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In markets with price-time priority, why don't traders enter limit orders at all prices, so that they could be first in line when the price moves? For example, if the current best bid is $10 and the best offer is $11, why don't traders enter limit orders at all other prices — $1, $2, $3, ..., $9.97, $9.98, $9.99, ..., $11.01, $11.02, $11.03, ... , $12, $13, $14, ... — so that they could obtain priority when the market price moves to the level of any of their limit orders? If a trader happens to have placed an order at $15 far in advance, and the price eventually moves to $15, the trader's order will have priority because the trader was the first to place a limit order at that price. However, when I look at limit order books, I don't see traders scrambling to occupy every single price level. Why is that?

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  • What kind of traders are you thinking about? Market makers? Ones who want to transact at a certain price to buy/sell the stock? – GS - Apologise to Monica May 10 at 6:38
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    I don't understand the premise of the question. Why would the trader want to trade the shares at every single price level? – Daniel May 10 at 10:27
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    @Flux If the trader wants to be first in line to trade, they can just make a market order and it'll be executed immediately. If they have a maximum purchase price or minimum sell price, they'd just put in a limit order at that price. What is the scenario in which they would need to have more orders than that? – Daniel May 10 at 14:06
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    If they really wanted to buy 1 share at no more than $9.99 and another share at no more than 9.98 and another one at no more than 9.97, sure they could do that. I guess I just don't really understand why that would ever be the case. – Daniel May 10 at 14:08
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    The initial question's wording was confusing. It sounded like you were considering placing multiple orders at different prices. That would only make sense if trying to acquire (or sell) a predetermined number of shares via DCA if price moved significantly. This would make no sense if you were flooding the market with multiple limit orders where it was possible to acquire more shares than desired (@$14, @$13, @$12, etc.). One could layer conditional orders but that's way too much effort. As stated in my answer, this would make sense if you wanted to scale in or out of and existing position. – Bob Baerker May 10 at 14:30
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A limit order is an order to buy or sell a product at a specific price or better. For a buy order, you might buy for lower than the limit. For a sell order, you might sell for more than the limit.

If you have a buy order at $10 in your example, then you are already covering every price increment up to that price with your limit order; someone may sell to you for $9. Your priority also extends to the full extent of this range, not just the specific limit of your price.

There is no need to explicitly enter an order for each valid price increment. If you did so with non-OCO orders then you might even execute multiple times.

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    Good answer that may get at the root of the question at hand. – Grade 'Eh' Bacon May 10 at 17:00
  • Flux's premise is applicable to scaling in or out of a position (long or short) at various prices at various prices. I suspect that his premise was not to flood the market with orders at every conceivable price point just to be first in line. However, he will have to provide verification of that. – Bob Baerker May 10 at 18:23
  • In practice, is it really ever "better"? Every limit order I have placed has gone through at the limit I specified -- even when the market price has gone "better" -- and my broker happily pockets the difference. – DrSheldon May 11 at 21:56
  • @DrSheldon May depend on the broker and the market. I'm unfamiliar with stocks, but there's high liquidity and tight spreads, so perhaps any difference is presumed to be neglible. Guessing. I work for an IDB, mainly credit and rates, and it's much less liquid. It happens fairly often for us that a client will get a better price, and when they do we're not pocketing the difference – Michael May 11 at 22:28
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In a reply to one of the comments, you state: "Isn't [getting the transactions filled] a good thing? Isn't that the whole point of placing an order and being the first in line? What's the point of placing orders if they never get transacted?"

The point of placing an order isn't just to 'get it filled', it's to get it filled at a price you are happy with. If you want to buy a share for $10.00, it isn't necessarily true that you want to buy it for $11, $10.59, or even $10.05. By filling an order book chock a block with orders at every incremental half-penny step, what happens if the price jumps by $0.10? What are you going to do with 20x the amount of shares you wanted? That's a tough pill to swallow, regardless of what type of trading entity you are.

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    "If you want to buy a share for $10.00, it isn't necessarily true that you want to buy it for $11, $10.59, or even $10.05" I don't think that's what he was saying. What he was saying was if you want to buy a share for $10, then it is necessarily true that you want to buy it for $9, and every single increment up to $10. I believe it stems from a fundamental misunderstand of what a limit order actually is. – Michael May 10 at 16:48
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It would make sense for an investor or trader to place a limit order in advance to close an existing position at a better price.

For new positions, traders might be less inclined to have limit orders on the books because they could be blindsided by adverse news and while their fill would be better than current price, it could end up being a poor fill (think large gap).

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why don't traders enter limit orders at all prices, so that they could be first in line when the price moves?

Because when the price moves to your limit, you aren't "first in line": you've already made the trade. When someone agrees to your bid or ask, no one asks you if you still want to make the trade. You're obligated to make it.

As such, you wouldn't want to enter limit orders for more than you want to buy or sell. For example if you place a bunch of limit buy orders for equity in some company, and then the company releases some bad news, you will be obligated to buy stock from the hordes of people subsequently looking to sell.

There are particular dangers in doing so: consider a flash crash. Here's one way this can happen:

  • Traders buy an asset, and enter a stop loss order to protect their position. A stop loss order converts to a market order when the price goes below a threshold. Note: a market order executes at whatever the highest bidder is offering, not the stop loss order threshold.
  • Something happens (like some bad news) which pushes the price down a little bit, triggering stop loss orders to convert to market sell orders.
  • The market sell orders execute against limit buy orders in the order book.
  • If the sell volume is high enough, this can "burn through" the order book in a positive feedback cycle: selling removes the higher bids from the order book, which triggers more stop loss orders, which creates more market sell orders, which remove more bids from the order book, ...

It would be very bad for you, if you are the one that entered more limit buy orders than you wanted to buy. They will all execute, and you will have bought more than you wanted of an asset that a whole lot of people don't want.

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The short answer is that they do.

Well, they do in the markets where this matters. In volatile markets, queue priority doesn't matter, you'll get filled at the back of the queue whatever.

But in big heavy markets, where the price moves reasonably slowly, market makers will have resting orders in the depth ready to be front of the queue when the market does move. In some markets, traders will have orders there for years waiting to become top of book, at which point they have the option of canceling the orders or leaving it there with priority.

To answer your question as to why do they not do it... the answer is RISK.

So you place 1000 lots at 99.9, and 1000 lots at 99.8, and so on, pretty soon you have a million lots sitting there. This is fine, you can cancel the ones you don't want to get filled later. But what happens if the market does suddenly move. What if, there's a global pandemic. And that market that normally moves 1 tick a day, suddenly drops 100 ticks. If you aren't quick enough to cancel your orders, you could be filled in (100 ticks * 1000 lots per tick), now you are left holding a very big position that is very expensive to get out of.

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That will cause the amount of shares the person buys or sells to correlate directly with how far the price has moved. If the price moves twice as much, the trader will buy or sell twice as many shares. That's rarely what anyone wants, but if there was someone who wanted that, they could accomplish it as you suggest.

If you do want to price into any movement, you could place offers like that. It's not unusual for people to place a small number of orders clustered around the current price, usually with the volume increasing as you get further from the current price. This is generally a market-making strategy that allows you to make large trades without taking huge losses if the price moves more quickly than you can move your offers.

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