CFA Level IEquity InvestmentsMedium
A trader places a market order to buy 500 shares of a stock. The order book shows the best ask price of $50.05 with 300 shares available, and the next best ask price of $50.15 with sufficient shares to fill the remainder. What is the average execution price per share for this market order?
- A$50.09
- B$50.15
- C$50.10
- D$50.05
Show answer & explanationAnswer & explanation
Correct answer: A. $50.09
The market order fills 300 shares at $50.05 and the remaining 200 shares at $50.15. Total cost = (300 × $50.05) + (200 × $50.15) = $15,015 + $10,030 = $25,045. Average price = $25,045 / 500 = $50.09.
Why the other options are wrong
- B. Incorrect; this is the price for only the second, smaller portion of the order.
- C. Incorrect; this is a simple (unweighted) average of the two prices, not weighted by quantity.
- D. Incorrect; this only reflects the best ask price, ignoring the shares filled at the next price level.
Market Order Execution & Slippage
A market order executes immediately at the best available prices, potentially filling across multiple price levels of the order book if the order size exceeds the volume available at the best price, resulting in an average execution price different from the quoted best price.
- Market orders prioritize speed over price certainty
- Large orders may 'walk the book,' filling at successively worse prices
- Average execution price is a quantity-weighted average across fill levels
Memory trick: Big orders climb the ladder of asks.