Stock Markets

Stock exchanges

• NYSE, Nasdaq, etc. are organized as limit order books.
• A limit order is an order with a price specified.
  • Buy at price of x or less
  • Sell at price of x or more
  • If not immediately executable, it goes into the “book.”
• Market orders are orders to trade “at market,” taking whatever price is available.
• Your broker is required to route your executable order to the venue offering the best price.

Bid-ask spread

• The price on a limit sell order is called an ask or offer price.
• The price on a limit buy order is called a bid.
• The best (lowest) ask and best (highest) bid are called the inside quotes.
• The difference between the best ask and the best bid is called the bid-ask spread or bid-offer spread.

Example of a limit orer book

The bid-ask spread is 180.02–180.03.

Institutional trading

• Mutual funds etc. typically execute trades over several days, trading a small amount at a time, to minimize the price impacts of their trades.
  • Brokers provide algorithms optimized to minimize price impacts.
• High frequency trading (HFT) is a different kind of automated trading.
  • HFTs look for opportunities that may only exist for only a millisecond and only earn a penny a share or less.

Internalization and payment for order flow

• Retail orders are primarily executed on Alternative Trading Systems rather than the limit order book.
• Your broker/dealer may execute your order itself, to earn the bid-ask spread.
• Or your broker may send your order to another institution in exchange for a “kickback” of part of the spread.
• You are nevertheless supposed to get the National Best Bid or Offer (NBBO).