The London Stock Exchange (LSE) is the world’s third-largest stock exchange by market capitalization and the second most international stock exchange.
The LSE continuously uses electronic and open outcry trading techniques to match buyers with sellers for shares, bonds, and derivatives contracts.
A market order
A market order is an order to immediately buy or sell a security at the best available price in the current market on a securities exchange.
A market on close (MOC) order becomes valid only at the end of a trading session and buys or sells at the last traded price.
The order book
The order book shows buyers on one side of the market and sellers on the other.
As long as prices are within the current exchange reference price range for each stock, orders can be filled at any time during trading hours via automatic execution by a market maker.
After which, an order is placed in a queue to await manual processing by a trader at their discretion.
The process then repeats itself until the trading session when MOC orders are processed automatically.
A mid-price auction occurs when there is more supply than demand in the market or ‘the spread between supply and demand is too large to be filled by individual orders, resulting in unfilled volume remaining on the book.
The auction process combines all buy orders above the mid-price and all sell orders below it into one order with a quantity equal to the difference between those prices.
They are then divided equally between them until filled or expire at the end of the trading session.
Automated traders often use it to limit their loss exposure, as their orders will not be partially executed if there are no matching prices within the current exchange reference price range for each stock.
When there is insufficient liquidity in an existing market order, that order may have to be adjusted after being entered into an electronic system, depending on its size relative to other orders on that particular security at that time.
This adjustment is also called “marking”, “referencing”, or simply “to the market!” and is, in an electronic environment, sometimes automated according to parameters set by the trader.
This means of price improvement was used on the LSE before the 19th century, with human traders submitting orders for shares via brokers who manually processed them.
Market re-opening occurs at the start of a new trading session after regular business hours.
Orders submitted during this time are queued until processing starts again, after which MOCs are matched against existing ones firstly by price then date/time received if necessary.
Otherwise, these orders are stored pending manual execution at their discretion during regular trading hours.
A limit order
A limit order allows traders to specify that they will buy or sell shares/bonds/derivatives for no more than a specific price, such as the bid price if buying or the asking price if selling.
You can only execute a buy limit order at the limit price or lower, and you can only execute a sell limit order at the limit price or higher.
A market accepted order
A market accepted order is used to indicate immediate acceptance of all outstanding orders currently on the book in use by electronic execution systems on an automated basis before new orders are processed.
Computer programmer Larry Harris developed this means of price improvement during one weekend in 1980 and implemented it two weeks later at NASDAQ (National Association of Securities Dealers Automated Quotations).
Harris wrote: “I felt like an inventor whose technology was immediately obsolete. We had the best system on the market almost instantaneously. I was discouraged and embarrassed. I knew it was a breakthrough.”
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