I have a few questions with regard to the terminology and its meaning of some terms.

Imagine the shares of RIL is quoting on the ticker at Rs 500. The bid price is Rs 499 and the ask price is Rs 501.

1) Does the quote on the ticker tape represent the bid price or the ask price or the last traded price or something else?
2) Imagine I place a limit buy order at Rs 498, will this change the bid price on the exchange? (from Rs 499 to Rs 498?) In other words, how is the bid price which is quoted by the exchange determined - is it the average of all the bid prices for RIL?
3) Though I have somewhat understood what a limit order means, I still find the concept of a market order difficult to understand. Imagine I place a market order when the bid is at 499, the ask at 501 and the ticker tape at 500, what would my market buy order look like when it reaches the exchange? Would it be equal to the current ask price?
4) From what I seem to have understood, whenever I place a market buy order or limit buy order - the price at which it is executed would, in both cases, be at the ask price; in the case of a market order the order is executed at the current ask price (hence executed quickly) but in the case of a limit buy order - the exchange waits for the current ask price to be equal (or lower) than my limit buy order and only then execute the order (hence a delay). Is my understanding of a market buy order and limit buy order correct?

I would appreciate any clarification.

- arcus.

1. Last traded price is called the market price or ticker price.

2. The "Market Watch" shows the best bid and the best offer.

Best bid means the highest bid.
Best offer means the lowest offer.

If you place a buy order which is lower than the "best bid", you will not notice any change in the "Market Watch".

However, if you place a buy order which is higher than the "best bid", but lower than the "best offer", your order will be displayed as the new "best bid".

3. Market buy order simply means "buy at whatever price the market is willing to sell".

If the best offer is at 501, your trade will happen at 501. If the sell quantity at 501 is less than your market buy order quantity, the remaining shares will be bought at an even higher price.

4. Limit buy order means that you give an upper limit to your buy order.

If you give a limit order @ 410, your trade won't be executed unless there are shares available at 410 or lower price.

If there are no shares available at your limit price, the exchange will wait till offer price comes down to 410.

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I would like to correct you a bit. A limit buy order is not executed at the ask price.

While deciding the price of a trade, priority is always given to the order that was placed first.

Let's assume a scenario where the best buy price is 408 and the best sell price is 409.

If you place a buy order for 1 share at Rs 410, the trade will happen at Rs 409 as the sell order (409) was placed earlier.

Again assume a scenario where the best buy price is 408 and the best sell price is 411.

Suppose you place a buy order for 1 share at Rs 410. No trade will happen as the best sell offer is at Rs 411.

Now, someone comes at places at a sell order for 1 share at Rs 409.

In this case the trade will happen at Rs 410 and not Rs 409, as the buy order was placed first.

In both cases a buy order at 410 was matched with a sell order at 409, but the trade price in each case turned out to be different.

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Thanks Alchemist. Now I have understood. After doing a bit of looking into this matter I have come to know that there are primarily 3 types of mechanisms in which trades might be executed in a financial market.

1) Order driven mechanism
2) Quote driven mechanism
3) Negotiated trading price mechanism.

From what I have seen on various websites and from your explanation too, I could infer that the mechanism followed on NSE (and most of BSE) is order driven.

In order driven markets, there is no much role for the market maker, instead preference is given to

1) Best price (price priority) &
2) Time of order priority (as shown Trading System - Order Books.

"An investor looking for a better price (by using a limit order) will not be served immediately and faces the risk (of the trade) not to be executed at all. An increase in the profit opportunity, when the order is executed, can then be obtained in return to a greater risk concerning the trade realization. When not executed, orders are stored in an order book, waiting for an hypothetical future compatible counterpart. Hence, the order book appears as some dynamic buy and sell functions during the trading day."

(http://www.univ-evry.fr/fr/index/Epe...es/Boyer08.pdf)

That explains the trade-off faced by an investor using a limit-order.

Alchemist, I have one more question this time pertaining to stop loss order and trigger price.

1) Imagine RIL is trading at 500, bid at 499 and ask at 501. Imagine I already have a few shares of RIL which I bought previously at say Rs 400 and want to put a stop loss at Rs 490 with a trigger price of Rs 495 in order to protect my profits (hence creating a band of 495-490). Now, whenever the LTP is at or below Rs 495, my stop loss is triggered and it reaches the exchange as a limit sell order of Rs 490. (Is that correct? i.e will my order go to the exchange as a limit sell order whenever the trigger price is triggered?).

Now as per the time priority rule, imagine a limit buy order had been pending from a long time before @ Rs 494, then my order will get executed at Rs 494 and that's it.

2) In the 2nd case, imagine the market is moving very fast, say like a market crash, then imagine the LTP is at Rs 495 (my stop loss is triggered) and within a fraction of a second, the LTP jumps to say Rs 480. In such a case, my order will not get executed but is still in a triggered state (because it is below my trigger price). Now whenever the LTP slowly climbs up from Rs 480...to 490 then my limit sell order will be given preference, because it has been in a triggered (yet, unexecuted) state for a long time - is that correct?

3) I have also heard somewhere that market orders are given preference over limit orders (if all else are equal), is there really any such thing?

thanks,
- arcus.

1. When your sell order at 490 is triggered, if a buy order at 494 already exists, the trade will get executed at 494, even if you placed the stop-loss sell order before the buy order.

2. Once an a stop-loss order is triggered, the exchange will immediately check if it can be filled. All orders coming after the trigger, will get lower preference.

Unless one single order took the stock directly from 495 to below 490, your stop-loss order will be partially or fully executed.

3. Neither a limit order gets a preference over market order nor vice versa.

In fact, it's not possible to give preference to any one type of order.

The exchanges don't accept two orders at the same time. Orders are accepted one after another.

If one type of order has to get preference over another type of order, both must coexist.

A limit order is either executed or placed in the order book.

A market order is executed immediately. It never exists in the order book.

Thus, there is no question of it being given higher or lower preference.

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Yeah. Imagine the price on the ticker is at 500 at 09.50 AM.

Later I put a trigger price at 495 with stop loss at 490 at 10.00 AM (to the stock RIL which I bought 2 days ago for say Rs 470).

Then someone puts a limit buy order at 494 at 10.10 AM.

Now imagine at 10.20 AM the LTP falls to 495.

At this instant my stop loss is activated as a limit sell order of Rs 490.

But since the limit buy order was instructed at 10.10 AM it will be given preference to be executed at that price (Rs. 494) than my limit sell order which was triggered at 10.20 AM (for the limit sell price of Rs. 490). So, as you said

I hope my understanding is correct.

This may not be true. If there are not enough open orders, then market order will also become limit order.

Yes, but that's finally a limit order and not a market order.

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You are right. The trade will happen at 494 and not 490.

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Suppose the stock is not at upper circuit, but still there are no sellers at all. If I place a market buy order, it won't be executed at all since there are no sellers, but at what price will it become a limit buy order? At the LTP?

For market buy orders that aren't filled (NSE):

The order becomes a limit buy order at LTP if there are no buy orders or sell order for the security and the security has been traded on that day.

If another buy orders exist, but there is no sell order, the market order becomes a limit order at the same price as the best buy order.

From NSE's NCFM Module:

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