Impact of Market Orders and Limit Orders

Medium Equity Market Structure Market Microstructure

In equity markets, understanding the nuances of market microstructure is essential for traders and investors. Market microstructure refers to the mechanisms of how trades are executed and the role of various participants in the market. One major concept within this domain is the difference between market orders and limit orders. A market order is executed immediately at the best available price, while a limit order is executed only at a specified price or better.

Consider the following scenario: Trader A places a market order for 100 shares of a stock, while Trader B has a limit order to sell 100 shares at a defined price. Which of the following statements correctly describes the impact of these trades on the market?

Trader A's market order will execute immediately and can potentially increase the stock price if there is insufficient supply at the current market price.

Trader B's limit order guarantees that the stock price will drop if executed.

Market orders and limit orders operate independently, do not interact, and thus do not affect each other's execution.

Hint

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