop orders below the current market are reduced by the amount of a cash dividend on the ex-dividend date unless marked 'do not reduce' (DNR).
- Applies to GTC orders
- Reduces buy limits and sell stops
- DNR instruction prevents automatic reduction
Memory trick: Dividends drop the stock, so open below-market orders drop too — unless DNR says 'don't touch.'