Trading, Clearing and Settlement
Order types and execution
Market orders execute immediately at the best available price but carry price risk; limit orders set a maximum buy or minimum sell price but may not fill. Know stop and stop-limit orders, time-in-force instructions (day, GTC, IOC, FOK) and the meaning of best execution. Understand the order book: bids, offers, spread, depth, and how a trade occurs when a buy order meets a sell order.
Market structure and mechanics
Recognise exchanges, alternative trading systems, dark pools and high-frequency trading. Know that price transparency and liquidity vary by venue, and that short selling involves borrowing securities and later buying them back.
Clearing and settlement
Clearing confirms and nets obligations and manages counterparty risk; settlement transfers cash and securities. A central counterparty interposes itself via novation, becoming buyer to every seller and seller to every buyer, backed by margin and a default fund. Know the settlement cycle (T+1 or T+2 depending on market), delivery-versus-payment, and the difference between gross and net settlement.
Traps
Questions confuse clearing with settlement, or treat a limit order as guaranteed to execute. Another trap: assuming a central counterparty removes all risk - it mutualises and manages it. Also watch the distinction between fail and default.
Worked example
An investor places a limit buy at 50 for 1,000 shares. The market trades at 51 all day: no fill, because the limit is below the market. If the price falls to 49.90, the order fills at 50 or better. A market order in the same scenario would have filled immediately at 51 - a useful contrast for order-type questions.
Rule of thumb
Market order = certainty of execution; limit order = certainty of price, not execution.