Limit Order

A limit order is an execution instruction: it tells the broker and the exchange the worst price the trader will accept. When the order arrives, the matching engine compares its limit price with the opposite side of the book. Any portion that can trade immediately at an acceptable price does so, and the remainder is posted as a standing order at the limit price, where it waits for a counterparty.

Consider a buy limit for 500 shares at 50.05 arriving at a book showing 300 shares offered at 50.00 and 400 more at 50.10. The engine fills 300 shares at 50.00, because that price is better than the limit, and cannot touch the 50.10 offer. The residual 200 shares are displayed as a bid at 50.05, improving the best bid. Priority among resting orders is normally price first, then time of arrival, so the order queues behind any earlier orders already bidding 50.05 or higher.

Limit orders are classified by where the limit price sits relative to the current quotes. A buy limit priced at or above the best offer is marketable, or takes the market, because at least part of it should trade immediately; the same applies to a sell limit at or below the best bid. A limit priced exactly at the best bid for a buy, or best offer for a sell, is said to be at the market and joins the existing queue.

An order priced strictly inside the spread makes a new market, narrowing the quoted bid-ask spread and becoming the new inside quote. A limit priced worse than the current same-side quote is behind the market, and one priced far away is described as far from the market, essentially a contingent order waiting for a substantial price move. This vocabulary maps directly onto execution probability: the more aggressive the price, the higher the chance of a fill and the lower the price improvement.

A resting limit order is economically similar to a written option: it grants other market participants the right, but not the obligation, to trade with the poster at a fixed price. The poster earns the spread when uninformed order flow arrives, but suffers adverse selection when an informed trader picks off a stale quote just before the price moves against it. This is why quotes widen and depth thins when volatility or information risk rises, and why standing orders may be cancelled and replaced continuously by automated systems.

Because standing limit orders supply liquidity, many venues compensate them through maker-taker fee schedules that rebate the passive side and charge the aggressive side. Dark or hidden and iceberg variants exist so that large limit orders can rest without revealing full size. Collectively, all resting limit orders form the limit order book that defines the quoted spread and depth for the security.

Expect to classify an order given a quote: identify whether a stated limit price makes a new market, sits at the market, is behind the market, or is marketable, and infer the resulting execution outcome. You should also be able to walk a small book, allocating shares across price levels in order of best price and posting any unexecuted balance, and then state the average execution price.

Equally important is separating the execution instruction from the validity instruction and the clearing instruction. A limit price says how, not how long: it must be paired with a day, good-till-cancelled, immediate-or-cancel or fill-or-kill qualifier, and may carry all-or-nothing or hidden attributes. Finally, be ready to weigh the trade-off directly: limit orders control price and bear execution risk, market orders control execution and bear price risk, and the appropriate choice depends on urgency, order size relative to displayed depth, and the security's liquidity.