UK Regulation & Professional Integrity Practice Test

The requirement concerning limit orders and average daily trading volume is designed to prevent market manipulation and ensure that large orders do not unduly affect the market price. When a limit order exceeds approximately 10% of the average daily trading volume, it can potentially disrupt trading if executed all at once, as it represents a significant portion of the shares typically traded in a day.

This regulation aims to enhance market stability by encouraging traders to consider the overall market activity before placing large orders. Such scrutiny ensures that trades are executed in a manner that aligns with prevailing market conditions, thereby maintaining a balanced trading environment.

Other responses do not align with the regulatory standards. For instance, stipulating that the limit order must be less than 5% of volume would be too restrictive, potentially hindering liquidity in the market. Saying there are no restrictions fails to provide necessary oversight needed to prevent market disturbances. Lastly, stating the limit order must equal daily trading volume is impractical, as this could create unrealistic expectations for traders and lead to market distortions.