0

First off, please bear in mind that this is a very rare scenario for a very illiquid stock in an illiquid market. Let's say the lowest ask price for the stock is 10.00 atm and there's no bid order whatsoever on the other side; a market sell order comes in soon after sitting in the queue as there's yet any incoming/matching buy order at the moment. 30 seconds later a buy order finally comes in with a bid of 10.05 on the same exchange.

Here comes the question: does the 10.05 buy order get matched with the market order at 10.05 or does it match with the limit sell order at 10.00. My understanding is that market order generally has higher priority than limit order so it would get matched first albeit higher price. However, if price/time priority were to be valued, then intuitively it would make more sense that the lower-priced 10.00 limit sell order be matched with the buy order! This is a very rare case but can someone please shed some light on this? Thanks.

LAZJ
  • 1
  • 1
  • 1
    Which stock exchange is this on? – Flux May 11 '22 at 09:45
  • Hard to know what you're asking because the circumstances are unclear. (1) What is 10 atm? ATM is an option term, aka at-the-money. What's it meaning here? (2) If this is the NYSE, there has to be a bid price because there are market makers who are required to maintain a market. (3) If a market order comes in, it will be filled at the NBBO quote. What is it here? – Bob Baerker May 11 '22 at 11:27
  • I meant "at the moment" not at-the-money option ! I know market makers are required to maintain a market. However, this is purely a hypothetical situation. I guess what I meant to figure out is with the existing limited sell order already sitting in the book on the ask side, would the market order (which comes in after the limit sell order) still get crossed with NBBO (10.05 from the bid) even though the limit sell order had already come in with a 10.00 ask price. – LAZJ May 11 '22 at 12:46
  • 1
    In other words, do market orders always have priority over limit orders despite the limit orders having a better price ? Wouldn't this consitute a trade-through which is in violation of Rule 611 since the buy order is filled with inferior price by market order (10.05 ) vs earlier arriving limit sell (10.00). – LAZJ May 11 '22 at 12:46
  • The first order received has priority. If it's a market order, it's filled immediately. If it's a limit order, it's filled if it's executable at current NBBO. If it's not marketable, it goes on the order book. – Bob Baerker May 11 '22 at 15:06
  • Thanks for the explanation Bob. I understand what you’ve described is how orders would normally be matched under normal market condition where there is no ambiguity with respect to the price/time principle -orders are first ranked according to their price; orders of the same price are then ranked depending on when they were entered (Pro-rata model ignored). What I mentioned is more of an extreme case of a beaten-down stock in a subdued market condition than a normal two-way actively traded stock for which market makers (specialists for NYSE) would step in to maintain its flow. – LAZJ May 12 '22 at 04:06
  • For example, there is a small-cap company whose trading activity has been inactive – no bid orders in the book for a while. A market sell order from an investor whose position is underwater is posted in an attempt to slash his/her holding for whatever price that he/she could get at time 0; another limit sell order is then posted at 10.00 soon after at time 1. None of these two orders were transacted since there was no bid on the other side at the time. Suddenly positive news is announced that leads to an upbeat sentiment towards the stock, and a bid at 10.05 comes in at time 2. – LAZJ May 12 '22 at 04:07
  • Now if the earlier arrived market order were to take precedence, the 10.05 would transact with the market order at 10.05 – which would then trade through the 10.00 limit sell (NBBO) that arrived at time 1. Would this be the case? This is a rare case as the highest bid comes in at a higher price than the lowest limit ask price with a market order already ahead in time on the ask side. – LAZJ May 12 '22 at 04:09
  • Or the 10.05 bid would get matched with the market order at 10.00 instead since the NBO is currently at 10.00? And I do know that without the market order in the picture, the 10.05 limit buy would automatically get matched with the 10.00 limit sell (NBO)by the matching engine resulting in a transacted price of 10.00. – LAZJ May 12 '22 at 04:20
  • https://money.stackexchange.com/questions/57063/how-are-unmarketable-market-orders-other-side-of-the-order-book-is-empty-match – LAZJ May 19 '22 at 08:51
  • It seems from the question that it's irrelevant whether the is or was a standing bid-side of the market, unless something is misunderstood in the question. – Catalyx May 23 '22 at 22:25

0 Answers0