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 of order to 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.
- 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.
- 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.
How Do Limit Orders Work?
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.
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.