trainor@ucla-cs.UUCP (02/06/85)
Can anyone out there enlighten me as to how brokers actually
execute limit orders. Is there some joker that occationally
checks what I want? Is it done automatically? Or, is an
interrupt generated when my stock hits a certain price.
Douglas
ARPA: trainor@ucla-locus.arpa
UUCP: ...!{cepu,ihnp4,randvax,sdcrdcf,trwspp,ucbvax}!ucla-cs!trainorbrett@ucla-cs.UUCP (02/06/85)
> > Can anyone out there enlighten me as to how brokers actually > execute limit orders. Is there some joker that occationally > checks what I want? Is it done automatically? Or, is an > interrupt generated when my stock hits a certain price. > > Douglas > > ARPA: trainor@ucla-locus.arpa > UUCP: ...!{cepu,ihnp4,randvax,sdcrdcf,trwspp,ucbvax}!ucla-cs!trainor The answer to this question is more compilicated than you may originally have imagined. I will explain from what I remember - I cant seem to find my stock info book. First, it depends whether you are talking about a stock traded on an "exchange" ie the New York or American exchange being common examples. If the stock is traded there, your limit order arrives from your brokerage firm and your bid to sell or buy is entered with the specialist for the stock you are trading. The specialist paid an enormous amount of money to obtain a "seat" on the exchange. His purpose is to maintain orderly markets in a small set of stocks. Typically a specialist handles a number of different issues. He is bound by the extensive scrutiny of the exchange. The specialist can make or lose money quickly. If everyone is selling XYZ today, the specialist for the stock will probably have to buy the stock to maintain orderlyness of his market. He would take a drubbing in that case. Other times a rash of buy orders increase the value of his inventory. The specialist, as far as I know, does not make any per/transaction fee. The specialist is carefully scrutinized too. If he had hundreds of buy limit orders for 100.00 (or 1 of hundreds of thousands of shares), the exchange tries to monitor that he does not "push" the price up precipitously so that those limit orders to buy are triggered. Assume an execution can be made (there are ticks to worry about - yet another story). If it can, he buys or sells the stock from his "inventory". (Again, his goal is to maintain an orderly market.) Otherwise the specialist records your bid to buy/sell in his "log". When recorded the specialist knows if this is a day order or a GTC order. As prices change, your bid is in his log and will be executed FCFS at the price you have "limited" too. Say a stock is at 99 5/8, and several buys came in. These depleted the supply of stock and the price went to 100. Assume your buy was for 99 7/8. Well in that case you could be passed up. You will see the price range go 99 5/8 - 100, but yet your order may not be executed because there were "at market" or "limit" bids that depleted supply and drove price up. Your broker will call this "stock ahead". So, because an order is placed - it traded in your range - it doesnt mean you got the stock. Be careful of this if you are a same day trader. NASDAQ, the National Assoc. of Securities Dealers Advanced Quotation system (or some such), is a computerized version of this. Becuase there is no exchange you buy your OTC stock from the inventories of brokers. (How the brokers got the stocks is another issue!!) These "n specialists" (if you want to think of it this way) are brokers: Bache, Merill Lynch, etc. Your order goes in and the prices all the brokers are willing to part with the stock or buy the stock is displayed. This is called the stocks spread. That's why you see two prices with OTC stocks. Your execution is made if there is a match. For the most part there is a very thin margin between what Bache is willing to buy/sell XYZ for and Merill is willing to buy/sell XYZ for. The spread becomes larger as brokers "diverge". Since this is a computerized marketplace entirely, your bid remains in the system and is executed if a broker and "you" match. Thats an off the top of my head recounting and rambling. I will probably get hundreds of corections now......... -- Brett Fleisch University of California Los Angeles 3804 Boelter Hall Los Angeles, CA 90024 Phone: (213) 825-2756, (213) 474-5317 brett@ucla-cs.ARPA or ...!{cepu, ihnp4, trwspp, ucbvax}!ucla-cs!brett -------------------------------------------------------------------------
suhre@trwrba.UUCP (Maurice E. Suhre) (02/08/85)
I understand limit orders on the sell side to mean that when
the limit (i.e. stop) price is reached, the order becomes a
*market* order. The stock may fall farther before the buyers
finally catch up with the sellers. That is, your order may
actually be executed *below* your stop loss price.
Those who believe that the specialist system is rigged in favor
of the specialists (they are either paranoid, cynical, or accurate)
suggest that limit orders tell the specialist where the gold is
buried.
On the other hand, if you are trying to pick up a stock or option
a little cheaper than the usual trading range, you have a chance at
it by entering a limit order. I would suggest that these be either
day trades (good only for the current day) or else you monitor them
closely.
The specialist does not collect a fee for each transaction, but rather
makes his money on the spread between the bid and asked prices.
Finally, the use of limits on odd lot trades is different. When a
round lot trades at the limit price, the odd lot broker is required
to execute all odd lot limit trades waiting at the same price.
Don't forget that the odd lot broker gets 1/8 for his troubles.
And you generally pay a higher comission for odd lots.
All in all, this mess is not a simple matter!
(Usual disclaimers about not being a registered investment adviser,
etc.)
Maurice
{decvax,sdcrdcf,hplabs,ucbvax}!trwrb!suhrebrett@ucla-cs.UUCP (02/09/85)
> I understand limit orders on the sell side to mean that when > the limit (i.e. stop) price is reached, the order becomes a > *market* order. The stock may fall farther before the buyers > finally catch up with the sellers. That is, your order may > actually be executed *below* your stop loss price. I dont think so. A limit order means your going to get the price you want to sell it at or it wont be sold. You seem to be confusing stop-loss orders with limit orders. They are not the same thing. On a stop-loss order (to sell) what you say may or may not be true. Depending on where you trade, the sell stop-loss order can become a *market* order or it may be executed as a limit order. I have been asked when entering stop-loss orders which I prefer. Example: if you have a stop loss (sell) at 14: if its a limit order you will hit 14 and are guaranteed to get 14.00/share or better (or it wont be sold). If its a stop to sell at 14 and its market - you will get what you can for it. Any comments from you investing pros on this? -- Brett Fleisch University of California Los Angeles 3804 Boelter Hall Los Angeles, CA 90024 Phone: (213) 825-2756, (213) 474-5317 brett@ucla-cs.ARPA or ...!{cepu, ihnp4, trwspp, ucbvax}!ucla-cs!brett -------------------------------------------------------------------------
merrill@rex.DEC (02/09/85)
Some brokers "check" the limits themselves and they usually have to execute a little beyond the target. Big Houses have their own specialists on the Street who check limits and usually execute at or Better than target. Merrill-Lynch limits the time for an open limit order to one month to keep the number of things to check to some managable size. Yes, I would guess that the bigger specialists have computers do a lot of that work for them. Rick