What Is a Limit Order Book?

A limit order book is a record of unexecuted limit orders maintained by the security specialist who works at the exchange. 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 and executes them at or better than the given limit price when there are available pricing and inventory to do so. The specialist makes 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. As technology has allowed, this process has been shifted from a manual process to one that is largely automated.


How Do Limit Orders Work?

Limit Order Book Explained

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 (floor brokers, market makers, etc.). 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 execution 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/exchange will sell a security, or the price at which an investor can buy the security. The ask/offer is the price at which the specialist/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 a book or an electronic database of orders, it will stay on the book until it can be matched with a suitable trade and executed. Buy limit orders are placed with an upper price threshold. The investor says "I don't want to pay more than $X for this share." Sell limit orders are placed with a lower price threshold. The investor says "I don't want to sell this share for less than $X."