What Is a Limit Order Book?
Let me tell you directly: a limit order book is essentially a record of all outstanding limit orders, maintained by the security specialist at the exchange. You need to understand that a limit order is an instruction to buy or sell a security at a specific price or better. For instance, a buy limit order means you're buying at a preset price or lower, while a sell limit order is for selling at a pre-specified price or higher.
When you enter a limit order for a security, the specialist records it. As more buy and sell limit orders come in, they all get added to this book. The specialist then executes these orders when the market hits the pre-specified price, always at or better than what you set.
Key Takeaways
Here's what you should remember: the limit order book is managed by the exchange's security specialist. It's all about limit orders, which specify buying or selling at exact prices or better. Every entered limit order gets recorded, and the specialist tracks all incoming buy and sell orders in this book.
Understanding a Limit Order Book
The specialist in charge has a clear duty: execute the top priority order before anything else in the book, and certainly before orders at equal or worse prices from floor brokers or market makers. They make their profit from the spread between bid and ask prices as they handle these executions.
Things have changed with technology; what used to be a manual process is now mostly automated, making it faster and more efficient for everyone involved.
Tracking Limit Orders
Back in 2000, the SEC stepped in to create a centralized limit order book that tracks orders electronically across exchanges. This system automatically matches the best pairs: the highest bid with the lowest ask.
Remember, the bid is the price you'll pay to buy or what the specialist sells at, and the ask is what you'll get when selling or what the specialist buys at. Once your limit order is in the system—whether handled by a specialist or an electronic database—it stays there until matched and executed.
For buy limits, you set an upper threshold: you won't pay more than X. For sell limits, it's a lower threshold: you won't sell for less than X.
Limit Order Qualifiers
Limit orders can come with qualifiers to fit your strategy. Without them, it's just a day order, valid only for that trading day, and it might not fill completely or at all.
Take an example: if you say 'buy 10,000 shares of XYZ at 32,' you're asking for that many shares at $32 or better. Add 'GTC' for Good 'Til Cancelled, and the order stays open until you cancel it, even if it fills gradually over time.
Another one is 'AON' for All or None, meaning fill the entire order or nothing at all—no partial fills. There are more qualifiers out there, each letting you set precise limits on how the trade happens to match your goals.
Special Considerations
You're guaranteed the price if the order triggers when the market reaches your level, but execution isn't guaranteed—it only happens if the price hits that point. This setup protects you from paying more than your set price, which is why limit orders are so useful.
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