Saturday, July 21, 2012

why marketable limit order treated as market order (my take

Imagine a limit order to sell at $9.99 comes before a limit order to buy at a higher(!) price of $10.01. You may feel 2nd trader is crazy, but it can happen in a fast market. It can also happen for price-control on a market order -- See [2]


Q: execute at what price?
%%A: at the earlier quote's price. $9.99 in this case.

Exchange ought to publish a transaction price at the earlier quote's price. I feel this is so as to maintain a realistic view of the supply/demand on the security.

The rule -- 2nd limit order is a "marketable limit order" and treated as a market order. What's wrong if exchange decides to set the execution price at the late-comer's price?

- Suppose this is the last trade of the day. The closing price would be skewed/influenced by the "crazy" trader. This would create a skewed view of the price level of the stock.
- Or suppose a trader wants to trigger false signals, so she sends a few "stupid" limit orders once a while to make exchange send out artificially high last-execution prices. There are many algorithmic trading engines out there that react to last-execution prices, so execution price feed ought to be designed as a realistic reflection of supply/demand.
- A "crazy" trader can easily create a historical high in the price feed by buying one share at $800. Clearly unrealistic and misleading price information.

But why do I say the earlier quote's price is more realistic and consistent with reality on the market?
* the 2nd limit order is irrational, or simply a mistake.
* the earlier quote has remained in the market longer and therefore represents a more serious, more firm and more rational intention

If the 2nd limit order is a serious order, it has to be a larger order (otherwise I can't see why you call it serious). In that case the unfilled portion will remain in the market, and represents a serious intention.

Dr. Hongsong Chou actually said a BUY market order can be seen as a (marketable) limit order with price = +inf.

[2] given The Rule, a rational justification to use a marketable limit order is to put a constrain on an otherwise unconstrained market order in a fast market. An unconstrained market order could result in a disastrous Buy at $18.

No comments:

Total Pageviews

my favorite topics (labels)

_fuxi (302) _misLabel (13) _orig? (3) _rm (2) _vague (2) clarified (58) cpp (39) cpp_const (22) cpp_real (76) cpp/java/c# (101) cppBig4 (54) cppSmartPtr (35) cppSTL (33) cppSTL_itr (27) cppSTL_real (26) cppTemplate (28) creditMkt (14) db (65) db_sybase (43) deepUnder (31) dotnet (20) ECN (27) econ/bank` (36) fin/sys_misc (43) finGreek (34) finReal (45) finRisk (30) finTechDesign (46) finTechMisc (32) finVol (66) FixedIncom (28) fMath (7) fMathOption (33) fMathStoch (67) forex (39) gr8IV_Q (46) GTD_skill (15) GUI_event (30) inMemDB (42) intuit_math (41) intuitFinance (57) javaMisc (68) javaServerSide (13) lambda/delegate (22) marketData (28) math (10) mathStat (55) memIssue (8) memMgmt (66) metaProgram` (6) OO_Design (84) original_content (749) polymorphic/vptr (40) productive (21) ptr/ref (48) py (28) reflect (8) script`/unix (82) socket/stream (39) subquery/join (30) subvert (13) swing/wpf (9) sysProgram` (16) thread (164) thread_CAS (15) thread_cpp (28) Thread* (22) timeSaver (80) transactional (23) tune (24) tuneDB (40) tuneLatency (30) z_ajax (9) z_algoDataStruct (41) z_arch (26) z_arch_job (27) z_automateTest (17) z_autoTrad` (19) z_bestPractice (39) z_bold (83) z_bondMath (35) z_book (18) z_boost (19) z_byRef^Val (32) z_c#GUI (43) z_c#misc (80) z_cast/convert (28) z_container (67) z_cStr/arr (39) z_Favorite* (8) z_FIX (15) z_forex (48) z_fwd_Deal (18) z_gz=job (33) z_gzBig20 (13) z_gzMgr (13) z_gzPain (20) z_gzThreat (19) z_hib (19) z_IDE (52) z_ikm (5) z_IR_misc (36) z_IRS (26) z_javaWeb (28) z_jdbc (10) z_jobFinTech (46) z_jobHunt (20) z_jobRealXp (10) z_jobStrength (15) z_jobUS^asia (27) z_letter (42) z_linq (10) z_memberHid` (11) z_MOM (54) z_nestedClass (5) z_oq (24) z_PCP (12) z_pearl (1) z_php (20) z_prodSupport (7) z_py (31) z_quant (14) z_regex (8) z_rv (38) z_skillist (48) z_slic`Problem (6) z_SOA (14) z_spring (25) z_src_code (8) z_swingMisc (50) z_swingTable (26) z_unpublish (2) z_VBA/Excel (8) z_windoz (17) z_wpfCommand (9)

About Me

New York (Time Square), NY, United States
http://www.linkedin.com/in/tanbin