Market Orders, Limit Orders, and Walking the Limit Order Book
Summary
This introduction to electronic market microstructure explains how market orders and limit orders interact. Limit orders specify a price and quantity, rest in the limit order book, may fill partially, and can be cancelled. Market orders seek immediate execution by trading against available limit orders at the best prices. If an order exceeds the quantity available at the best price, it consumes successive price levels, a process known as walking the book.
The article uses order-book examples for Hewlett-Packard and FARO Technologies to illustrate how liquidity affects execution. The more liquid book has greater depth at its price levels, while the thinner book is more likely to produce worse average execution prices for a market order of a given size. This provides a basic explanation of market impact and liquidity risk relevant to high-frequency trading and execution design. The discussion simplifies real markets to two order types and does not quantify costs or cover the full range of order instructions and matching rules.
Key ideas
- Limit orders rest in the book at specified prices and may receive partial fills or be cancelled.
- Market orders trade immediately against the best available limit orders.
- Large market orders can consume multiple price levels and receive worse average prices.
- Order-book depth helps explain why illiquid instruments are more vulnerable to execution costs.
- The article uses a simplified two-order model of electronic markets.
Tags
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.