Couple Questions On How Orders Are Processed

Hey All,

Great discussions on here lately regarding order flow. Thank you to everyone...I have been reading and absorbing it all. I am also making my way thru the Trading and Exchanges book. Many many notes taken so far.

I had a couple questions on orders going thru.

1) Is there any way possible that MARKET orders can be matched with MARKET orders? I know the usual is for, say, buy market orders to "hit/lift" the offer (sell limit orders). But what if, for example, a large sell market order comes in AT THE SAME TIME as the large buy market order....is it possible for the buy market orders to be matched with the sell market orders FIRST...before hitting the offers (provided there is some leftover after the sell market orders)? If this is not the case, how is this handled in the market (ie. buy market orders at the same time as sell market orders)??

2) Let's say price ticks down....hits the bid....but there would also be sell stops there, too....so basically at every price level there are resting limits (the DOM volumes) + stops (which do not show up on the DOM). Is it safe to say that when the stops are hit, which then become sell market orders....they would chew thru the bids at that exact same level...before moving lower (if there's an excess of sell market orders over bids)?


So in other words....at every tick up or down...there is a "battle" going on....the limit orders at that level versus the stops at the exact same level + any new incoming market orders?

Just kinda curious how all this works. The more I read about orders and market microstructure, the more interested I get. Any help and information would be greatly appreciated.

Bids and offers are buying/selling ...but only in the context that the bids/offers PREVENT price from moving. For example, in the case of offers. These set orders above price prevent it from going further until the buying pressure can cut thru them. It ABSORBS the buying pressure. But as far as ADDING selling pressure...it doesn't do this because it's not hitting bids and applying selling pressure to send the market down. Sorta like it's playing defense.....offers PREVENT upwards movement....while the "offense" is done buy sell MARKET orders...hitting bids.....because this is not absorbing pressure....it's APPLYING pressure....downwards.

So offers = absorbing, but NOT applying downward pressure....while sell market orders/stops = applying (and possibly defending) pressuse downwards.


Is this all correct?

The magic word that you're searching for is S P R E A D.

The orders can't come in the same time, there's no such thing as the same time and the first order will consume all the available liquidity in one direction. The next order will do the same in the opposite direction and their effect is the increase of the spread.

Great. Thanks for the info., Sauron. Makes sense.

No. The market buy would be matched with the best priced offers, and the market sell would be matched with the best priced bids. Doesn't matter if they come in at the same time. A market order doesn't have a price associated with it, so what price would you match a buy and sell market order at?

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2) Let's say price ticks down....hits the bid....but there would also be sell stops there, too....so basically at every price level there are resting limits (the DOM volumes) + stops (which do not show up on the DOM). Is it safe to say that when the stops are hit, which then become sell market orders....they would chew thru the bids at that exact same level...before moving lower (if there's an excess of sell market orders over bids)?

Yes.

Thanks Eurotrash!

I am really trying to understand the internal mechanics of order processing...along with other things done "behind the scenes" from, say, a dealer's perspective.