A Closer Look – Stock Market Order Matching

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A Closer Look – Stock Market Order Matching

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How does order matching actually occur in the stock market?

Whenever you place an order in the stock market, your online broker will let you see all other orders currently queued for your chosen stock.

This is the order board or quote screen that identifies the Buying (Bid) and Selling (Ask) parties into each stock choice. This stock quote screen lists on the left column the desire to buy and on the right column the desire to sell, showing the respective volume levels (or size) at each bid price level.

The queue actually shows the precedence/sequence and thus of priority of execution of these orders, depending on their price, which you can use to adjust your own bid/offer price to get the desired priority.

For example, in the case above for SMDC, under the BID column, the order with the highest bidding price of 8.30 (with 31,700 shares) will be prioritized against those orders with bidding prices 8.29 and below, so it’s placed in the first row being the best buyer.  How come he’s the best buyer? It’s because he has the highest bid price. It’s obvious. If you’re a seller with several buyers vying for the thing you sell, wouldn’t you prioritize that buyer who has the highest buying price?

It’s the same with the stock market. But this time, it’s the PSE trading system who determines for you the best buyer you could have. Whoever the trading system sees as the best buyer, that will automatically be placed first in line and will have the priority of getting his order matched.
With the same line of reasoning, under the ASK column, sellers with the lowest ask price of 8.31 will get priority versus those with price 8.32 and above, being the best seller.  Any seller who wants to readily sell his holdings will naturally lower his selling price to attract more buyers, and get his order done. This is exactly how the stock market makes its trading process.

When are orders matched?

Now, unless there’s an agreement of price between buyers and sellers, no matching will occur.
For SMDC above, the quote then is: BUYING at 8.30 and SELLING at 8.31. Since there’s no agreement of price at this point, there’s no order matching possible. Only when the buyers raise their bid price to 8.31 or the sellers lower down their selling price to 8.30 will the next order matching occur.
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You see it boils down to the order price. If you want to make sure that your order be executed (matched) right after posting it, you use the best bid price or lower (if you’re selling) or the best ask price or higher (if you’re buying) in your order. In this way, you become the best seller or best buyer respectively.
If you don’t do that, your order just gets lined up in the queue and you have to wait for further price movements (caused by some other market participants who have finally “given up”) toward your price before it can be matched. Take note however that if you decide to wait, you also take the chance of getting left behind if the market price goes in opposite direction and no buyer /seller would be willing to buy/sell it at your set price. In that way, you’re ultimately left behind.
This principle of being the best buyer or best seller is actually crucial for momentum trading where being the “first” to be matched can mean a big profit or big loss. As momentum trading is a very short term trade (usually within the day), taking advantage of this principle can spell the difference between a successful and a failing momentum traders. Hang around to that hot topic!
In the meantime, start getting your order matched!

Have fun investing!

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This Post Has One Comment

  1. Don July 4, 2016 Reply

    what if i want to get the lowest price during market preopen. do i order with the highest price even way above the best asking price?

    ex.
    bid
    90
    89
    88

    ask
    89
    90
    91

    to get the price that i wanted (89), should i post an order of 91? what will it cost me, 89 or 91.

    thanks… don

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