Is market frozen when orders are executing

Question

Looking around I haven't found an answer to this simple question.

My understanding:

When the bid price exceeds the ask price (can you call this negative spread?) then orders start to execute. According to many exchanges, the order of execution would start with highest priced orders, being filled at the bid price and not the order's sell price.

Since a particular stock is pretty liquid and we only have delayed quotes, I can't simply put in a sell order equal to the current bid price if I want to guarantee an execution. Instead I would need to put a sell order in for an amount I think will cover the short-term volatility of the stock (some price lower than the current bid price).

When I put in my order it guarantees that orders will start executing (if they weren't already) according to exchange rules.

My question:

Now, are orders for this particular stock frozen (neither new orders added or existing orders canceled) until all orders execute (spread becomes non-negative)?

It seems like this would be the only fair way to operate. However, I have a suspicion that there are players in the market with fast computers that can simply spot a negative bid-ask spread and put in new sell orders at higher prices to get ahead in the queue, meaning that my limit order will inevitably always sell at my limit price rather than at the higher price it would have been filled at if orders were frozen during the execution process. Is that true?

Answer 1

Most, if not all exchanges process orders on an order-by-order basis.

If an order comes in that is 'marketable', i.e. the limit price of a buy order equals or is better than the currently posted order to sell, it will execute straight away, starting with the best priced offer, and until the order is filled completely, will continue to execute until either the available volume that it will trade against is exhausted or filled completely.

If it is not filled completely, it will normally become the bid. Only after the order has finished executing will it be displayed. It is the difference in the bid/ask of the displayed price that is referred to as the spread. The spread on a single exchange should never be 'negative'.

If the overall spread is made up of prices from different exchanges, which may have different priced bids or offers, then the possibility exists that one could end up with a negative spread or equal spread (these are called 'crossed' or 'locked' markets).

However, in the US, there are multiple exchanges trading the same securities, so they have 'order protection rules' which state that one exchange is not allowed to match or exceed the offer on another exchange, or 'lock' or 'cross' other exchanges prices.

So in circumstances where an exchange is about to post a bid in the market data feed that would lock or cross another exchange, the exchange either:

• rejects the order
• routes the order to the exchange where it would otherwise lock, or
• hides the order until the locking price from the other exchange disappears.

If they (or their members) were to do so, they could be charged with engaging in a pattern or practice of locking and crossing markets, and fined. However, there are some race-conditions where to exchanges could simultaneously post locking or crossing prices, but these are usually resolved quickly.

Answer 2

The concerns you raise don't seem applicable to a typical stock exchange. Placing a sell order below the current bid (which is then immediately filled, if covered by the bid quantity) is different from having the ask (lowest unfilled sell order) lower than the bid. The latter is a rare breakdown of the market mechanism. As far as I know, the sell order, if filled completely on arrival, is never published as an ask.

In addition, all orders are timestamped and prioritized based on when they arrive at the exchange. Traders compete to get their orders in fastest (low latency), but if responding to an order of yours, even the most advanced trader would end up with a later timestamp than yours.

Incidentally, if you want to guarantee execution despite a possible sudden move in the stock, you can place a market order instead.

Answer 3

A crossed market is when the bid price for a security is higher than the ask price. It can occur from a stale quote that has not been removed by the market maker(s). It can also occur when there is an extremely high number of orders in a fast market (transaction price volatility). At the root of it all is the fragmentation of markets.

A locked market is when the bid price at one exchange and ask price at another exchange are identical.