Execution price when the bid exceeds the ask

ScroogeMcDuck

ScroogeMcDuck

If at the beginning of the pre-market Alice has a buy limit order for 100 shares of XYZ at $101 and Bob has a sell limit order for 100 shares of XYZ at $99, what's the execution price? Whichever order arrived first gets the whole $200? Or do they both get fucked out of $200 by HFT?

I'm assuming they both transmit the order from before the pre-market begins. What if their orders end up on different exchanges? What if their orders end up on the same exchange?

Is it generally -EV to leave a GTC limit order up outside regular trading hours because you get past-posted when it moves against you? Seems like it would be, unless it's so far away from market that it never gets a fill.

Are there any good books about market making / earning the spread? I'm that guy who puts in a pre-market limit sell for 2x the last price just in case somebody was forced to cover a short. I'm also that guy outbidding by 0.001 wherever I see a kink in a corporate yield curve with a decent spread. So far neither strat has made me any money net of commissions.
 
Secretive world. Give flash boys or darkpools a read. About as much as you’ll find out about it. Even the big banks don’t really understand how their orders get wrapped around darkpools and the exchanges. Theirs more order types that no retail has easy access too. Your competing in a highly competitive area where nano seconds is the game.

If you haven’t made money yet your not going too.
 
ScroogeMcDuck said:
If at the beginning of the pre-market Alice has a buy limit order for 100 shares of XYZ at $101 and Bob has a sell limit order for 100 shares of XYZ at $99, what's the execution price? Whichever order arrived first gets the whole $200? Or do they both get fucked out of $200 by HFT?

I'm assuming they both transmit the order from before the pre-market begins. What if their orders end up on different exchanges? What if their orders end up on the same exchange?

Is it generally -EV to leave a GTC limit order up outside regular trading hours because you get past-posted when it moves against you? Seems like it would be, unless it's so far away from market that it never gets a fill.

Are there any good books about market making / earning the spread? I'm that guy who puts in a pre-market limit sell for 2x the last price just in case somebody was forced to cover a short. I'm also that guy outbidding by 0.001 wherever I see a kink in a corporate yield curve with a decent spread. So far neither strat has made me any money net of commissions.
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On a single exchange the price cannot cross during continuous trading. Orders submitted while the exchange is closed or halted can cross, so they are cleared using an auction before continuous trading begins again. Read up on auctions to understand how the price gets chosen. It tends to be very fair, and in the scenario you outlined (zero net imbalance), both Alice and Bob would get execution at the last sale price, assuming that was between 99 and 101.

The auction/crossing process makes GTC orders safe on halt gaps, but not for jumps during continuous trading. Leaving standing limit orders is probably -EV in general.

Prices on different exchanges can cross, especially during premarket when NMS protections are inactive. These should get quickly arbed by HFT.
 
ScroogeMcDuck said:
You're telling me there's another auction at 4am, before the opening auction at 9:30am?
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Yeah. At least on NYSE/NYSE ARCA it's called "Early Open Auction" and it happens at 4:00 am. I thought it was on NASDAQ too but I'm having trouble finding documentation on that.

Also, apparently most exchanges stopped accepting native GTC orders in 2016, so the behavior will likely depend on how your broker handles them.

If an exchange has no GTC orders and does not accept any limit orders until continuous trading is open, then there is no problem. One order will always arrive first, then the second becomes marketable.
 
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