What is Limit Order Book?
366 reads · Last updated: December 5, 2024
A limit order book is a record of outstanding limit orders maintained by the security specialist who works at the exchange. A limit order is a type of order to buy or sell a security at a specific price or better. A buy limit order is an order to buy at a preset price or lower while a sell limit order is an order to sell a security at a pre-specified price or higher.When a limit order for a security is entered, it is kept on record by the security specialist. As buy and sell limit orders for the security are given, the specialist keeps a record of all of these orders in the order book. The specialist executes the orders at or better than the given limit price when the market moves to the pre-specified price.
Definition
A limit order book is a record of unfulfilled limit orders maintained by securities specialists at an exchange. A limit order is an order to buy or sell a security at a specific price or better. A buy limit order is to purchase at a preset price or lower, while a sell limit order is to sell at a preset price or higher.
Origin
The concept of the limit order book originated from traditional trading methods at stock exchanges, dating back to the late 19th century. At that time, exchange specialists were responsible for recording and managing all unfulfilled limit orders to ensure orderly trading. With the advent of electronic trading, this concept has evolved into an electronic limit order book.
Categories and Features
The limit order book is primarily divided into buy limit orders and sell limit orders. Buy limit orders require purchasing securities at a preset price or lower, while sell limit orders require selling at a preset price or higher. Its features include helping investors lock in ideal buying and selling prices amid market fluctuations, thus avoiding losses due to market price volatility.
Case Studies
Case 1: In 2020, Tesla's stock experienced significant volatility. An investor set a buy limit order at $480 when Tesla's stock was priced at $500. When the market price dropped to $480, the order was automatically executed, allowing the investor to purchase the stock at the desired price. Case 2: In 2021, after Apple released a new product, its stock price rose. An investor set a sell limit order at $150. When the stock price reached $150, the order was executed, enabling the investor to lock in profits successfully.
Common Issues
Common issues investors face when using limit orders include the market price not reaching the limit, resulting in the order not being executed, and during rapid market fluctuations, limit orders may not be executed promptly. Investors should set reasonable limits based on market conditions to increase the likelihood of order execution.
