Limit Order Books

Question 1

Limited Order Book (Continuous Double Auctions)

Answer 1

Real-time, continuously updated list of buy orders (bids) and sell orders (asks/offers) in a financial market.

Question 2

Limit Orders

Answer 2

Orders to buy or sell a financial instrument at a specified price or better.

Question 3

Market Orders

Answer 3

Buy or sell a financial instrument immediately at the best available current market price.

Question 4

Market Order v Limit Order

Answer 4

Limit Orders guarantee price but not execution.
Market Orders guarantee execution but not price.

Question 5

Midprice

Answer 5

(Best ask + best bid) / 2

Question 6

Bid-Ask Spread

Answer 6

Best ask - best bid

Question 7

Average Price Paid

Answer 7

Refers to the ending price of a market order, where we have:
(Best ask x amount) / amount

Question 8

Tick Size

Answer 8

Smallest price increment that an equity, future, or other exchange-traded instrument can move by.
Can be fixed or varied.
The bid-ask spread will often equal the tick size.

Question 9

Short Selling

Answer 9

The practice of selling securities or other financial instruments that are currently not owned, and subsequently purchasing them (covering).

Question 10

Short Selling Example

Answer 10

Suppose I expect the price of a stock will drop. Then I can
borrow 100 shares from a broker and sell them at the current price of $1.
If the price drops down to $0.9, I can buy 100 shares back, return them to the broker, and earn $10.

Question 11

Trading Models and Market Data

Answer 11

Trading models are developed using historical market data, like:
- time-based bars
- tick data

Question 12

Penny Jumping

Answer 12

Let’s say there is a big limit order.
You buy the stock (associated with the big order) at one penny higher, and you can profit if the price increases. If not, you only lose one penny if you sell.

Question 13

Expected Execution Price

Answer 13

Total cost / total shares bought.