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When an electronic market reopens in the morning how exactly are all the bids (including market orders from both sides) handled?

A good answer should include a description of the process the exchange uses to determine the outcome, that is orders executed and at what price.

Consider for example the following order book: enter image description here

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  • Between the below 2 questions you will have answers to your question. If you still have doubts, please ask a specific question. money.stackexchange.com/questions/57063/… money.stackexchange.com/questions/15156/…
    – Dheer
    Commented Apr 14, 2020 at 12:26
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    Does this answer your question?
    – nanoman
    Commented Apr 14, 2020 at 21:35
  • @nanoman, it seems to go along way and helps explain why Dheer was talking about a price algorithm. I am confused about whether this algorithm is secret or why it should need to be.
    – hkBst
    Commented Apr 16, 2020 at 7:17

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The process an exchange uses to match orders differs from one exchange to the other, and specifically the process of opening the market varies also, in some cases placing the burden on the lead market maker appointed in the relevant security.

A method that might work in this situation could be as follows:

  1. Determine the midpoint - 840.80
  2. Match off the market orders on both sides at that midpoint price (11,150 shares).
  3. This leaves 2,953 shares on the ask side
  4. These can be matched off against all of the bids, leaving 2,646 shares to fill at market on the ask side. When any new bids come in, they will be matched up against the outstanding market orders until they are exhausted.
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When an order is placed, it receives a time stamp. The time stamp determines the priority of an order on the order book. Earlier orders at a given price are executed before later orders at that price. This occurs for buy orders and for sell orders.

It's worth knowing that cancel/replace orders where you lower the number of shares/contracts in an order do not lose their time priority. However, you cannot cancel/replace with a larger number of shares in your order because that effectively let's you cut in line and prevent others from trading.

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    This answer answer explains the ordinary functioning of a market that is already open, but it does not explain how the situation at the opening of the market is handled and does not talk about market orders from both sides.
    – hkBst
    Commented Apr 14, 2020 at 8:00
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    Actually it does. See, the timestamp (or serial number) is done ON ENTERING THE ORDER and per definition nothing enters the ticker plant in parallel (because at the end it is a serial process). So you DO have a serial order to build a book upon. THE OPENING price otoh depends - on exchange. Time not to ask on an internet forum but RTFM - every exchange documents this and it varies, at least possibly by country.
    – TomTom
    Commented Apr 14, 2020 at 11:43
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    It depends on the specific exchange and their procedures. Opening procedures are described in their rule-book. It is possible for a cancel-replace increasing the number of shares to occupy two positions in the order book at that price-level, and would depend on the matching engine's programming. Market-on-open orders are a bad idea in general...
    – xirt
    Commented Apr 29, 2020 at 5:00

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