Limit order markets Chapter 4

Size: px

Start display at page:

Download "Limit order markets Chapter 4"

Rodney Fletcher
5 years ago
Views:

1 Securities Trading: Principles and Procedures Limit order markets Chapter 4 The transition to electronic markets: Aurora Developed by the Chicago Board of Trade around Limit order markets, Copyright 2018, Joel Hasbrouck, All rights reserved 2

2 What we have instead: the (electronic) limit order market Built on one feature of the floor market: the book. Dominant for equities, exchange-traded futures contracts and options. In foreign exchange (FX), bonds, and swaps, dealer markets dominate. Limit order markets, Copyright 2018, Joel Hasbrouck, All rights reserved 3 The basics of the book and its operation An order specifies direction (buy or sell), quantity and limit price. Buy 100 MSFT, limit 27 Buy 100 shares of Microsoft, up to $27 per share. Incoming orders that can t be matched are added to the book. The book is the collection of unexecuted (resting) orders. A new arriving order is compared to the book. If there s a compatible counterparty order, we have a match (a trade, an execution). The match quantity is the smaller of the quantities in the two orders. The match price is the limit price of the resting order. Limit order markets, Copyright 2018, Joel Hasbrouck, All rights reserved 4

3 Live limit order book Exchanges show their books in real time ($$). BATS Global Markets is free batstrading.com Book Viewer panel (lower right) shows the live book in SPY (the S&P 500 ETF). SPY is active and liquid. For comparison, try AAPL, and PRK. Limit order markets, Copyright 2018, Joel Hasbrouck, All rights reserved 5 Basic book interactions Suppose that there is one bid in the book: Buy 200 ABC, limit 20 What happens with an arriving order Sell 200 ABC, limit 19? Sell 50 ABC, limit 21? Sell 50 ABC, limit 20? Sell 500 ABC, limit 18? Limit order markets, Copyright 2018, Joel Hasbrouck, All rights reserved 6

4 Price-time priority Suppose the bid book has multiple bids for XYZ with limit prices at least $10. An order arrives: Sell 39 XYZ, limit $10. Who gets filled? Most markets use price-time priority: First sort orders on price. More aggressive prices (higher bids, lower asks) have priority. Then (within price) sort on time. Orders entered earlier have priority. Limit order markets, Copyright 2018, Joel Hasbrouck, All rights reserved 7 A set of orders sorted in price-time priority :31 Amy SELL :30 Gina Sell priority Buy priority Limit order markets, Copyright 2018, Joel Hasbrouck, All rights reserved 8

5 Priority by price, visibility and time Many markets allow orders to be fully or partially hidden. Hidden (undisplayed orders) are available for execution They are in the book. But they aren t displayed on the screen. With hidden orders, the sorting is First on price More aggressive prices (higher bids, lower asks) have priority. Then on visibility At the same price, displayed orders have priority over hidden orders. Then on time Within a price/visibility class, orders entered earlier have priority. Limit order markets, Copyright 2018, Joel Hasbrouck, All rights reserved 9 Price/visibility/time priority SELL :31 Amy Limit order markets, Copyright 2018, Joel Hasbrouck, All rights reserved 10

6 Hari submits Buy 200, limit SELL :31 Amy Limit order markets, Copyright 2018, Joel Hasbrouck, All rights reserved 11 Hari submits Sell 1200, limit SELL :31 Amy Limit order markets, Copyright 2018, Joel Hasbrouck, All rights reserved 12

7 Hari submits Sell 1200, limit SELL :31 Amy Limit order markets, Copyright 2018, Joel Hasbrouck, All rights reserved 13 Hari submits Buy 500, limit SELL :31 Amy Limit order markets, Copyright 2018, Joel Hasbrouck, All rights reserved 14

8 Controlling price, time, and visibility in order strategy The market in XYZ is $50.10 bid for 1,000 shares, 500 shares are offered at $ I want to buy 1,000 shares. My default order template is set for a displayed order for the full amount, at the bid plus $0.01: Buy 1,000 shares, displayed, limit $ Should I change anything? Limit order markets, Copyright 2018, Joel Hasbrouck, All rights reserved 15 XYZ is $50.10 bid for 1,000 shares, 500 shares offered at $50.20 My default order is Buy 1,000 shares, displayed, limit $ Should I raise or lower the limit price? Limit order markets, Copyright 2018, Joel Hasbrouck, All rights reserved 16

9 XYZ is $50.10 bid for 1,000 shares, 500 shares offered at $50.20 My default order is Buy 1,000 shares, displayed, limit $ Should I make the order hidden? Limit order markets, Copyright 2018, Joel Hasbrouck, All rights reserved 17 Market orders Buy 100 XYZ at the market Buy at the best (lowest) available price XYZ is $50.10 bid for 1,000 shares, 500 shares offered at $ What are the possible outcomes for these orders? Buy 100 XYZ limit $ Buy 100 XYZ limit $ Buy 100 XYZ at the market. Limit order markets, Copyright 2018, Joel Hasbrouck, All rights reserved 18

10 Marketable orders An order is marketable if it can be executed immediately. This determination is made when the order is received by the market. The market in XYZ is $50.10 bid for 1,000 shares, 500 shares are offered at $ I submit Buy 100 shares, limit $51. I expect that this order will be marketable, and that I ll buy at $50.20, but this is just my hope. Limit order markets, Copyright 2018, Joel Hasbrouck, All rights reserved 19 Latency SELL :31 Amy Suppose there is a news flash. A US court has rejected a challenge to a patent on XYZ s main product. What happens? Limit order markets, Copyright 2018, Joel Hasbrouck, All rights reserved 20

11 Order modifiers and qualifications Immediate or Cancel (IOC) Do it now or not at all. Partial fill is okay, but cancel the remainder. All or None (AON) Don t give me a partial fill. Order held unexecuted until it can be filled in its entirety Fill or Kill (FOK) = IOC + AON Execute the entire order right now. Otherwise, cancel. Notes: IOC is very common; AON less common. In some markets AON defaults to FOK. Limit order markets, Copyright 2018, Joel Hasbrouck, All rights reserved 21 Buy 500, limit :31 Amy SELL H :29 Marte Limit order markets, Copyright 2018, Joel Hasbrouck, All rights reserved 22

12 Buy 500, limit IOC :31 Amy SELL H :29 Marte Limit order markets, Copyright 2018, Joel Hasbrouck, All rights reserved 23 Buy 2000, limit FOK :31 Amy SELL H :29 Marte Limit order markets, Copyright 2018, Joel Hasbrouck, All rights reserved 24