Limit Order Book
A limit order book is the exchange record of outstanding limit orders to buy or sell a security at specified prices. It lists all active buy (bid) and sell (ask) limit orders and is used to match orders when prices align.
How it works
- A limit order specifies a maximum price to buy or a minimum price to sell. A buy limit executes at the limit price or lower; a sell limit executes at the limit price or higher.
- Orders remain in the book until they are matched and executed, cancelled, or expire.
- Matching prioritizes the best prices (highest bid and lowest ask). Within the same price level, orders are generally executed in time-priority order.
- Historically maintained by a floor specialist, order books are now largely electronic. Centralized electronic order books automatically match the best available pairs of bids and asks.
Bid and ask explained
- Bid: the price at which buyers are willing to purchase (the price at which the market will sell to them).
- Ask (offer): the price at which sellers are willing to sell (the price at which the market will buy from them).
- The bid–ask spread is the difference between the highest bid and lowest ask; specialists or market makers can earn profit from this spread.
Order qualifiers and types
Limit orders can include qualifiers that change their duration or execution rules:
* Day order (default): valid only for the trading day and expires if not filled.
* Good ‘Til Canceled (GTC): remains active until explicitly cancelled, possibly filling over multiple days in partial executions.
* All-or-None (AON): instructs the market to fill the entire order quantity at once or not at all.
* Other qualifiers exist to control partial fills, time-in-force, and routing preferences.
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Example: “Buy 10,000 shares XYZ @ $32 GTC” requests 10,000 shares at $32 or better and keeps the order active until cancelled.
Priority, execution, and limitations
- Orders are executed when market prices reach the specified limit. A triggered limit order is guaranteed not to execute at a worse price than specified, but it is not guaranteed to execute at all.
- Partial fills can occur when available opposite-side liquidity is insufficient.
- Electronic matching and algorithmic trading have increased speed and complexity in how order books are managed and how liquidity is consumed.
Practical considerations for traders
- Use limit orders to control execution price and avoid paying more (or receiving less) than desired.
- Be aware of the risk that a limit order may never fill if the market never reaches the limit price.
- Choose qualifiers (GTC, AON, etc.) that match your execution objectives, balancing the desire for complete fills against the potential for missed opportunities.
Summary
A limit order book organizes and prioritizes limit orders by price and time, enabling exchanges to match buyers and sellers efficiently while giving traders control over execution prices. Understanding how orders are recorded, prioritized, and matched helps traders manage execution risk and liquidity expectations.