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Limit Order Matching, Execution Price, and the NBBO

Article Quant Q&A · Author: Ignasi Piqué Muntané
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Summary

This note examines how a buy limit order priced above a sell limit order may execute when both reach an empty book. It explains that the matching outcome depends on event sequencing at the venue and on the national best bid and offer (NBBO). In the example, with an inside market of $1.50 by $1.55 and the $2 buy arriving first, a US exchange would be expected to match at $1.55, giving the seller price improvement relative to the buy limit.

The answer is framed for US equities in NMS securities outside opening and closing auctions. It says trade-through rules constrain exchange executions relative to the NBBO, while an alternative trading system with midpoint-crossing rules could execute at the midpoint. These examples illustrate venue-specific pricing rather than a universal outcome: the actual execution depends on market conditions, order sequencing, and venue rules.

Key ideas

  • Matching depends on the order of events processed by the execution venue.
  • The NBBO can constrain the price at which a US exchange matches orders.
  • In the stated example, the seller receives price improvement at the current offer.
  • An alternative trading system may apply midpoint-crossing rules and produce a different execution price.
  • The explanation is limited to a particular US equity context outside opening and closing auctions.

Tags

EquitiesExecutionMarket microstructureUS markets
Full text
# How do limit order prices meet?


# How do limit order prices meet?












I understand how limit orders work but I don't know how do they meet. Suppose the book of a ticker ABC is empty. Trader 1 sends a buy limit order for 1 share of ABC at 2\$, and at the same time (ideally speaking, simultaneously) Trader 2 sends a sell limit order for 1 share of ABC at 1$. What will be the transaction price?

In this question, the "accepted" answer says that it depends on the arrival position, it is a "race condition", so the last order to arrive will execute against the first.

If we suppose that Trader 1 was the first one to send the order by a microsecond, what does it mean this solution? What does it mean that Trader 2 will be executed against the price of Trader 1?

Does it mean that Trader 2 will sell at 2\$? So, here Trader 1 won't take full advantage trying to buy for less than 2$?

Thanks,

## Answer by Sammy (score 1)

https://quant.stackexchange.com/a/60391

I am answering your question based upon a US market equity scenario in an NMS security and not at the opening or the close (as they may have auction like processes that occur). The answer does depend on a couple of additional factors. One being the sequencing of when events occur at the executing venue. The other being the NBBO. If the inside NBBO is 1.50x 1.55 and in your example the buy at 2 came in first then you can expect a US exchange would execute the matching of the limit orders at 1.55 where the seller gets advantage of the Price improvement. Since exchange is subject to the trade through rule they can not match outside the NBBO. Note that there could be the case where if the orders are routed to an ATS that has rules to cross at a midpoint then such trade could be executed at 1.525.

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.