Why do I often see some very deep limit buys and limit sells in a limit book? For instance the bid-ask may be \$39.00-39.01 but I see some bids at \$20 or even \$10 and some ask at \$60 or even \$500. What's the point of doing so? To capture some potential long-tail events?

  • 1
    $\begingroup$ Queue position when the price does get there. Or if an algo goes crazy then they will get ridiculous value with those limit orders. $\endgroup$ Nov 25, 2013 at 7:58
  • $\begingroup$ When does the SEC steps in to "break" the trade if an algo goes crazy? What rule do they follow? $\endgroup$
    – CharlesM
    Nov 25, 2013 at 20:33
  • $\begingroup$ Different kill switch rules for different exchanges. There is a tonne of academic research on this. Makes a good event study paper with large amounts of data! $\endgroup$ Nov 26, 2013 at 14:29
  • $\begingroup$ The only reason is to make money due to others' errors. Such orders are very rarely being updated or cancelled. The queue position is irrelevant in this case. $\endgroup$
    – Serg
    Nov 26, 2013 at 17:46
  • $\begingroup$ Errors aside, these can be GTC orders for bid from value buyers and sell from long (probably buy and hold) investors. Not every action in the market is fully explainable or rational in all respects $\endgroup$
    – user12348
    Apr 21, 2014 at 22:19

4 Answers 4


I can think of 3 reasons:

1) Queue position

2) To be on the other side when an alogrithm has a disastrous error, which happens quite often on singular stocks and doesn't get reported (but someone will get fined) . I've seen cases where the price will drop over 99% almost instantaneously. For this to occur a backfiring algo will clear out the entire bid schedule, but keep issuing market orders, and a smart automated market making algo will take the other side for 1 cent.

3) To capture errors by manual traders. For example if they enter an extra zero on their limit order.

For (1) to be true, the orders must be relatively near to the insides. For example an order 8 levels above the insides is likely to be for (1) and (1) only. An order many hundreds of levels away is not due to (1) but due to other factors.

All else held equal, the probability that (2) is the reason is up to the exchange in question. Some exchanges will reverse the trades when an algo breaks down making such orders futile, others won't.

On some exchanges, (3) is not even possible since the exchange matching engine will guarantee that you receive the best possible price for your trade.

  • $\begingroup$ 3) how this can capture errors from manual trades? $\endgroup$
    – Svisstack
    Nov 26, 2013 at 11:37
  • $\begingroup$ @Svisstack If they enter an extra zero on their limit order for example. $\endgroup$ Nov 26, 2013 at 11:37
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    $\begingroup$ 1) for queueing that entity must make orders on 599.99, 599.98 and so on, because price have more priority than time $\endgroup$
    – Svisstack
    Nov 26, 2013 at 11:38
  • $\begingroup$ @Svisstack The probability of this being the reason depends on the tick size. With the tick size you're talking about the probability would be close to zero. $\endgroup$ Nov 26, 2013 at 11:38
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    $\begingroup$ @Svisstack 10 levels above the inside would be for queue position. 5000 levels would be something else. $\endgroup$ Nov 26, 2013 at 11:39

Don't discount the fact that it could be a fund testing a strategy or order type.

I do this all the time. I'll take an algo that should penny on say, VWAP, and make it penny on VWAP - $10 to ensure that it works but if it does go a bit crazy then atleast I have a buffer before it starts going active.

Same thing with order types, if I'm testing a new fix field I'll send an order that is way off the market so its easy to see it out there without the noise of other traders.


I fully agree with all potential rationals written here to put bids and asks deep in the book. All these interests are part of what we should name the latent order book, since potentially agent would be glad to buy or sell at such prices in an hypothetical future. Philosophically, I would say that the more mature a market is, the less you should see such orders, since agents would be confident in using electronic means to post orders when needed, thus nobody would have to post an order hours in advance (you should be able to convert price distance into hours using the volatility of an instrument).

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Have a look at bitcoins orderbooks today (see inserted image) and you will see a lot of such orders: the latent orderbook is visible for such a recent instrument (you will never see LOB that full on equity markets: in such mature markets the orderbooks shapes are beta-like). For US equity markets the orderbook is far more "hidden" since a lot of agents are confident their trading algorithms will post orders when needed, thus they do not have to disclose their interests in advance.


Some exchanges have agreements with market makers to provide liquidity (the market makers often get some kind of preferential treatment in return).

Often these agreements will include obligations to be actively quoting some minimum percentage of the time, on both sides of the book (bid & offer). Quoting non-marketable prices is one way to meet these obligations and retain one's status as a designated market maker, while avoiding execution risk in inclement or unfavorable markets.

Other times it's to profit off trade errors (someone fat fingers an order and puts 100,000 shares in at "market", eating through the book, all the way up to the very deep and very profitable buried quote).


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