Markets and limits (orders, that is)

By: Ray Pellecchia

File Under: NYSE, NYSE

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A reader writes in response to Q&A: Shouldn't you have to stand by your offer for more than a fraction of a second?. I've annotated my comments in bracketed italics:

Hi Ray,

Thanks for answering my question regarding the percentage of executed orders that are limit orders.

Given the numbers above, consider the following:

1) For every 100 orders the exchange *receives*, 97 are limit orders and 3 are market orders. Since all market orders are executed [Actually, some market orders are cancelled before they're executed, such as before the opening or when we hit a Liquidity Replenishment Point], and since (from above) 20% of executed orders are market orders [No, my origninal post said that 20 percent of our SHARE volume resulted from market orders], it follows that 15 of our original 100 orders will execute: 3 market orders and 12 limit orders [Not necessarily the case; the market orders could all be executed against one large limit order].

2) Now imagine the exchange receives 200 orders (194 limit orders, and 6 market orders). From (1), we know this will result in 15 trades, since each trade requires two executed orders, one on each side. [Yes, there must be at least one order on each side, but frequently there are multiple orders per side on a trade]. Since in the Hybrid Market two market orders won't match, it follows that 40% (6/15) of executions involve market orders.

The point of this somewhat long discursion is to demonstrate the (otherwise somewhat understated) importance of market orders in the Hybrid Market.

As the comments on this blog and elsewhere have made clear, market orders have suffered disproportionately on Hybrid due to the disappearance of the specialists and the lack of reserve quoting ability (for anyone but floor brokers). Based on the Exchange's own numbers, market orders are involved in nearly half of the volume on Hybrid.

The NYSE needs to take these concerns seriously.

-- Steve

Steve -- First, my apologies for not responding sooner. The blog needs a lot more care and feeding than I can give it these days.

I don't want to be argumentative about the numbers, but I couldn't let stand a misunderstanding about statistics.

Nothing I said in my posts on this topic was intended to diminish the importance of market orders for those who prefer them. I was merely trying to point out that limit orders are far more prevalent, and there are reasons for that, including the fact that the speed of the market can outstrip the ability of someone to watch a stock price, react and hit a key before the market moves away.

Lastly, I don't want my quibbling about the numbers to take away from the fact that we do take your concerns seriously. That's why we remain open to your comments, and continue to evaluate the market to determine next steps. Again, we'll keep everyone apprised as we make changes.

Tags: New York Stock Exchange, Hybrid Market, NYSE, NYSE Group, NYX, trading, stock market