Order Routing and Order Matching in stock markets

Order Routing:

Once the order is entered and confirmed by the investor at his trading terminal and verified by the broker software the order is routed to the exchange for its execution. 

The order gets executed at the exchange depending upon the type of order. If the order is a market order it gets executed immediately.  If it is a limit order it is stored in the order book and matched against the other limit orders. Once the order is matched a trade is said to be executed. As soon as a trade is executed the trade confirmation message will be informed to the brokerage firm which in turn informs the investor through a message on the trading terminal.

Order Modification/Cancellation:
All orders can be modified or cancelled during the trading hours provided they are not fully executed. For the orders, which are partially traded, only the open or unexecuted part of the order can be cancelled.

Order Matching:
We will examine how the order matching works in detail.

The order matching in an exchange is done based on price-time priority. The best price orders are matched first. If more than one order arrives at the same price they are arranged in ascending time order. Best buy price is the highest buy price amongst all orders and similarly best sell price is the lowest price of all sell orders.

Let’s take an example.

The following table is a sample order book.






Buy Quantity

Buy Price

Sell Quantity

Sell Price

50

121.20

50

121.50

100

121.10

200

121.80

25

120.90

3000

122.10

500

120.00

1000

122.20

5000

120.00

200

122.60

 

These quotes are visible to investors. Now if a buy market order comes with an order quantity of 50 it gets executed for a price of Rs121.50 and the order book entries on the sell side moves up by one notch i.e. the 121.80 order comes to top.  On the other hand if a limit order with a sell price of Rs 121.20 for a quantity of 500 comes 50 shares get executed and the order for remaining 450 stays at the top on the sell side.

The 4th and 5th orders on the buy side have same price attached to them. That means the order with 500 quantity had reached before the one with 5000 quantity.

This is a very simple example of the order book. But in reality, in most liquid counters the orders keep on changing with in fraction of a second and the bid-offer spread (difference between bid price and sell price) will also be very less.   
All orders come as active orders into the order book. If they get a match they will be executed immediately else will get an entry into the order book according to price and time as passive orders.

Trade cancellation: Trades done during the day can be cancelled with mutual consent of both the parties. This is mostly due to the errors in the system. Trade cancellations are rare.
 

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August 3, 2008 | Filed Under Stocks 

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