What is a Limit Order Book?

The exchange’s security specialist keeps track of all outstanding limit orders in a limit order book. A limit order is an order to purchase or sell a security at a specific price or above. An order to purchase an asset at a predetermined price or below is known as a buy limit order, while an order to sell an asset at a predetermined price or above is known as a sell limit order.

The security specialist keeps a record of each limit order that is entered for security. The specialist logs all the buy and sell limit orders for security in the order book as they are placed. When the market moves to the predefined price, the expert executes the orders at or better than the set limit price.

How to Interpret a Limit Order Book

It is the duty of the specialist overseeing the limit order book to ensure that the orders with the highest priority are executed before orders in the book and before orders held or submitted by other floor traders, such as floor brokers and market makers, at a price that is equal to or worse.

When they execute the orders, the expert makes money from the spread between the prices of the ask and bid orders in their book. The process is now mostly automated instead of manual due to developments in trading system technologies.

Monitoring Stop Orders

The Securities and Exchange Commission (SEC) developed a consolidated limit order book in 2000, which tracks limit orders on exchanges electronically.

This computerized order tracking system automatically matches the optimal pair of orders to execute within the system. The orders with the highest bid and the lowest ask make up the best pair.

The price at which an investor can purchase a security, or the price at which a specialist or exchange will sell it, is known as the bid. The ask or offer is the price at which a specialist or exchange will purchase a security or the amount at which an investor can sell a security.

A limit order remains on the books until it can be matched with a suitable trade and executed after it is placed into a trading system and fielded by an expert working the book or an electronic database of orders. Orders for buy limits are placed with a maximum price limit. “I don’t want to pay more than $X for this share,” the investor might say. Orders for the sell limit are placed with a lower threshold price. It would be something like, “I don’t want to sell this share for less than $X.” from the investor.

Order Limit Qualifications

A limit order could have “qualifiers.” An order without qualifiers will only be deemed a “day order,” valid for the market day, and may expire with no shares being purchased or with only a partial fulfillment of shares.

If the order from the investor says, “Buy 10,000 shares of XYZ common at 32,” it means that they want to purchase the 10,000 shares at $32 or a lower price, which is the order’s qualifying price.

The investor’s strategy can be entered as “buy 10,000 shares of XYZ at 32 GTC” if it calls for 10,000 to be filled at any time at the specified price or better. Even if the purchase is made in batches of 100 shares over several weeks, a “Good ‘Til Cancelled” order directs the market to buy those shares until the order is canceled. The investor wants it executed regardless of how long the market takes to fill the order.

An additional qualifying factor is the AON, or “All of None.” Investors use this qualification to tell the market to fill this order with all 10,000 shares as asked or buy none at all, as they may want to avoid taking the chance of merely partially filling the order.

Other kinds of order qualifiers let an investor make sure the trade is carried out precisely as it fits their specific investing goal and, in each case, specify the “limits” the investor is placing on the market to execute the trade.

Particular Points to Remember

If the order is executed after the market hits the designated level, investors are sure of receiving the price. The execution of the limit order is not assured, though. As stated differently, the order can only be fulfilled if the price reaches the predetermined level. Investors benefit from limited orders since they ensure they don’t spend more on security than the initial pre-set price specified in the order.

CONCLUSION

• A limit order book records outstanding limit orders kept by the exchange’s security specialist.
• A limit order is a form of order that allows you to purchase or sell a security at a set price or better.
• When a limit order for a security is entered, the security professional records it.
• As buy and sell limit orders for the securities are placed, the specialist records them in the order book.