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I understand how limit orders work but I don't know how do they meet. Suppose the book of a ticker ABC is empty. Trader 1 sends a buy limit order for 1 share of ABC at 2\$, and at the same time (ideally speaking, simultaneously) Trader 2 sends a sell limit order for 1 share of ABC at 1$. What will be the transaction price?

In this question, the "accepted" answer says that it depends on the arrival position, it is a "race condition", so the last order to arrive will execute against the first.

If we suppose that Trader 1 was the first one to send the order by a microsecond, what does it mean this solution? What does it mean that Trader 2 will be executed against the price of Trader 1?

Does it mean that Trader 2 will sell at 2\$? So, here Trader 1 won't take full advantage trying to buy for less than 2$?

Thanks,

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  • $\begingroup$ The anwer to this is both exchange specific, also dependent on the trading style of the instrument you're looking at, and then again it can be dependend on the currernt trading segment, and a bunch of other scenarios (i.e. are we currently in a volatility auction? Is there a market pause due to a circuit breaker? Is the price up against a limit (i.e. maximum price move)? etc.). The rules you're looking for are often called matching rules, and information can be found on the exchange website where the instruments you're interested in trade. $\endgroup$
    – will
    Jan 9 at 13:57
  • $\begingroup$ Thanks! It is true that I did not specify the conditions of the operation. I tried to consider the simplest and most hypothetical scenario. I will research about what you mentioned, "matching rules". $\endgroup$ Jan 9 at 15:01
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I am answering your question based upon a US market equity scenario in an NMS security and not at the opening or the close (as they may have auction like processes that occur). The answer does depend on a couple of additional factors. One being the sequencing of when events occur at the executing venue. The other being the NBBO. If the inside NBBO is 1.50x 1.55 and in your example the buy at 2 came in first then you can expect a US exchange would execute the matching of the limit orders at 1.55 where the seller gets advantage of the Price improvement. Since exchange is subject to the trade through rule they can not match outside the NBBO. Note that there could be the case where if the orders are routed to an ATS that has rules to cross at a midpoint then such trade could be executed at 1.525.

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  • $\begingroup$ I believe that I understood the problem I had. I mislead myself trying to match "the buy of Trader 1" with "the sell of Trader 2", like a closed-unique system. However, in reality there is (what I did not know about) the NBBO which considers much more orders sent by other people. Summing it up, could we generalize who will usually take benefit? I mean, the last order to arrive will usually take benefit? Or the first order to arrive will usually take benefit? $\endgroup$ Jan 8 at 2:05
  • $\begingroup$ By the way, when you say "the seller gets advantage of the Price improvement" do you mean the Trader 2 takes advantage of the price improvement or a seller that was already inside the NBBO system waiting in the 1.50/1.55 asks and bids takes advantage of the price improvement. Thanks for your response, $\endgroup$ Jan 8 at 2:09

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