Secondary Security Markets: Order-Matching Rules
Look at the following table of market orders for Superstretch Gum Company stock:
| Buy Shares Quantity | Buy Share Price (USD) | Sell Shares Quantity | Sell Share Price (USD) |
|---------------------|-----------------|----------------------|------------------|
| 13 | 2.10 | 13 | 2.10 |
| 8 | 2.09 | 18 | 2.11 |
| 2 | 2.08 |5 | 2.11 |
| 13 | 2.07 | 13 | 2.12 |
Knowing that orders are matched somehow, what is a correct observation based on the information in the table?
No.
This is something that does not appear to be feasible because this buyer looks like he or she would be paying much more than desired.
Yes.
Even though no order-matching rules have been given thus far, this is a desired scenario for a buyer because the buyer can deal with just one seller to fulfill the order and get the price being requested.
No.
All orders will be likely be matched, even a very small order. This buyer may just have to wait as the order is not first on the list. There are currently no orders that would satisfy the buy order at the price limit shown.
Looking again at the market orders for Superstretch Gum, this means that the buyer looking to buy 13 shares at USD 2.10/share has the highest-priced buy order; similarly, the 13 shares at USD 2.10/share is the lowest-priced sell order.
| Buy Shares Quantity | Buy Share Price (USD) | Sell Shares Quantity | Sell Share Price (USD) |
|---------------------|-----------------|----------------------|------------------|
| 13 | 2.10 | 13 | 2.10 |
| 8 | 2.09 | 18 | 2.11 |
| 2 | 2.08 |5 | 2.11 |
| 13 | 2.07 | 13 | 2.12 |
There are enough shares to fill the order, and as long as the buyer is willing to pay the seller's ask price, the transaction is made with the minimum quantity of 13.
The sell order of 18 shares at USD 2.11 is the next lowest sell order and that would be matched with the buy order of 8 shares at USD 2.09 per share. This is given as the next priority sell order in line because of __secondary precedence rules__, matching rules that delineate orders that are made at the same price. The leftover sell order can possibly partially fill the next order, and so on.
Order-driven market systems usually use time as a way to rank same-priced orders. The first one to arrive is given precedence. Some trading rules permit partially hidden orders and as a result, these would receive lower priority if they are a same-price order.
How do you suppose the order-matching rules help the overall market?
Yes.
The order-matching rules give traders a way to improve pricing, timing, and maintain market transparency, which in turn results in increased liquidity.
No.
The market structure and the rules governing it do not cause a size increase.
No.
The order-matching rules establish the lowest buyer price and the highest seller price as each ordering system has its respective viewpoints; the buyer would pay the least and the seller would be paid the most. However, orders are not guaranteed to be filled if prices cannot converge.
To summarize:
[[summary]]
When you were in school, teams were formed through a matching process according to a teacher's rules. For example, a fast runner would be placed on team A and another equally fast runner on team B. Or in an academic competition, the top student would get to answer the first question.
This is the scenario seen in order-driven markets such as the New York Stock Exchange (NYSE). Orders are placed and are transparent so that sellers can see all desired sales quantities and prices, and buyers can see the same for buying quantities and prices.
The __order precedence hierarchy__ controls the sequence in which orders will be considered. __Price priority__ supports the plan that the highest-priced buy orders and the lowest-priced sell orders are matched first.
A buyer interested in buying 13 shares at USD 2.10 would probably want to deal directly with the seller who has listed 13 shares at USD 2.10
A buyer with the lowest buy price, 13 shares at USD 2.07, would want to trade with the seller with the highest sell price, 13 shares at USD 2.12
A buyer interested in buying two shares of Superstretch could never not be matched with any seller's orders
The rules ensure buyers pay the lowest prices possible
The rules increase market liquidity
The rules ensure market size increases
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