Electronic Market Microstructure: Limit and Market Orders
Summary
The article introduces electronic markets as computer systems that match buyers and sellers, then describes two basic order types. Limit orders specify a price and may fill only partly while waiting for counterparties; they can also be canceled. Market orders express urgency to trade, consuming available quotes and potentially filling across multiple prices when liquidity is insufficient at the best quote.
The explanation highlights the trade-off between execution urgency and price: market orders are more likely to complete promptly, but thin liquidity can worsen the average execution price. The article uses a hypothetical stock order to illustrate partial limit-order fills and discusses how available depth affects market-order execution. It is an introductory overview rather than a technical treatment of order books or high-frequency strategies; it gives no empirical measurements, exchange-specific rules, or quantitative model of execution costs.
Key ideas
- Limit orders specify a price and may fill partially while awaiting matching orders.
- Market orders prioritize immediate execution and consume available liquidity.
- Limited depth can cause market orders to fill at less favorable average prices.
- The article provides basic concepts and examples but no quantitative execution analysis.
Tags
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.