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From: brett@ucla-cs.UUCP
Newsgroups: net.invest
Subject: Re: Limit Orders
Message-ID: <3767@ucla-cs.ARPA>
Date: Wed, 6-Feb-85 09:51:16 EST
Article-I.D.: ucla-cs.3767
Posted: Wed Feb  6 09:51:16 1985
Date-Received: Mon, 11-Feb-85 07:58:53 EST
References: <3754@ucla-cs.ARPA>
Organization: UCLA Computer Science Department
Lines: 83

> 
> 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
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