Couple Questions On How Orders Are Processed

[ajt1970 10]

Hi all...

 

 

I had a couple questions on orders going thru.

 

1) Is there any way possible that MARKET orders can be matched with MARKET orders? I know the usual is for, say, buy market orders to "hit/lift" the offer (sell limit orders). But what if, for example, a large sell market order comes in AT THE SAME TIME as the large buy market order....is it possible for the buy market orders to be matched with the sell market orders FIRST...before hitting the offers (provided there is some leftover after the sell market orders)? If this is not the case, how is this handled in the market (ie. buy market orders at the same time as sell market orders)??

 

2) Let's say price ticks down....hits the bid....but there would also be sell stops there, too....so basically at every price level there are resting limits (the DOM volumes) + stops (which do not show up on the DOM). Is it safe to say that when the stops are hit, which then become sell market orders....they would chew thru the bids at that exact same level...before moving lower (if there's an excess of sell market orders over bids)?

 

 

So in other words....at every tick up or down...there is a "battle" going on....the limit orders at that level versus the stops at the exact same level + any new incoming market orders?

 

Just kinda curious how all this works. The more I read about orders and market microstructure, the more interested I get. Any help and information would be greatly appreciated.

[TheDude 10]

1 - Good question, but I don't think so. A market order to buy will be matched against the first offer (limit with price), and a market sell against the first limit bid. Although market orders generally have higher priority over limit orders, they cant be matched against each other because neither has a price specified. At what price would you match those orders? You cant determine that, as it would be unfair to one of the orders. Also, one of the market orders would be matched at the inside price which would again be unfair to the limit order users at that price as you would be queue jumping.

 

2 - Yes. Your understanding is correct.

[ajt1970 10]

Thanks, The Dude! Very helpful.

 

Had another thought..........

 

Bids and offers are buying/selling ...but only in the context that the bids/offers PREVENT price from moving. For example, in the case of offers. These set orders above price prevent it from going further until the buying pressure can cut thru them. It ABSORBS the buying pressure. But as far as ADDING selling pressure...it doesn't do this because it's not hitting bids and applying selling pressure to send the market down. Sorta like it's playing defense.....offers PREVENT upwards movement....while the "offense" is done buy sell MARKET orders...hitting bids.....because this is not absorbing pressure....it's APPLYING pressure....downwards.

 

So offers = absorbing, but NOT applying downward pressure....while sell market orders/stops = applying (and possibly defending) pressuse downwards.

 

 

Is this all correct?

[ajt1970 10]

TheDude...thank you very much for the info. Very helpful. I am focusing, at the moment, on understanding market mechanics, order flow, how orders make price move, etc. Also studying tapereading, too...but not sure if it will work in spot forex (via currency futures). But I like to idea of traing without charts.

[TheDude 10]

  ajt1970 said:

Thanks, The Dude! Very helpful.

 

Had another thought..........

 

Bids and offers are buying/selling ...but only in the context that the bids/offers PREVENT price from moving. For example, in the case of offers. These set orders above price prevent it from going further until the buying pressure can cut thru them. It ABSORBS the buying pressure. But as far as ADDING selling pressure...it doesn't do this because it's not hitting bids and applying selling pressure to send the market down. Sorta like it's playing defense.....offers PREVENT upwards movement....while the "offense" is done buy sell MARKET orders...hitting bids.....because this is not absorbing pressure....it's APPLYING pressure....downwards.

 

So offers = absorbing, but NOT applying downward pressure....while sell market orders/stops = applying (and possibly defending) pressuse downwards.

 

 

Is this all correct?

 

Yes, thats pretty much it. If you join the offer with a limit order, you are being passive. If you hit the bid with either a sell market or sell limit (at bid price), you are being aggressive. This is because in the first scenario, if you were to exit immediately after your fill, you would 'scratch' (ie get out at the same price you got in at assuming the market hasnt moved). In the second scenario, it you had to cover your position immediately, you would be down a tick, as you would have to cover your short position at the offer, when you got filled at the bid. Therefore, the aggressive order takers need to be a lot more sure what they are doing as a high probability as they are 'in the whole' (taking a paper loss) as soon as they are filled.

 

As for tape reading, personally I don't think it's a good idea to trade one market from the Time & Sales from another, apparently related market (such as 'spot' FX traded from T&S from a futures market of the same pair). Time & Sales is becoming increasingly difficult in liquid markets due to algo's, iceberg orders etc. If you want to learn T&S today, I would look to trade a 5year or 10 year bond or note future in a country where volumes aren't as massive as on say CME or Eurex - try Montreal Exchange, Brazil or MexDer exchanges for example.

 

There is less liquidity in these markets meaning you get more price innefficiency thus a lot more opportunity. Too many people want to trade FX, ES, Bunds etc 'because the big players' do. If you had just learnt to play poker last week, would you immediately want to sit at the same table as world champions?

[Kiwi 16]

Nothing is ever that simple.

 

These two give examples of market orders being matched with market orders:

- http://www.experts123.com/q/how-are-market-orders-executed.html

- NYSE, New York Stock Exchange > Equities > NYSE Arca Equities

 

I think the principles would be:

- exchanges are different to each other

- if two market orders were matched then the price that was achieved would be at or inside of the price of the nearest limit order.

 

The training book for the SWX lays out how they handle this:

http://www.six-swiss-exchange.com/download/trading/training/3_match_en.pdf

[ajt1970 10]

Kiwi, Thank you. I downloaded that pdf as well as checked out the links you provided.

 

TheDude, you definitely make some valid points. I have been considering trading Treasuries, as you suggest. I'll just have to see. My first liking is currencies though...that is why I wanted to stick with that. It's all about adjusting a strategy to your market of choice, I suppose. Thanks for the insight.

[TheDude 10]

  Kiwi said:

Nothing is ever that simple.

 

These two give examples of market orders being matched with market orders:

- http://www.experts123.com/q/how-are-market-orders-executed.html

- NYSE, New York Stock Exchange > Equities > NYSE Arca Equities

 

I think the principles would be:

- exchanges are different to each other

- if two market orders were matched then the price that was achieved would be at or inside of the price of the nearest limit order.

 

The training book for the SWX lays out how they handle this:

http://www.six-swiss-exchange.com/download/trading/training/3_match_en.pdf

 

Sorry Kiwi, perhaps you can help me a bit and point out where these examples cover market orders being matched against market orders? There was only one example I could see in the Six-Swiss example, but that was to do with a pre-open session where there were no limit orders in the book, so a reference price was used instead, based around the previous close/settle I imagine - which kind of demonstrates that a market order needs a price to execute against. Submit a market order in a market with an empty order book (ie doesnt trade) like 2year Gilts and see if you get a fill....

 

Any help appreciated.