What Is a Limit Order Book?
A limit order book is a record of outstanding limit orders maintained by the security specialist who works at the exchange. A limit order is a type oforderto buy or sell a security at a specific price or better. A buy limit order is an order to buy at a preset price or lower while a sell limit order is an order to sell a security at a pre-specified price or higher.
When a limit order for a security is entered, it is kept on record by the security specialist. As buy and sell limit orders for the security are given, the specialist keeps a record of all of these orders in the order book. The specialist executes the orders at or better than the given limit price when the market moves to the pre-specified price.
Key Takeaways
- A limit order book is a record of outstanding limit orders maintained by the security specialist who works at the exchange.
- A limit order is a type oforderto buy or sell a security at a specific price or better.
- When a limit order for a security is entered, it is kept on record by the security specialist.
- As buy and sell limit orders for the security are given, the specialist keeps a record of all of these orders in the order book.
Understanding a Limit Order Book
The specialist running the limit order book has the responsibility to guarantee that the top priority order is executed before other orders in the book, and before other orders at an equal or worse price held or submitted by other traders on the floor, such as floor brokers and market makers.
The specialist earns a profit off of the spread between the difference in prices between the bid and ask orders on their book as they execute the orders. With the advancements in trading system technologies, the process has shifted from a manual process to one that is largely automated.
Tracking Limit Orders
In 2000, the Securities and Exchange Commission (SEC) began to create a centralized limit order book that keeps track of limit orders on exchanges electronically. This electronic order tracking system automatically matches for the execution of the best possible pair of orders in the system. The best pair is made up of the highest bid, and the lowest ask orders.
The bid is the price the specialist or exchange will sell a security or the price at which an investor can buy the security. The ask or offer is the price at which the specialist or exchange will buy a security or the price at which the investor can sell the security.
When a limit order is entered into a trading system and fielded by either a specialist working the book or an electronic database of orders, it will stay on the books until it can be matched with a suitable trade and executed. Buy limit orders are placed with an upper price threshold. The investor would say "I don't want to pay more than $X for this share." Sell limit orders are placed with a lower price threshold. The investor would say "I don't want to sell this share for less than $X."
Limit Order Qualifiers
A limit order may include "qualifiers." Without qualifiers on an order, the request will be valid only for the market day, considered a "day order," and may expire without any purchase, or with only a partial fulfillment of shares.
If an investor's order states, "buy 10,000 shares of XYZ common @32," they have requested to buy 10,000 shares at $32 or a better price, the qualifier for this order.
If the investor's strategy requires 10,000 to be filled at any time at the requested price or better, it may be entered as "buy 10,000 shares XYZ @32 GTC." A "Good 'Til Cancelled" order instructs the market to acquire those shares until the order is canceled, even if the purchase is completed 100 shares at a time and over several weeks. The investor wants the order completed regardless of how long the market takes to fill the order.
Another qualifier is the AON, or "All of None." Investors may not want to risk only partially completing the order, so they use this qualifier to instruct the market to fill this order with all 10,000 shares as requested or buy none.
There are other types of order qualifiers that allow an investor to ensure the transaction is executed exactly in the manner that suits their particular investment objective, and in each case, define the "limits" the investor is putting on the market to make the trade.
Special Considerations
Investors are guaranteed to get the price if the order is triggered after the market moves to the specified level. However, there is no guarantee that the limit order will be executed. In other words, the order can only be filled if the price hits the price level. Limit orders are helpful to investors because they help ensure that they don't pay more for a security than the pre-set price initially established with the order.
FAQs
The limit order book is the list of orders (prices at which you can transact) for a given security. Depending on the security, these orders may be on one exchange, or aggregated across many exchanges.
What is limit order book data? ›
A limit order book is a record of outstanding limit orders maintained by the security specialist who works at the exchange. A limit order is a type of order to buy or sell a security at a specific price or better. When a limit order for a security is entered, it is kept on record by the security specialist.
What is a limit order in simple terms? ›
A limit order is an order to buy or sell a stock with a restriction on the maximum price to be paid (with a buy limit) or the minimum price to be received (with a sell limit). If the order is filled, it will only be at the specified limit price or better. However, there is no assurance of execution.
What is a limit order book vs market order? ›
Investors can use two common types of orders to buy or sell stocks: market orders and limit orders. Market orders often execute right away at whatever price the market is charging. Limit orders won't trigger until the market price meets whatever price the investor is looking for.
What is the disadvantage to using a limit order? ›
The biggest drawback: You're not guaranteed to trade the stock. If the stock never reaches the limit price, the trade won't execute. Even if the stock hits your limit, there may not be enough demand or supply to fill the order. That's more likely for small, illiquid stocks.
Why you should always use limit order? ›
A limit order works better when:
If you're looking to get a specific price for your stock, a limit order will ensure that the trade does not happen unless you get that price or better. You are able to wait for your price. If your limit price is not the market price, you'll probably have to wait to have it filled.
What are the problems with limit orders? ›
Why Might a Limit Order Not Get Filled? A buy limit order won't get filled if the price of the underlying asset jumps above the order's stated price. This is because the limit price is the maximum amount the investor is willing to pay. In the case of a gap, that price would now be below the market price.
What is the function of a limit order? ›
In a limit order, the investor has to specify a quantity and the desired price at which he or she wants to make the transaction. Say a share is currently trading at Rs 100 per share but the investor wants to buy it at Rs 95 per share. A limit order of say 10 shares at Rs 95 per share is placed.
What is the opposite of limit order? ›
A limit order sets a maximum price that you're willing to pay or a minimum price that you're willing to accept on a sale. A stop order is triggered when an asset reaches a certain price and will be filled at the next available price. Limit orders are visible to the market, while stop orders are not visible.
What is the riskiest type of stock? ›
Equities are generally considered the riskiest class of assets. Dividends aside, they offer no guarantees, and investors' money is subject to the successes and failures of private businesses in a fiercely competitive marketplace. Equity investing involves buying stock in a private company or group of companies.
Investors may cancel standing orders, such as a limit or stop order, for any reason so long as the order has not been filled yet. Limit and stop orders may stand for hours or days before being filled depending on price movement, so these orders can logically be canceled without difficulty.
How to place a limit order? ›
If you trade online, the option to place a limit order should be grouped in a "trade" or "place order" tab with other options, such as placing a market order. If you trade using an actual broker, simply tell your broker that you would like to place a limit order. Identify the security you wish to trade.
What is the difference between a trade book and an order book? ›
While an order book displays the state of an order such as cancellation, modification, pending and even all the completed instructions, a trade book only shows the detail of a completed order to a trader. However, orders which are canceled or pending have no space in a trade book.
Why do companies need to maintain order books? ›
Order Book – Advantages
An order book shows the buy and sell prices in real-time (constantly being updated). It allows market participants to make informed decisions.
What is the concept of order book? ›
An order book is an electronic list of buy and sell orders for a security or other instrument organized by price level. Order books are used by almost every exchange for various assets like stocks, bonds, currencies, and even cryptocurrencies.
How does a central limit order book work? ›
It is a transparent system that matches customer orders (e.g. bids and offers) on a 'price time priority' basis. The highest ("best") bid order and the lowest ("cheapest") offer order constitutes the best market or "the touch" in a given security or swap contract.
What does top of book data mean? ›
The top of the book is where you'll find the highest bid and lowest ask prices. These point to the predominant market and price that need to get an order executed.
What is the limit order book on FX? ›
The limit order book is the list of orders (prices at which you can transact) for a given security. Depending on the security, these orders may be on one exchange, or aggregated across many exchanges.
What is the difference between RFQ and CLOB? ›
RFQ. In contrast to the CLOB approach is the Request For Quote (“RFQ”) trading method. RFQ is an asymmetric trade execution model. In this method, a customer queries a finite set of participant market makers who quote a bid/offer (“a market”) to the customer.
