Limit Order Books, Maker–Taker Roles, and Venue Liquidity
Summary
The document explains the roles of limit orders and marketable orders in exchange matching. A resting limit order supplies liquidity as the maker; an incoming order that executes against it takes liquidity, even if it was submitted as a limit order. Orders with instructions to execute only passively may instead wait for an incoming counterparty. From this matching perspective, displayed trades pair a maker with a taker, though the answer does not quantify the share of total exchange volume executed through limit order books.
It also describes how liquidity can reinforce itself: traders may route orders to venues where liquidity is already available, encouraging more resting orders and taker flow. Maker–taker fee models can support this dynamic by paying rebates to makers and charging takers. The answer notes that US trade reporting can include trades recorded away from displayed venue matching, such as certain block or derivatives-linked transactions, and that routing rules affect how venues compete. It offers a conceptual explanation rather than cross-market statistics, and its US-focused regulatory discussion does not settle the comparison among the named exchanges.
Key ideas
- A resting limit order supplies liquidity, while an order that executes against it takes liquidity.
- Marketable limit orders can act as taker orders when they immediately execute.
- Passive-only instructions can cause an order to wait for an incoming counterparty.
- Existing venue liquidity can attract more routed orders and reinforce a venue’s liquidity.
- Maker–taker fee models may reward resting orders and charge orders that consume liquidity.
- Some reported trades occur outside displayed venue matching, so the document does not establish book-volume shares across exchanges.
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# How important is the limit order book? # How important is the limit order book? I'm trying to understand how important the limit order today for NYSE, NASDAQ, Euronext and LSE. For example, when we talk about the volume traded during the day, what share of that volume has been traded through the limit order book in those exchanges? I googled some papers, but the situation seems to change and be different across exchanges. My current understanding is that for the Euronext, the trading through the limit order book is central. How big is the share of limit order book trades and what are the different options to trade? ## Answer by Nathan S. (score 1, accepted) https://quant.stackexchange.com/a/16985 Every match that hits the tape from the perspective of displayed ECNs is a market order matched with a limit order. You can think of this in terms of makers and takers. If I want to buy MSFT at 51.00 and post a limit for that price 3 microseconds before you post your limit to sell at 51.00 then I am the maker and you are the taker. And your sell order will be treated as a market order unless you used some instruction that would only allow it to execute on the passive side. In that case you would wait until my order fills and someone else comes to buy at 51.00. I'm not accounting for all of the routes and order options selected in user (or user's robot) land, because the piece that becomes visible to the ECN matching engine and gets the fill is either a limit or market order and will match against the other. This alone would make limit orders half of the equation and that's an important level. But if I know that when I route to a particular venue there are more likely to be orders at the prices I want (they have more liquidity) then I will choose to route there more often. This is a self-reinforcing effect for liquidity, where limits want to rest there because more takers will come there and more makers come to match with more takers, etcetera. Market orders (takers) are the benefit. They're not the anchor orders of this virtuous cycle. That's why the earlier models and more popular models of maker-taker ECNs pay rebates to resting liquidity / makers (limit orders) and charge fees to takers (market orders, including marketable limits). Matching regulations (Reg NMS - 611) are intended to change some of the analysis in the last paragraph, because the matching engines have to look at multiple venues for resting liquidity (limit orders) and match against the best prices. I think it would go to the edges of question scope to consider how business models change when shop owners have to route customers to competitors with better prices, but I could justify a place for it in a comprehensive answer. I'm leaving it alone mostly, because it's an evolving area of research where I presently only have glimmers of insight. ## Answer by JoshK (score 0) https://quant.stackexchange.com/a/25817 Trades in the US can just go to the tape (the ADF). This is common with certain block trades and certain trades linked to derivatives. There is a flag on those trades to let you see that they are "average priced trades" or "derriv linked trades"...
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