I have a doubt which is haunting me since several days. I hope somebody with clear basics can help me out.
This is regarding limit orders and order matching. As I see, limit order is defined online from several sources as "An order to buy or sell stock at a specified price. The order can be executed only at the specified price or better."
I will ask this question with an example
Lets consider the following limit order book
----BID ---------- ASK----
(buyer 1)105.0 (seller 1)103.5
(buyer 2)104.0 (seller 2)105.0
(buyer 3)103.0 (seller 3)106.0
(buyer 4)102.0 (seller 4)107.0
(buyer 5)101.0 (seller 5)108.0
(for simplicity sake assume order quantity is same for all buyers & sellers)
Now here goes my questions. Please try to answer all 3 of them since they all are very closely related and each answer affects the answer to another question
1. How will the order matching happen. Will it be (buyer 1 with seller 2) or (buyer 1 with seller 1)
2. If you say matching will be (buyer 1 with seller 2) then why does a limit order definition says order can be executed at your limit price or better? In what scenario can this execution at better price exactly happen?
3. if you say matching will be (buyer 1 with seller 1) then at what price will the trade be executed- 105 or 103.5. if you are saying 103.5, then wouldn't it eventually imply that any limit sell order practically can never be executed at higher prices even though its definition says so?
This is regarding limit orders and order matching. As I see, limit order is defined online from several sources as "An order to buy or sell stock at a specified price. The order can be executed only at the specified price or better."
I will ask this question with an example
Lets consider the following limit order book
----BID ---------- ASK----
(buyer 1)105.0 (seller 1)103.5
(buyer 2)104.0 (seller 2)105.0
(buyer 3)103.0 (seller 3)106.0
(buyer 4)102.0 (seller 4)107.0
(buyer 5)101.0 (seller 5)108.0
(for simplicity sake assume order quantity is same for all buyers & sellers)
Now here goes my questions. Please try to answer all 3 of them since they all are very closely related and each answer affects the answer to another question
1. How will the order matching happen. Will it be (buyer 1 with seller 2) or (buyer 1 with seller 1)
2. If you say matching will be (buyer 1 with seller 2) then why does a limit order definition says order can be executed at your limit price or better? In what scenario can this execution at better price exactly happen?
3. if you say matching will be (buyer 1 with seller 1) then at what price will the trade be executed- 105 or 103.5. if you are saying 103.5, then wouldn't it eventually imply that any limit sell order practically can never be executed at higher prices even though its definition says so?
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