Limit Order Book
A limit order book is a record of outstanding limit orders maintained by the security specialist who works at the exchange. A limit order is a type of order to buy or sell a security at a specific price or better. A buy limit order is an order to buy at a preset price or lower while a sell limit order is an order to sell a security at a pre-specified price or higher.When a limit order for a security is entered, it is kept on record by the security specialist. As buy and sell limit orders for the security are given, the specialist keeps a record of all of these orders in the order book. The specialist executes the orders at or better than the given limit price when the market moves to the pre-specified price.
Definition: A limit order book is a record of unfulfilled limit orders maintained by a securities specialist at an exchange. A limit order is an order to buy or sell a security at a specific price or better. A buy limit order is to purchase at a preset price or lower, while a sell limit order is to sell at a preset price or higher.
Origin: The concept of the limit order book originated in traditional stock exchanges, dating back to the late 19th century. At that time, securities specialists (also known as market makers) were responsible for recording and managing all unfulfilled limit orders to ensure fair and transparent trading. With the development of electronic trading systems, the limit order book has gradually transitioned from manual records to electronic management.
Categories and Characteristics: The limit order book is mainly divided into buy limit order book and sell limit order book. The buy limit order book records all orders to buy securities at a preset price or lower, while the sell limit order book records all orders to sell securities at a preset price or higher. Its characteristics include:
- Price Priority: Orders in the limit order book are arranged according to price priority, with better-priced orders executed first.
- Time Priority: When prices are the same, orders submitted earlier are executed first.
- Transparency: The limit order book provides market transparency, allowing investors to see current buy and sell demands.
Specific Cases:
- Case 1: Suppose Investor A wants to buy 100 shares of a company at $50 per share. They can submit a buy limit order. When the market price drops to $50 or lower, the record in the limit order book will trigger the transaction, and A's order will be executed.
- Case 2: Investor B wants to sell 200 shares of a company at $60 per share. They can submit a sell limit order. When the market price rises to $60 or higher, the record in the limit order book will trigger the transaction, and B's order will be executed.
Common Questions:
- Q: Does a limit order guarantee execution?
A: Not necessarily. A limit order will only be executed if the market price reaches the preset price or better. If the market price does not reach the preset price, the order will remain unfulfilled. - Q: Can orders in the limit order book be modified or canceled?
A: Yes. Investors can modify or cancel limit orders at any time before they are executed.
